INTRODUCTION TO MICROECONOMICS
INTRODUCTION TO MICROECONOMICS ECO 304K
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This 35 page Class Notes was uploaded by Rossie Green PhD on Monday September 7, 2015. The Class Notes belongs to ECO 304K at University of Texas at Austin taught by Wayne Hickenbottom in Summer 2015. Since its upload, it has received 714 views. For similar materials see INTRODUCTION TO MICROECONOMICS in Economcs at University of Texas at Austin.
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Date Created: 09/07/15
Key practice MT 1 Sectionl MC 1b 2e 3e 4b 50 60 7a 8a SECTION II DO ONLY 1 OF THESE 2 QUESTIONS 2 pages WRITE ANSWER IN APPROPRIATE PLACE ON ANSWER DOCUMENT 1 0 31223 b 6 12 15 30 plzza c Cannot be on same demand curve because price of Dr is different in a and b Violates ceteris Paribus condition Key practice MT 1 2 a Diminishing returns is where MP starts to decrease From numbers in table MP is increasing up to L 3 So Dim Ret sets in between L 2 and L 4 th b The 10 worker 1ncreases cost and causes a lower total output so drops revenue so 9 workers has more revenue and less cost so must have more pro t Thus 10 cannot be pro t maximizing c total revenue 2 100000 200000 explicit costs 7 10000 70000 implicit costs 24000 10000000 10 124000 Economic pro t 200000 7 70000 7 124000 6000 gt 0 Accounting pro t 20000 7 70000 130000 d Accounting pro t would go up since hiring fewer workers Economic pro t would go down because now I add in Ted s time which is 50000 gt 100000 so economics costs go up and economic pro t goes down so this is not a good idea Even if Ted is twice as productive and can replace 2 workers then two workers cost 20000 lt 50000 so economic pro t still goes down SECTION III DO ONLY 1 OF THESE 2 QUESTIONS 1 page WRITE ANSWER IN APPROPRIATE PLACE ON ANSWER DOCUMENT 1 a A 1573 ATC MC AVC 120 40 24 39 6 10 39 4 Key practice MT 1 b At q 7 MC is increasing and MC and MP are inversely related so MP must be decreasing C market supply 204 demand 3600 L 2 a q FC vc MC 0 5O 0 1 5O 8 8 2 5O 1 4 6 3 5O 19 5 4 5O 26 5 5O 36 1 O b q 4 profit 94 76 40 lm MC L AVC ATC 8 58 7 32 193 23 264 19 365 865 c At q 2 MC lt AVC so P lt AVC so not covering variable costs and better off shutting down Since to produce P must be at least as big as AVC the smallest AVC in the table is 197 or 633 So that is the lowest price in the table that will get the firm to produce in the SR Practice MT 1 SECTION I MULTIPLE CHOICE DO ALL 8 QUESTIONS 1 A consumer with an income of18 has a utility maximizing bundle of 1 6 when the price of good X is 6 and the price of good y is 2 Which ofthe following must be true The person likes the bundle 1 6 better than the bundle 2 3 II The utility from the bundle 16 is biggerthan the utility from the bundle 010 Ill The consumer can afford 4 units of good X a Only and II are true b Only is true c Only III is true d Only II is true e Only II and III are true 2 A rm has a standard shaped short run cost curves where diminishing returns sets in at 10 units ofoutput Which of the following statements must be true The ATC is above the AVG at 8 units ofoutput ll MC is increasing at 12 units of output lll lf ATC MC at 21 units of output then AVC is increasing at 21 units of output a Only is true b Only and II are true c Only and III are true d Only II and III are true e All of them are true 3 At the Pampered Pet Salon the marginal products of the first second and third workers are 20 16 and 10 dogs washed respectively The total product number of dogs washed by the three workers is a 1533 b 30 c 60 d 138 e 46 4 Two points on a demand curve for a good qP are 13 25 and 7 55 The price elasticity of demand between these two points is and the demand is a 1 unitary elastic b 08 inelastic c 12 inelastic d 12 elastic e 08 elastic Practice MT 1 5 HmbNulljgt rP Day Total Utility Marginal Utility 1 30 2 52 3 67 4 76 5 4 gay Ml Utility Marginal Utility 1 20 2 35 3 47 4 57 5 7 Refer to the table above Assume that a store is giving hamburgers and sodas away for free Consumers can have as many sodas and hamburgers as they want but the food has to be consumed one unit at a time If George has already had one soda and two hamburgers then George should a next consume a soda to maximize his utility b next consume a hamburger to maximize his utility c be indifferent between consuming the second soda or the third hamburger d consume neither another soda nor another