ECN 104 Lecture : Micro.Week2.2012.docx

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13 Dec 2012

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In order to figure out how we choose the best point on the ppf, we have to know what consumers want to consume. In a decentralized economy, consumers have a lot to say in determining what is produced. We begin by defining consumer demand as what consumers want to buy, given certain economic conditions. We call dx the demand function , or sometimes just demand . Given the values of the economic variables, the demand function spits out a number that tells us how much of the good (in this case x) is demanded. Note: dx/ px means the derivative of dx with respect to: own price px (law of demand) Px, holding all other variables that affect the function dx constant : other prices py effect of change could go either way if dx/ py > 0 if dx/ py < 0 substitute complement. Note that this is a definition, not an explanation.

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I've completed this but I want to check my answers. Thanks

1) List and briefly explain three economic variables that shift the Demand Curve.

2) Define opportunity cost. How is opportunity cost used to determine comparative advantage?

3) In the market for calculators we observe that the price has fallen and more calculators are being sold. What might have happened to cause this change?

4) The price of gasoline rises. What would we expect to see happen in the market for cars with high gas mileage (like the Prius)?

5) What is the effect of a price floor (a price set above equilibrium) in the sugar market. Why does the government impose price floors?

6) Define the price elasticity of demand. Why is this concept important in economics?

7) Define the income elasticity of demand. Why is this concept important in economics?

8) List and briefly explain three economic variables that shift the Supply Curve.

9) A firm lowers of price of its product by 10% and consumers buy 5% more of the product. What is the price elasticity of demand for the product?

10) If the price elasticity of demand for a product is elastic, explain what will happen to total revenue when the price is decreased.

11) What is the difference between a change in quantity supplied and a shift in supply?

12) Write out the equation for the arc price elasticity of demand using symbols. Then write out the equation using the following numbers: the price increases from $8 to $10 and the quantity demanded falls from 3 units to 2 units. (Do not calculate the equation.)
Three Questions (no choice)

Long Answer Questions (20 points each)

Be certain to label all graphs. Write all explanations in complete sentences.

1) Draw a supply and demand graph for the market for oranges.

Illustrate and explain what happens with when a freeze destroys part of the crop.

2) Draw an increasing cost Production Possibilities Curve (PPC) for the U.S. with computers on the horizontal axis and textiles on the vertical axis.
a) What is the definition of a PPC

b) Choose a point on the PPC. What does this point represent?

c) Illustrate the opportunity cost of producing more computers.

d) Explain a point inside the PPC.

e) Explain a point outside the PPC.

f) Technological change reduces the cost of producing computers and textiles, illustrate and explain what happens in the graph.

g) Choose a new point that represents production and consumption after technological change.

h) Where does the U.S. produce and consume relative to before technological change.

i) Illustrate and explain the opportunity cost of producing more computers after technological change.

3) Define the price elasticity of demand. What does elastic, inelastic and unitary price elasticity of demand mean? For each of the three values of the price elasticity of demand explain what happens to quantity demanded and total revenue when the price of the product is increased? What about when the price of the product is decreased?

4) Using a supply and demand graph in the market for bread, illustrate and explain the effect of a price ceiling (Price set below equilibrium price).

Why would the government impose such a price ceiling?

How is the available bread distributed to consumers when there is a price ceilin

1.
Which of the following is not a characteristic of a market?

A. Markets are physical locations where trading occurs
B. Voluntary exchanges between economic agents
C. Flexible prices
D. There are rules and arrangements for trading

2.
How would a decrease in supply affect the equilibrium price in a market?

A. The equilibrium price would remain the same
B. The equilibrium price decreases.
C. The equilibrium price increases.
D. More information is needed. It may increase, decrease, or remain the same.

How would the equilibrium price in a market be affected if there were a large increase in supply and a small increase in demand?

A. The equilibrium price would remain the same
B. The equilibrium price decreases.
C. The equilibrium price increases.
D. More information is needed. It may increase, decrease, or remain the same.

How would the equilibrium price in a market be affected if there were a large decrease in supply and a small decrease in demand?
A. The equilibrium price would remain the same
B. The equilibrium price decreases.
C. The equilibrium price increases.
D. More information is needed. It may increase, decrease, or remain the same.

4.
What does it mean to say that we are running out of "cheap oil"?
A. That there are declining reserves of low-quality oil, but there is still plenty of high-quality oil remaining.
B. That world demand for oil is declining , which will raise the price of oil in the future.
C. That we will soon seplete all the world's oil reserves, which will cause the price of oil to increase significantly.
D. That oil reserves are becoming more expensive to find and extract over time.

What doese this imply for the price of oil in the future?
A. the demand for oil will increase, which will lead to lower prices in the future.
B. the demand for oil will decrease, which will lead to higher prices in the future.
C. The supply of oil will increase, which will lead to lower prices in the future.
D. The supply of oil will decrease, which will lead to higher prices in the future.

5.
What is meant by holding all else equal and how is this concept used when discussing movements along the demand curve?
A. everything else in the economy is held constant, including the price of the good.
B. All variables that can affect the demand for the good are held constant.
C. All variables in the model are set to equal values.
D. All of the above.

We make the assumption of holding all else equal when considering demand curves since we want to focus on the changes in the quantity demanded that result from changes in [ only the price of a good / only the income of consumers / the price of a good and incomes ]

amberseal240

Suppose we have two types of consumers (for simplicity we'll assume that there is one person of each type). They have inverse demand curves given by p1 =110 - 2q1 and p2 =70 - 4q2. Initially, we will assume that the monopolist can tell them apart and that consumers cannot change or fake their type. Let the marginal cost of production be equal to 10. Label group 1 as the "high type" and group 2 as the "low type".

(A) How much surplus does the high type get from buying the low type's package? Derive a general expression, A(q2), for this surplus in terms of q2.

(B) Will the low type want to buy the high type's package?

(C) Holding the quantities fixed at their levels from part (b), what is the optimal block pricing scheme that satisfies the incentive compatibility constraints?

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ECN 104 Lecture : Micro.Week2.2012.docx

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