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# ECON Midterm Study Guide 1 ECON 1011

GWU

GPA 3.92

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This 12 page Study Guide was uploaded by SophieSol on Thursday October 29, 2015. The Study Guide belongs to ECON 1011 at George Washington University taught by Yezer, A in Fall 2015. Since its upload, it has received 241 views. For similar materials see Principles of Economics I in Economcs at George Washington University.

## Reviews for ECON Midterm Study Guide 1

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Doesn't cover all subject, badly formatted graphs, might as well get the answers from HW responses by Yezer

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Date Created: 10/29/15

Linear 1 Pork FLA Bo Peep has a 20 acre ranch and 8 employees She can produce 30 pounds of lamb chops per acre or 50 pounds of pork chops per acre Draw Peep s PPF Given this PPF what is Peep s opportunity cost of pork chops lf lamb chops are 6 per pound and pork chops are 3 per pound what will Peep produce a Write the production function equations a Do this by thinking what two things constitute the whole So she gets 30lbs lamb chopsacre This means that if you multiply 30 by the amount of acres you have designated to lamb chops you will get the total amount of lamb chops Therefore b L 3OAL c We do the same thing for pork chops she gets 50lbs pork chopsacre and multiplying 50 by the amount of land assigned to pork chops would give us the total amount of pork chops So d P 50Ap b We need to determine the total amount of acreage for both lamb chops and pork chops or in other words we need to combine these functions into an equation Note that the two letters that the production functions have in common are which indicate that Acres is what we start with So a A AL AP b We need to isolate the AL and Ap variables in the production functions in order to plug them in i L 3OALD AL L30 ii P 50Ap A D P50 c Now to plug and chug a A L30 P50 b But A is equal to 20 acres see problem question so i 20 L30 P50 d If we decide that lamb chops will be the independent variable X axis and that pork chops will be the dependent variable yaxis then we isolate the variable P as though it is y in a quoty mx bquot equation Note that it doesn t matter which variable plays the role of y or unless we are told in the question which to put on which axis a P 1000 53 L l our PPF 800 i We can graph this with the mindset of 1000 being 700 the yintercept and 53 being the slope 600 500 400 300 200 100 100 100 90 Lamb FLA e You can nd the opportunity cost by looking at the absolute value of the slope in the equation of the variable you are looking for It is 53 L so if you want to nd the opportunity cost of one lamb chop you look for the slope with I and know that it is 53 pork chops To get the opportunity cost of the other variable you take the reciprocal So the opportunity cost of one pork chop would be 35 lamb chop f When there is a question about money you automatically know to nd the equations for the isorevenue lines Revenue is R so we know that we have a total R comprised of revenue from lamb chops and revenue from pork chops We get 6lb of lamb chops and 3lb of pork chops So a R 6RL 3Rp b Because P is our quotyvariablequot we solve for P and get i RP R3 ZRL 1 What always confused me with this was that there is not really a quotyinterceptquot because of the R What I had to learn was to only look at the slope which is 2 In a linear PPF the iso revenue lines will intersect at one of the two corner points of the graph so start at the y 1 20 intercept of the PPF line and draw a new line using the slope of the isorevenue line The one that is the furthest away from the origin 100 is what gives us our answer Furthest out iso revenue line This tells us that she will produce 600 lbs of Lamb Chops and 0 Pork r lA nn 2 Original Growth Lumber makes wood products out of large trees growing on 10000 acres of mountain land Original Growth can turn 1 tree into 50 studs stud is 8 foot long and 2 by 4 or 75 boards boards are 34 inch thick Flatlands Forest Products uses smaller trees grown on a 20000acre tree farm and can turn 1 tree into 20 studs or 40 boards Assuming each producer can process 30 trees per day Find the equations of the PPF s for OGL and FFP and plot the PPF s What is OGL s opportunity cost of studs What is FFP s opportunity cost of studs Which has the lower opportunity cost of studs Which has a comparative advantage in producing studs OGL Studs per tree S 50TS D S50 TS Boards are B 75TB D B75 TB Total trees per day 30 T TS T6 Substitution T 30 S50 B75 i Solve for S S 1500 23B ii This is the PPF equation Plot the PPF with S on the vertical axis The slope is 23 so the