hamburger to maximize his utility e consuming less of both goods 6 lfa perfectly competitive firm is currently producing where AVC lt P MC lt ATC in the short run a the firm could increase profit by producing zero b the firm could increase profit by producing less but should produce c the firm is producing the profit maximizing quantity of output d the firm could increase profit by producing more e cannot be determined from the given information 7 A good has a price elasticity of demand of O75 an income elasticity of 1 and a cross price elasticity with sugar of 23 Which of the following is true The good is inferior The good has an inelastic demand I The good is a complement to sugar a All of them are true b Only and III are true c Only is true d Only II is true e None of them are true Practice MT 1 8 At point B in the diagram below the consumer s marginal rate of substitution must be A Jason39s preferences and budget constraint 100 i i i i iQB Number of ice cream sandwiches Number of ice cream cones a more than 23 b exactly 23 c less than 23 d more than 32 e exactly 32 SECTION U DO ONLY 1 OF THESE 2 QUESTIONS 2 pages WRITE ANSWER lN APPROPRIATE PLACE ON ANSWER DOCUMENT 1 In all these problems the consumer is choosing to spend all his income on either pizza or Dr Pepper In all graphs put Dr Pepper on the vertical axis a Draw the budget of a person who has 150 and Dr Pepper costs 2 per unit and pizza costs 15 per unit specifically labeling the intercepts Explain whether or not it is possible for the consumer s utility maximizing bundle to be 7 pizzas and 30 Dr Peppers 3 points b The demand curve of pizza forthis individual contains the following 2 points P Q This person has 150 in income and chooses to buy 30 Dr Peppers when the price of pizza is 10 and when the price of pizza is 5 Draw the budget constraint when the price of pizza P 5 and when the price of pizza P 10 Draw both of these budget constraints together on a new graph but not the same graph as in a Specifically label the intercepts of each constraint Also find the coordinates of the utility maximizing point on each budget and draw the indifference curve through the point 5 points Practice MT 1 c If we knew that forthe budget in a the utility maximizing bundle contained 4 pizzas would this information tell us a 3rd point on the demand curve in b Why or why not 3 points 2 Let s explore the business of Farmer Ted The farmer has two fixed inputs that he owns A tractor which Ted can rent out for 24000 per year if he doesn t use it on his farm at all in the year and land which is currently valued at 1 million dollars The only variable input is labor The output of the farm per year depends on the quantity of labor hired per year in the following way L Q L Q 1 1 0000 6 90000 2 25000 7 100000 3 45000 8 106000 4 63000 9 108000 5 78000 10 107000 a Explain at what level of labor diminishing returns sets in 3 points b Referring specifically to the definition of profit explain why Ted would never hire 10 workers per year if he is trying to maximize profit 1 point Ted is currently producing 100000 bushels of hops per year for which he receives a price of 2 per bushel Ted pays 10000 per worker per year Currently Ted does no work on the farm He instead works as a stockbroker earning 50000 per year Being a stockbroker he is aware of opportunities that would allow him to invest his money safely and earn 10 c Find the economic profit per year for Ted s farm at current production levels How will this number look different than the accounting profit described by Ted s bookkeeper 3 points d Ted is worrying that the farm is not as profitable as he would like He is decides to do some of the farm work he is currently paying for He would no longer have time to do his work as a stockbroker but would still be aware of the same investment opportunities If Ted has the same farming skills as a person he hires and wants to keep the same level of production show what would happen to his accounting and economic profit with this decision Is this a good idea Would it be a good idea if Ted was as productive as two workers 4 points SECTION III DO ONLY 1 OF THESE 2 QUESTIONS 1 page WRITE ANSWER IN APPROPRIATE PLACE ON ANSWER DOCUMENT 1 A rm has standard shaped cost curves Diminishing returns sets in at q4 The minimum value of AVC is 24 at q6 MC crosses ATC at a value of 120 when q10 The xed cost is 800 Key Practice Initial exam MC1e 2a 30 4d 5b 6b 7a 8a