ECO 305 Study Guide - Quiz Guide: Price Discrimination, Demand Curve, Variable Cost

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26 May 2018
Department
Course
Professor
ECO 305
Prof. Bucci
6 November 2017
PS 5
1. True A firm that practices multimarket price discrimination will set the lower price in
the market that has the most elastic demand. (You must use a graph of multimarket
price discrimination in order to receive full credit.)
Most elastic demand means demand is strongly affected by the change in prices. Thus,
putting in a lower price causes big increase in demand of the product. Thus, sale of the
product increases.
2. False If a profit-maximizing firm finds that at its current level of production
MR<MC, it will raise prices.
The firm will increase output in order to maximize its profits.
3. False If increasing returns to scale are present, the long-run average cost increases as
more output is produced. (you must use a graph as part of your answer.)
ATC must decline in order to increase returns over the long run.
4. True A monopolist has no supply curve.
The firm decides what price to sell at which means there is no unique price-quantity
relationship.
5. True Sugar and honey have a positive cross-price elasticity of demand.
Sugar and honey are substitutes which is the case for positive cross price elasticities.
6. False A firm that is profitable in accounting terms must also be profitable in
economic terms. Similarly, a firm that is profitable in economic terms must also be
profitable in accounting terms.
Accounting terms does not take into account the implicit costs like economic terms does
so the profitability may change accordingly once those costs are taken into account.
7. )n the early 88’s cigarette-rolling machinery became available. Prior to this all
rolling was done by hand. The machines dramatically cut the cost of rolling
cigarettes. But they were not fully automatic—they needed the permanent
presence of an operator in order to work. Draw representative isoquants for
cigarette-rolling before and after the introduction of the machines. What were
the MRTS’s in each case?
With the introduction of machines, the demand with rise for machines and decrease for
labor. This can be seen in the parallel shift to the right on the graph above.
Q2
Q1
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Document Summary

Most elastic demand means demand is strongly affected by the change in prices. Thus, putting in a lower price causes big increase in demand of the product. Thus, sale of the product increases: false if a profit-maximizing firm finds that at its current level of production. Atc must decline in order to increase returns over the long run: true a monopolist has no supply curve. The firm decides what price to sell at which means there is no unique price-quantity relationship: true sugar and honey have a positive cross-price elasticity of demand. Sugar and honey are substitutes which is the case for positive cross price elasticities: false a firm that is profitable in accounting terms must also be profitable in economic terms. Similarly, a firm that is profitable in economic terms must also be profitable in accounting terms. rolling was done by hand. The machines dramatically cut the cost of rolling.

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