opportunity cost of a board at OGL is 23 of a stud The B intercept is 30 75 boards per tree 2250 boardsday 1000 l39iCD FFP S 20TS l S20 TS B 40TB l B40 TB Total trees per day 30 T TS T6 Substitution T 30 S20 B40 i Solve for S S 600 12B ii This is the PPF equation The slope is 12 so the opportunity cost of a board is 12 of a stud and the B intercept is 1200 boardsday OGL has an absolute advantage in production because than can make more of both studs and boards than FFP 1070 EL Comparative advantage depends on opportunity cost of studs which comes from the slope of the PPF At OGL they take 30 trees and produce either 1 500 studs or 2250 boards per day At FFP they use 30 trees and produce either 600 studs or 1200 boards a Opportunity cost of boards at OGL is 23 of a stud b Opportunity cost of boards at FFP is 12 stud i Clearly boards cost less at FFP and hence FFP has a comparative I J II IJE Studs day 2000 1900 1800 1700 1600 1500 1400 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100 0 PPF for OGL sllope 23 5 5 S 0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 2600 2800 Boards Per Day NonLinear 7a Figure 1 shows the PPF for Neptune Boats which can produce either sailboats S or powerboats P Assume that sailboats sell for 100000 and that powerboats sell for 50000 each Neptune maximizes revenue by producing 55 sailboats 65 powerboats and earning 8750000 in total revenue 0 10 20 30 40 50 60 70 80 90 100 110 120 Powerboats The slope of the iso revenue line is P1OwemoatPsailoat 50000 100000 12 Isorevenue lines with this slope are shown by the dashed lines on the figure Tangency between the PPF and isorevenue line with slope 12 occurs when 65 powerboats and 55 sailboats are produced Total revenue 65 50000 55 100000 3250000 5500000 8750000 1 The demand for doughnuts in Flabtown is given by QD 4000 50P where P is the price in cents and OD is doughnuts demanded per day If the current price 40 cents how many doughnuts will be sold What is total expenditure a Substitute 40 for P and nd Q 4000 5040 4000 2000 2000 Total expenditure price x quantity and hence PQ 2000 40 cents 80000 cents 800 If the price rises to 60 cents how many doughnuts will be sold What is expenditure b Substitute 60 for P and nd Q 4000 5060 4000 3000 1000 Total expenditure price x quantity and hence PQ 1000 60 cents 60000 cents 600 Assume the supply of doughnuts to Flabtown is given by Q5 2000 100P OS is doughnuts supplied and P is price in centsdonut Find the marketclearing price and quantity C 591 Q5 QD d 2000 100P 4000 50P i Adding 2000 to each side and adding 50P from both sides of the equation gives 150P 6000 or P 6000150 40 cents per doughnut e Market clearing price 40 cents f Market clearing quantity 2000 Assume a price ceiing at 30 cents per doughnut What would you observe in the market g Substitute 30 cents into both supply and demand functions i QD 4000 5030 4000 1500 3500 ii Q5 2000 100 30 2000 3000 1000 h A price ceiling at 30 cents per doughnut should produce excess de ma nd i 1000 doughnuts will be produced and sold The excess demand is 2500 doughnuts 2 The short run market demand curve for apples in Appletown is given by A 2000 500 PA where A is pounds of apples purchased per day and PA is the apple price in dollars What is the choke price of apples If apples are provided free how many pounds will be consumed daily a To find the choke price from a demand curve set quantity 0 and solve for P b In this case set A 2000 500 PA 0 and PA 200500 4 pound is the choke price c Apple consumption when free is found by setting PA 0 and solving for A which means A 2000 500 PA 2000 5000 2000 The short run market supply curve for apples in Appletown is A 1000 1000 P A Note the supply curve is only defined in the first quadrant ie for values of A 2 0 What is the short run market clearing price of apples in Appletown How many pounds of apples will be sold per day 1 Set short run quantity demanded equal to short run quantity supplied a A 2000 500 PA 1000 1000 PA i This implies that 1500 PA 3000 or PA 30001500 2 per pound ii Substitute into either demand or supply to get quantity A 2000 5002 1000 pounds of apples per day Now impose a price ceiling of 250 per pound on apples How many pounds of apples will be sold per day a The market clearing price is 2 Therefore a price ceiling of 250 has no effect 1 The own price elasticity of demand for doughnuts is 2 Due to failure of the wheat crop there is some wheat in doughnuts the price of doughnuts rises by 2 3 30 You then expect doughnut consumption to change by and revenue to change by about a E AQAP b Substitute for E and AP and solve for AQ as follows c 2 AQ30 or AQ 60 d AR z AP AQ 30 6 60 30 When the price of doughnuts fell by 20 total revenue from doughnut sales