SECTION II 1 a at 59 yogurt 13 additional yogurt cost 2 cheese so 1 costs 213 0154 at 82 yogurt 9 additional yogurt cost 2 cheese so 1 yogurt costs 29 022 b at 101 yogurt 11 additional yogurt cost 2 cheese so 1 costs 211 0182 at 112 yogurt 12 additional yogurt cost 2 cheese so 1 yogurt costs 212 16 0167 c in a as produce more opportunity costs increases this consistent with law of inc opp cost In b producing more has lower opp costs this doesn t make sense since shifting less ef cient resources d Yogurt Cheese slope between 10 cheese and 12 cheese 132 or 65 slope between 8 cheese and 6 cheese 92 45 Slope between 4 cheese and 2 cheese 112 55 Slope between 2 cheese and 0 cheese 6 2 a cost of tomatoes for Kinsella is 3 peppers Cost of tomatoes to MacDonald is 8 peppers MacDonald gives up more to produce tomatoes so may trade with Kinsella 1 for opp costs 1 for why trade Any reference to cheaper or lower opp cost is ok b Slope is 3 from y intercept of 52 until kink at 440 Slope is 8 from kink to X intercept of 9 1 for both intercepts correct 1 for coordinates of kink 1 for shape correct Do not need slopes for credit PEPPERS w o 0 5 1O TOMATOES Key Practice Initial exam c Good deal for McDonald since a tomato costs him 8 peppers and at this price can get a tomato for 2 No good for Kinsella since he can produce 3 peppers if he gives up a tomato and at this price he only gets two 1 for why good for mcD l for why bad for Kinsella One if use speci c numbers in each d If both specialize they can produce 4 tomatoes and 40 peppers which is the total being consumed here If economy at this point on the ppf Kinsella must be producing 4 tomatoes and 0 peppers Since he ends up consuming 2 tomatoes and 14 peppers that means the trade was 2 tomatoes for 14 peppers This trade also works for McD since trading l4 peppers leaves him 4014 26 and he gets the 2 tomatoes he consumes This trade makes the price of l tomato was 7 peppers 1 for production 1 for how trade works 1 for price SECTION III 1 a In anticipation of future rising prices consumers increase their demand today This increases price and quantity of cotton P A Cottontoday S lt D D Q 1 for increase demand in picture 1 for increase price and quantity can be stated or with arrows on axis of graph 1 for shift in anticipation of future prices b Supply of dress shirts decreases due to the input cotton getting more expensive Price of dress shirts increases and quantity of dress shirts decreases Silk is a substitute for cotton so increased demand for silk Higher price and quantity A Dress shirts P A Silk l xT lt D P Practice Final SECTION I MULTIPLE CHOICE DO ALL 22 QUESTIONS Which ofthe following must be true about a monopolistically competitive firm I In the long run the firm produces where P gt MC II The rm faces a perfectly elastic demand curve lll Every firm in the industry produces homogeneous output a Only and III are true b Only is true c Only III is true d Only II is true e All 3 are true 2 lfthe Pareto Ef cient quantity of good X is 27 and the market quantity demanded at price of 1 3 is 27 then a The MC of producing the 28th unit ofthe good must be less than 12 b Producing more of good X means producing less of some other good c No one is willing to pay 10 to buy another unit ofX d Producing more than 27 units of good X would make someone better off without making someone else worse off e le was produced in a perfectly competitive market less than 27 units ofX would be produced 3 A rm has only 3 projects to choose from Project X costs 10000 today and has a rate of return of 6 Project Y costs 1 000 today and pays 1070 next year and that is it Project Z costs 5000 today gives all if its payments two years from now and has a rate of return of 3 Which of the following is not true a 11000 4 is a point on the firm s investment demand curve b In two years project Z pays less than 5400 c Since we don t know exactly how much the future payments of project X and Z are we cannot tell whether or not we will invest in these projects at a given interest rate d The firm will not invest anything if it has no money on hand and the interest rate on borrowed money is 8 e lfthe rm has 16000 on hand that is earning 15 it will use all 16000 to invest in these projects Answer questions 4 and 5 based on the picture below Practice Final were market price of the good would be a P2 b P3 c P5 d P2number of firms e P3number of firms 5 lfthe rm in this picture were