Homework #4
- (8 points) Show the derivation of a demand curve from the underlying fundamentals of consumers solving their problem. In other words, show a budget constraint and indifference curve that shows a consumer solving his problem. Then change the price of good 1 (either decrease or increase it) and show the new amount of good 1 consumed (assume the indifference curves are basically parallel and behave “nicely”). Change the price one more time (in the same direction) and show the new amount of good 1 consumed. Plot your three (Q, P) points on a separate graph to reveal your demand curve.
- (8 points) Joe’s hot dog stand projects the following demand for hot dogs:
Price Quantity Purchased (per day)
$3 90
$4 80
$5 70
$6 60
$7 45
$8 15
Calculate the same price elasticity of demand between $7 and $8. If you get a decimal answer longer than two decimal places, round your answer to the 2nd (hundredths) decimal place.
Given Find
Qf = SPED
Qi =
Pf =
Pi =
- (8 points) Walmart projects the following quantities of Coke demanded as the price of Pepsi changes:
Price Quantity Purchased (per day)
$1 200
$1.50 220
$2 250
$2.50 290
$3 340
$3.50 400
Calculate the cross price elasticity of demand between $1.50 and $2. If you get a decimal answer longer than two decimal places, round your answer to the 2nd (hundredths) decimal place.
Given Find
Qf1 = CPED
Qi1 =
Pf2 =
Pi2 =
- (8 points) Jason’s income elasticity of demand for boats is 4. If he owns two boats when he makes $500,000, how much money would he have to make in order to buy one more boat? If you get a decimal answer longer than two decimal places, round your answer to the 2nd (hundredths) decimal place.
Given Find
IED = If
Qf =
Qi =
Ii =
- (5 points) If a demand curve is perfectly elastic and consumers buy 500 units of the good at a price of $4, how many units will be purchased if the price increases to $4.50?
- (5 points) If a demand curve is perfectly inelastic and consumers buy 500 units of the good at a price of $4, how many units will be purchased if the price increases to $4.50?
- (9 points) Compute consumer surplus in the following scenarios.
- Ted has a reservation price for a Snickers bar of $3. He walks in to a convenience store and sees that Snickers bars cost $2.
- Susie has a reservation price for Gatorade of $5 after a long workout. She walks over to the vending machine and sees that Gatorade costs $3.
- Dwayne has a reservation price for Doritos of $2. While shopping at Publix, he sees that Doritos cost $2.50.
- (5 points) If two goods are substitutes for one another, what must be true about their cross price elasticity of demand?
- (5 points) If two goods are complements for one another, what must be true about their cross price elasticity of demand?
- (5 points) What must be true about the income elasticity of demand for inferior goods?
- (6 points) Clearly show where consumer surplus (CS) and producer surplus (PS) are on the graph below.
Price
S
P*
D
Q* Quantity
- (10 points) What happens to equilibrium price and quantity in the following scenarios? Circle the correct answer for each scenario below.
- Supply shifts right
PRICE -> GOES UP GOES DOWN UNDETERMINED
QUANTITY -> GOES UP GOES DOWN UNDETERMINED
- Demand decreases
PRICE -> GOES UP GOES DOWN UNDETERMINED
QUANTITY -> GOES UP GOES DOWN UNDETERMINED
- Demand and supply both increase
PRICE -> GOES UP GOES DOWN UNDETERMINED
QUANTITY -> GOES UP GOES DOWN UNDETERMINED
- Demand shifts left and supply shifts right
PRICE -> GOES UP GOES DOWN UNDETERMINED
QUANTITY -> GOES UP GOES DOWN UNDETERMINED
- A very large shift to the right in demand is accompanied by a very small shift to the left in supply (assume curves have equal magnitude of slope)
PRICE -> GOES UP GOES DOWN UNDETERMINED
QUANTITY -> GOES UP GOES DOWN UNDETERMINED
- (15 points) Complete the chart below regarding a firm’s costs as the quantity of output increases. Q is quantity, FC is fixed costs, VC is variable costs, TC is total costs, AFC is average fixed costs, AVC is average variable costs, ATC is average total costs, and MC is marginal cost. For all decimal answers longer than two decimal digits, round your answer to the 2nd (hundredths) decimal place.
| Q | FC | VC | TC | AFC | AVC | ATC | MC |
| 0 | 12 | 0 | 12 | n/a | n/a | n/a | n/a
|
| 1 | 4 |
|
|||||
| 2 | 9 |
|
|||||
| 3 | 15 |
|
|||||
| 4 | 22 |
|
|||||
| 5
|
30 | ||||||
| 6
|
39 | ||||||
| 7
|
49 | ||||||
| 8
|
60 | ||||||
| 9
|
72 | ||||||
| 10
|
85 | ||||||
| 11
|
99 | ||||||
| 12
|
114 | ||||||
| 13
|
130 | ||||||
| 14
|
147 |
- (3 points) What law of economics explains why VC increases by ever-increasing amounts as Q increases?
