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14 Apr 2019

1. Data for the market for graham crackers is shown below. Calculate the elasticity of demand between the following prices.

Price of crackers

Quantity Demanded (per month)

$3

80

$2.5

120

$2

160

$1.5

200

$1

240

 

$1.00 - $1.50: ___________________________________

$1.50 - $2.00: ___________________________________

$2.00 - $2.50: ___________________________________

$2.50 - $3.00: ___________________________________

 

If the price of graham crackers is $2.50 should firms raise or lower their prices if they want to increase revenue? Explain this in terms of elasticity.

 

 

2. Assume the competitive market shown below faces a short run price of $10. Using the graph below, identify the following:

 

Profit maximizing output: _______________________

 

Approximate mark up over cost _______________________

 

In the long run, the price falls to $7.50. Why does this happen?

 

What is the new profit maximizing output? _______________________

 

 

 

3. A local hardware store is trying to decide whether to stay open. They have found that their industry is extremely competitive and profits have shrunk considerably. Knowing that you have taken an economics course the owners have asked for your opinion. Draw a completely labeled graph to help you explain the shutdown decision. You should show two graphs in your answer, one for the market as a whole, and one for this store in particular. Assume that the store is losing money; however, explain why they may want to stay open for a little while longer. (NOTE: Your answer should be a written explanation of your graph.)

 

4. What combination of the two goods below allows you to maximize your utility with a budget constraint of $14? Show how you arrived at your conclusion in the space provided below. Place your final answers on the lines at the bottom of this page.

 

PRICE = $0.50 per pint

Bottles of glue

Total Utility (Utils)

1

15

2

23

3

30

4

35

5

38

6

40.5

 

PRICE = $2.00 per box

Bales of hay

Total Utility (Utils)

1

10

2

22

3

36

4

52

5

70

6

90

 

Bottles of glue: _________________________

Bales of hay: ____________________________

 

 

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Assume that the cost data in the table below are for a purely competitive producer:

Total

Product

Average

Fixed Cost

Average Variable Cost

Average Total Cost

Marginal

Cost

0

        

1

$60.00

$45.00

$105.00

$45

2

30.00

42.50

72.50

40

3

20.00

40.00

60.00

35

4

15.00

37.50

52.50

30

5

12.00

37.00

49.00

35

6

10.00

37.50

47.50

40

7

8.57

38.57

47.14

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  1. a. At a product price of $56, will this firm produce in the short run? It is preferable to produce, what will be the profit-maximizing or loss-minimizing output? What economic profit or loss will the firm realize per unit of output?
  1. b. Answer question 2a assuming the product price is$41.
  1. c. Answer question 2a assuming the product price is$32.
  1. d. In the table below, complete the short-run supply schedule for the firm (columns 1 and 2) and indicate the profit or loss incurred at each output (column 3).

(1)

Price

(2)

Quantity Supplied, Single Firm

(3)

Profit (+)

Or Loss (-)

(4)

Quantity Supplied

1500 Firms

$26

  

$

  

32

      

38

      

41

      

46

      

56

      

66

      
  1. e. Now assume that there are 1500 identical firms in this competitive industry; that is, there are 1500 firms, each of which has the cost data shown in the table. Complete the industry supply schedule (column 4).
  1. f. Suppose the market demand data for the product are as follows:

Price

Total Quantity Demanded

$26

17,000

32

15,000

38

13,500

41

12,000

46

10,500

56

9,500

66

8,000

What will be the equilibrium price? What will be the equilibrium output for the industry? For each firm? What will profit or loss be per unit? Per firm? Will this industry expand or contract in the long run?

6. The demand for a tennis racket is given by P = 300 - 2QD. The supply is P = 60 + QS. What are the equilibrium price and output?

A. $80, 140

B. $140, 80

C. $300, 240

D. $250, 100

E. $300, 160

7. Assume that at the current market price is $4 per cup of coffee, you are willing and able to buy 30 cups. Last month at a price of $4 per cup, you would have purchased 20 cups. What has most likely happened over the last month?

A. Supply has decreased

B. Quantity supplied has increased

C. Demand has decreased

D. Supply has increased

E. Demand has increased 

8. In the figure below, which graph represents what would happen if there was an increase in the price of the metal used in the production of a bike?

A. A

B. B

C. C

D. D

E. Both [C] and [E] would happen

9. If the price elasticity of supply = 2.5 and price decreases by 3 percent, then

A. supply will decrease by 75 percent

B. total output will increase

C. quantity supplied will increase by 83 percent

D. quantity supplied will increase by 1.2.

E. quantity supplied will decrease by 7.5 percent

10. When the price increases from $4 to $6 and the quantity demanded decreases by 2 units, the price elasticity of demand is 

A. -25

B. -1.5

C. -1

D. -2.5

E. Cannot be determined from the information given

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