acting like a oneprice profit maximizing monopolist the pro t of the firm would be a O b P2Q1 P5Q1 c 2P2 P5Q2 Q1 d 2P1 P2Q1 e P3Q2 P5Q2 6 A consumer facing a prices of 2 per apple and 3 per peach chooses to purchase 7 peaches and 5 apples Which ofthe following statements must be true The consumer s income is greater than 30 II The marginal utility of the 7 peach is larger than the marginal utility of the 5th apple Ill The consumer is not maximizing utility be because gig a All of them are true b Only and III are true c Only III is true d Only and II are true e Only II is true Practice Final 7 Referto the figure below fthe price of a hamburger is decreased from 4 to 2 the price elasticity of demand using the midpoint formula is 4 10790 8 77777 if Q 393 Gr a E 4 r r 1 2 r r r r A r r r n D 1 i 3 4 5 393 Number of hamburgers a 30 b Approx 033 c 14 d 10 e Approx 07123 8 According to the income statement of Joe s Clothing Store total revenue was 67000 and total cost was 48000 However Joe worked futime in his store and invested 30000 to buy and stock merchandise Give this information which of the following are true We cannot calculated exactly what the store s economic profit is because we don t knowthe opportunity cost of his time II We cannot calculate the exact value of the store s accounting profit because we don t know Joe s normal rate of return I The store s economic profit is less than 19000 a Only and III are true b Only is true c Onyandare true d Only II and III are true e A ofthem are true 9 If firm s LRAC 45 for all quantities between q7 and q 11 then a Increasing production from q8 to q9 leads to higher average costs in the LR b There must be constant returns to scale at q 10 c The short run competitive equilibrium price must be 45 d The long run competitive equilibrium price must be greaterthan 45 e Firms producing q9 in short run competitive equilibrium cannot be making economic losses Practice Final Questions 10 and 11 both referto the game below FIRMZ X Y F 110 175 I X 218 220 R M 150 140 Y 2 30 235 1 10 In the game pic ured above the dominant strategy equilibrium is a Both firms play X b Firm 1 plays X and firm 2 plays Y c Firm 1 plays Y and firm 2 plays X d Both firms play Y e There is no dominant strategy equilibrium in this game 11 Referring to the same game as question 10 which of the following statements are true Both firms playing Y is a maximin equilibrium ll Firm 2 s dominant strategy is to play Y lll Firm 1 playing X and rm 2 playing Y is a Nash equilibrium a Only is true b Only II is true c Only III is true d Only and II are true e All 3 are true 12 At q 7 the MC is 15 and the AVG is 20 Which of the following must be true At q7 AVC is decreasing ll lfthe price of the good is 15 the rm will produce 7 of the good in the Short run lll At q 7 ATC is decreasing a Only is true b Only II is true c Only and II are true d Only and III are true e All 3 are true Practice Final 13 Dorf can produce 4 cars OR 2 trucks Gedod can produce 12 cars OR 3 trucks Which of the following statements are true Gedod cannot be better off trading with Dorf because he has an absolute advantage in both goods II If Dorf and Gedod work together and produce 3 trucks they can only produce 4 cars lll lf cars are the good on the X axis the slope of Gedod s PPF is always 4 a Only is true b Only II is true c Only III is true d None ofthem are true e All of them are true 14 A consumer is offered two different salary options Option A pays a guaranteed 50000 per year Option B guarantees only 30000 but offers a chance to make an extra 100000 bonus Which ofthe following are true Any riskaverse person will prefer option A ll lfthe person is riskneutral and believes they have a 30 chance of making the bonus they will choose option B III For any consumer the utility of the expected income of option B is always higher than the expected utility of option B a None ofthem are true b Only and III are true c Only II is true d Only is true e All of them are true 15 A price discriminating monopolist has divided consumers into two groups The rst group is buying 50 units and paying a price of 60 The second group is buying 75 units and paying a price of 45 Which of the following statements must be true a The firm could increase profit by lowering the price to the 1St group of consumers b In would bene t consumers in both groups if consumers in the rst group were able to sell the good to consumers in the second