Homework #5
Name: _________________________________________________________
- (8 points) What are the differences in the assumptions between the industrial organizations of perfect competition and monopoly?
- (8 points) What are the differences in the conclusions between the industrial organizations of perfect competition and monopoly?
- (5 points) Complete the chart below. For all decimal answers longer than two decimal digits, round your answer to the 2nd (hundredths) decimal place. Note that a very similar chart appeared in homework 4, so you can use that solution as a guide.
| Q | FC | VC | TC | AFC | AVC | ATC | MC |
| 0 | 18 | 0 | n/a | n/a | n/a | n/a
|
|
| 1 | 4 |
|
|||||
| 2 | 9 |
|
|||||
| 3 | 15 |
|
|||||
| 4 | 22 |
|
|||||
| 5
|
30 | ||||||
| 6
|
39 | ||||||
| 7
|
49 | ||||||
| 8
|
60 | ||||||
| 9
|
72 | ||||||
| 10
|
85 | ||||||
| 11
|
99 | ||||||
| 12
|
114 | ||||||
| 13
|
130 | ||||||
| 14
|
147 |
- (5 points) Using your answers to problem #3, if the good that the firm makes sells for $13 in a perfectly competitive market, how many units will the firm make?
- (5 points) Based on your answers to problems #3 and 4, how much revenue will the firm make?
- (5 points) Based on your answers to problems #3 and 4, how much will that level of production cost the firm?
- (5 points) Based on your answers to problems #5 and 6, how much profit will the firm make?
- (12 points) Complete the table below for a monopolist concerning his revenues.
| Q | P | TR | MR |
| 0
|
78 | n/a | |
| 1
|
74 | ||
| 2
|
70 | ||
| 3
|
66 | ||
| 4
|
62 | ||
| 5
|
58 | ||
| 6
|
54 | ||
| 7
|
50 | ||
| 8
|
46 | ||
| 9
|
42 | ||
| 10
|
38 | ||
| 11
|
34 | ||
| 12
|
30 | ||
| 13
|
26 | ||
| 14
|
22 | ||
| 15
|
18 |
- (12 points) Complete the table below for the same monopolist concerning his costs. For all decimal answers longer than two decimal digits, round your answer to the 2nd (hundredths) decimal place.
| Q | FC | VC | TC | MC | ATC |
| 0
|
50 | 0 | n/a | n/a | |
| 1
|
10 | ||||
| 2
|
22 | ||||
| 3
|
38 | ||||
| 4
|
58 | ||||
| 5
|
82 | ||||
| 6
|
116 | ||||
| 7
|
156 | ||||
| 8
|
200 | ||||
| 9
|
250 | ||||
| 10
|
305 | ||||
| 11
|
370 | ||||
| 12
|
440 | ||||
| 13
|
520 | ||||
| 14
|
610 | ||||
| 15
|
710 |
- (5 points) Given the information in your tables for problems #8 and 9, how much output does the monopolist produce?
- (5 points) Given your answers to problems #8-10, how much revenue does the monopolist receive?
- (5 points) Given your answers to problems #8-10, what are the total costs that the monopolist has?
- (5 points) Given your answers to problems #11 and 12, what is the monopolist’s profit?
- (3 points) List and very briefly explain the three types of barriers to entry that can cause a monopoly situation to arise.
- (3 points) List and very briefly explain the three purposes of money.
- (5 points) Solve for C2* in the two-period consumption model with the following given information:
- Y1 = 500
- Y2 = 700
- r = 6%
- C1* = 450
- (4 points) Sometimes consumers don’t face the same prices. For example, a movie theater may offer cheaper tickets to senior citizens, or local restaurants may provide student discounts. How would different prices charged to different people change our model of the consumer problem? Would people end up at points on the ICs with the same slope upon solving their consumer problems? If not, why wouldn’t they be able to improve themselves through mutually beneficial trades (keeping in mind the movie ticket and meal examples provided above)?