fell 10 This implies that the quantity of doughnuts changed by and that the own price elasticity of demand for doughnuts is a AR z AP AQ 6 20 AQ 10 or AQ 10 b E AQAP c Substitute for AP and AQ d Solve for E e 10 20 05 Price rose by 10 but total revenue fell 10 Is this possible What does this imply for the own price elasticity of demand a AR z AP AQ 10 10 AQ or AQ 20 b You know own price elasticity E AQAP c Substitute for AP and AQ d Solve for E 20 10 2 When the price of J phonesquot fell from 250 to 150 the number of phones sold per month rose from 5000 to 15000 What does this suggest about the own price elasticity of demand for phones 3 E Q2 Q1Q2 Q12P2 P1P2 P12 15000 500015000 50002150 250150 2502 1000010000100200 112 20 and demand is quite elastic 1 Jack shops at Tracy s and purchases 12 cups for 4 each and 4 dishes for 12 each At the same time Jill shops at Sacks and purchases 8 dishes for 12 each and 4 cups for 6 each If Jack and Jill are neighbors and happen to meet what if any exchange might they consider a Jack a MUCMUD PCPD b 412 13 a MUCMUD PCPD b 6 12 12 c Jack values cups at 033 dishes and Jill values cups at 05 dishes d Jill s cups are worth more than Jack s e Jill will be willing to send Jack up to 3 dishes f Jack values 6 dishes at 9 cups so he has a gain from trade of 3 cups 2 Yizhi uses land labor and tractors to grow corn Currently the annual rental price of land is 500acre annual wages for farm workers are 8000 and annual rent per tractor is 1000 If the marginal products of land labor and tractors are MPLAND 2000 MPLABOR 24000 and MPTRACTORS 2000 bushels of corn per year Is he minimizing the cost of producing given output Assuming that Yizhi is a price taker in both factor and product markets how might he adjust her input mix a MC MP i MCLand 5002000 025 ii MCLabor 800024000 033 iii MCTr dctors 10002000 050 Land is the cheapest and tractors are the most expensive so Yizhi should hire more land and get fewer tractors High Income Household Low Income Household 2 180 160 140 120 100 080 060 040 Assume that Big BMI is a town with 1000 high income households and 1000 low income households The weekly demand for doughnuts by the typical high income household is given by DH 20 10 P where DH is number demanded per high income household per week and P is the price of doughnuts in dollars per doughnut The low income household demand for doughnuts per week is DL 10 5 P Plot these demand curves on a graph and add them horizontally to get the market demand for doughnuts in Big BMI Assume that the supply of doughnuts in Big BMI is given by D 5000 20000 P where D is total doughnut supply and P is price in doughnut Note that if P 025 D 0 which means that there is no willingness to supply any doughnuts at prices below 033 Plot the supply of doughnuts in Big BMI on the market diagram and find the market Clearing price and quantity produced The find the weekly consumption of doughnuts by the typical high and low income family Who determines the price and quantity of doughnuts and the distribution of doughnuts in Big BMI Market in Big BMI 020 DH DL D 5 10 15 20 1 2 3 4 5 6 7 8 9 10 11 5000 10000 15000 20000 25000 30000 Doughnuts per week Plot the demand curves of individual high and low income consumers and add horizontally multiplying consumption of the individual by 1000 in each case Note that the choke price is 2 for both groups so adding horizontally is quite easy Market demand has a choke price at 2 and at P 0 market demand is 10 1000 10 1000 30000 Supply is 0 at price lt 025 and it is plotted on the market diagram Market clearing price 1 quantity 15000 and this implies that each high income household consumes 10 doughnuts per week low income households 5 per week It is possible to add horizontally algebraically by simply multiplying the quantity demanded by each group by the number in that group so market demand is 1000 20 10P1000 10 5P 30000 15000 P Equating this to market supply find the market clearing price 30000 15000 P 5000 20000P 35000 35000 P or P 1 2 Now assume that 1000 more high income households move into Big BMI There is no change in the individual household demand curves but there is a new market demand curve Find that curve and determine the new market price total doughnut sales and consumption by high and low income households How have the new arrivals change the welfare of the households who previously lived in Big BMI Who determined the changes in price quantity and the distribution of doughnuts High Income Household Low Income Household Market in Big BMI 2 180 160 140 120 100 080 060 040 020 H L 0 5 10 15 20 1 2 3 4 5 6 7 8 9 10 11 5000 10000 15000 20000 25000 30000 Now add horizontally but multiply individual high income demand by 2000 and get the solid demand