group c The firm could make more profit by charging both groups the same price d The MC ofthe 125th unit ofoutput is less than 45 e In the long run rms will enter and charge a lower price to the consumers in the rst group Practice Final 16 Refer to the table above a chance of becoming disabled in any given year If she does become disabled she will earn 0 lf Jane does not become disabled she will earn her usual salary of 60000 Jane has the opportunity to purchase disability insurance for 20000 which will pay her her full salary in the event she becomes disabled Jane39s utility per year with the policy is and her expected utility without the policy is a 45 40 b 45 45 c 60 40 d 20 45 e 250 17 If marijuana is legalized and the risk currently associated with buying and selling it is thereby eliminated there is likely to be an effect on both the demand and the supply of marijuana This would most likely affect the current equilibrium price and the current equilibrium quantity in which of the following ways a price will definitely decrease quantity will de nitely increase b price will definitely increase quantity will definitely increase c effect on the equilibrium price uncertain quantity will definitely decrease d effect on the equilibrium quantity uncertain price will de nitely increase e effect on the equilibrium price uncertain quantity will definitely increase 18 A data processing firm hires you to provide economic advice The rm owner tells you that her only variable input is the number of dataentry operators The hourly wage for dataentry operators is 1500 The marginal revenue product curve for dataentry operators reaches its maximum at three workers with a marginal revenue product of 1 200 What advice would you give this rm a Hire three dataentry operators so as to minimize the amount of money the firm will lose b Shut down immediately as the firm is not able to cover all of its variable costs c Increase the wage rate paid to dataentry operators so that their marginal revenue product will increase d Produce as much as possible so as to maximize the difference between the wages paid to dataentry operators and their marginal revenue product e Hire more than three data entry operators so you are past the point of diminishing returns Practice Final 19 A consumer chooses the bundle 15 10 when the price of good X is 10 and the price of good y is 15 Both good X and good y are available in continuous quantities It must then be true that a The consumer s MRS at 15 10 23 b The consumer will purchase equal quantities to both goods when their prices are equal c The consumer s income is less than 300 d The consumer cannot afford the bundle 3 18 e The consumer prefers the bundle 25 6 to 15 10 20 An industry is currently in shortrun competitive equilibrium with 400 identical firms each producing a quantity of 7 at a total cost both LR and SR of 67 and making economic losses of 11 Which ofthe following must be true The long run equilibrium market quantity is more than 2800 II The long run equilibrium price is less than 10 Ill None of the existing firms will leave the market in the long run a Only and II are true b Only II is true c Only III is true d None ofthem are true e All of them are true 21 The market for a particular type of labor has an equilibrium wage at 48 and 300000 units of labor Which ofthe following must be true lfa rm hiring this labor has diminishing returns set it at the 4th unit of labor and the MRP of the 8th unit of labor is 40 then the firm hires more than 8 units of labor ll lfa rm with a price ofoutput of 8 hires 11 units of labor then the MP of the 11th unit of labor is at least 6 III lf households become less interested in providing this labor the market wage will increase a None ofthem are true b Only III is true c Only II and III are true d Only and III are true e All of them are true Practice Final 22 The present discounted value of R dollars to be paid in t years is a the future market value of receiving R dollars in t years b equal to R x t years c the amount you have to put aside now if you want to ensure that you end up with R dollars t years from now d the amount you will have to save in the future to allow you to consume R dollars today e The return in t years of investing R dollars today SECTION II DO ONLY 1 OF THESE 2 QUESTIONS WRITE ANSWER IN BLANK PAGES THAT FOLLOW QUESTION 1 Consider two individuals Fred and Barney In one hour Fred can produce either 