curve on the market diagram the original demand curve is show by dots Price 122 and sales are about 19500 Note that the growth in the community has caused a rise in price of doughnuts that makes the initial residents worse off they consume fewer doughnuts at the higher price of 122 rather than 1 It is possible to add horizontally algebraically by simply multiplying the quantity demanded by each group by the number in that group so market demand is 2000 20 10P1000 10 5P 50000 25000 P Equating this to market supply find the market clearing price 50000 25000 P 5000 20000P 55000 45000 P or P 5500045000 119 122 In the past GWU has provided free u shots for 3 hour periods on a given day and time to students and faculty at 4 different locations around campus each fall What would you eXpect to see at these events Describe the situation with a Marshallian cross diagram Let s say that 2 of these events are held at convenient locations and times and the other two are not Illustrate this on a Marshallian cross diagram If GWU charged a fee for the shots what would change sh0t Sshotsassuming 3 hours of operation Linecu a N Llnelnconvelt DConveniebnt Dhcglvenient We have two demand curves One is demand of inconvenience and the other is demand of convenience The convenient curve should be above the inconvenient one think that when demand increases the line shifts up or right If GWU charged a fee for the shots the lines would be shorter As the fee rises the lines would disappear 1 Output of phones and workers at the phone plant is give in Figure 1 Please plot the average an marginal product curves of labor Find the marginal product of labor when the number of workers is 20 50 and 80 Assuming that workers AlDLabor are paid 300 per day nd the margin39 cost of phones when the number of AlDLabor workers is 20 50 and 80 90 MP is slope of TP at each number Of workers Slope at 20 60030 20 Slope at 50 30030 10 Slope at 80 10030 33 Product AP is slope of a ray from the origin that Shows the ratio QL 18 AP20 MP20 20 16 AP50 80050 16 14 AP80 96680 12 12 10 Note that MPLaIDor is actually a series 8 Of steps at 20 10 33 J phonesday Figure 1 n 1000 3 900 800 SIO 39 APLabor 60 Slope 12 Slope 16 10 20 3O 4O 50 6O 7O 80 Workers Per Day J phonesL 26 24 22 Average M rginal Produ MP AP when labor is s 30 4 Then MPfalls to 10 and AP 2 begins to decline slowly 0 9O 10 20 30 4O 50 6O 7O 80 2 Now assume that workers are phones Draw the total average and total product curve above The wage of labor is 300worker Total cost is TC WL 300L 3 2 2 Plot total cost on the vertical axis and output on the horizontal axis and you 5 ll We mac that the total cost curve in this case only one input is just the total produc curve with the axes reversed this point in class When total product steep total cost is shallow because M and MC vary inversely 800 900 1000 Jphone 05 If the wage 1 the MC 1MPLaIoor So when L s 30 MC 30020 15 When 30 lt L s 60 MC3001030 When L gt 60 MC 30033 91 So MC is a step function because MP Is a step function Whenever MP is constant MC is constant AC AC TCQ WLQ LQ and you See that AC is just the inverse of AP in this case But in general AC varies inversely with AP the ONLY input in the production of marginal cost curves implied by the Total Cost in Hundreds of 1 0 Total Cost 0 Slope AC 27001000 0 210 ee180 th150 120 e 90 E 100 200 300 400 500 600 700 jphones per day hbr Marginal cost Wage 75 MC M 60 45 30 whe Q S 600 g 9 When L s 30 AC 300AP 15 MC 100 200 300 400 500 600 700 800 900 1000 When 30 lt L s 60 AC rises because Jphones perday MC gt AC and similarly when 60 lt L AC rises further as shown Figure 1 TCS 3 The graph on the right shows the short and long run total cost curves for Han s bicycles Based on these curves total fixed cost 250 short run average cost is minimized when output 33 bicycles Long run average cost is minimized when output 52 bicycles Note ACL minimum 80050 16 Note AC5 minimum 66633 22 10 2 40 50 3 Using the space provides on Figure 2 lgicycl39esday carefully draw the short and long run 35 Fi ure 2 MS quotAC5 average and marginal cost curves for 30 I x39 Han If she is a price taker 25 398 And the market price of bicycles 20 20 In the short run he will produce 31 bicycles 15 In the long run he will produce 5 6bicycles 10 i TMCL i 30 4 Draw ACL as a happy face win a minimum at 52 Draw AC5 tangent to ACL at 22 and with a minimum at 33 Then MCL is drawn through the minimum of ACL and MCS is drawn cutting MCL from below at 22 and through the minimum of ACS at 33 Short run output is found by equating P 20 MCS at an output of 33 this just happens to be the minimum of ACS and long run output is found by equating P 200 MCL at an output of 56 U

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