9 units of beer or3 units of wine In one hour Barney can produce 1 unit of beer or2 units of wine a Explain who has the comparative advantage in producing each good Specific calculations of opportunity cost should be part of your explanation 2 points b Draw the PPC for the entire economy if Fred and Barney work together with wine on the horizontal axis 3 points c Assume that each person wants to consume 1 unit of wine then as much beer as they can Determine what each person will end up consuming i when they cannot trade ii when they can trade at a price of1 beer 1 wine and use this to explain why trade benefits both consumers 5 points d Explain who bene ts if the price of trade changes from 1 beer 1 wine to 1 beer 12 wine 2 points 2 After hurricanes on the Gulf coast it is typical that the equilibrium price of water rises and less water is consumed a Draw a supply and demand diagram that is consistent with this information Explain why hurricane conditions would cause the shift that you drew 3 points b Given the results of the water market in a draw a supply and demand diagram showing how the changes in the water market affect the market for powdered laundry detergent and the market for milk Be speci c about how price and quantity change in each ofthese markets 5 points c It is common in hurricane situations that the governing authority regulates a price for water that is different from the equilibrium price Explain in such situations whether the regulated price is a oor or a ceiling Explain the goal behind such a regulation and why price regulation does not guarantee the goal will be met 4 points Practice Final SECTION III DO ONLY 1 OF THESE 2 QUESTIONS 2 pages WRITE ANSWER IN BLANK PAGES THAT FOLLOW QUESTION 1 Answer the following based on the graph below A 135 ATC MC a Find AVC when the rm is producing 12 units of output 3 points b Explain whether or not diminishing returns has set in at 9 units of labor if the total product of 4 units of labor is 1 1 2 points c Assume that this is the picture of1 of 150 identical firms producing this good in a perfectly competitive market In the picture do notredraw identify but do not calculate the total cost and pro t at the pro t maximizing quantity when the market equilibrium price is 90 Indicate whether the pro t is positive or negative 4 points d Explain why on the market supply curve there is no price that will cause the market to produce 600 units of output but there is a price that will cause the market to produce 1500 units ofoutput but you can t tell exactly what that price is 3 points Practice Final 2 A consumer who has 360 in income and faces a constant price of P 5 for soup has the following demand curve for nuts Price of nuts Quantity demanded of nuts 3 7O 5 36 8 20 a Draw 3 different budget constraints for the consumer all on 1 set of axes with nuts on the horizontal axis On each budget be sure to show the value of the intercepts the indifference curve through the utility maximizing bundle and the coordinates of that bundle 6 points Based on the information and graphs previously described explain whether or not each ofthe following statements are true b The bundle 70 30 has more utility than the bundle 55 39 2 points c The MRS for the consumer at the bundle 37 35 is less than 1 2 points d From the information in this problem about soup and nuts they appearto be complements 2 points Practice Final SECTION IV DO ONLY 1 OF THESE 2 QUESTIONS WRITE ANSWER IN BLANK PAGES THAT FOLLOW QUESTION 1 The picture below represents the demand and marginal cost for a good Demand and MC are linear but the diagram is not necessarily to scale L MC 1990 42 10 demand 16 q a Find the consumer surplus and producer surplus if the market is perfectly competitive 2 points b Explain why it must be that the demand equation is p 3Q 90 and the MC 2Q 10 2 points c Find the equation for MR 1 point d Find the price and quantity ifthis market is a monopoly 3 points e Find the value of consumer surplus if this is a monopoly Then nd the value of producer surplus for a monopoly Use these two figures and the answer to a to find the social cost of the monopoly 4 points 2 For each ofthe following situations explain whether or not you would make the described investment Be sure to specifically show any calculations useful in your explanation a A machine that costs 9000 today will increase the output of the rm by 500 units next year and 1000 units the year after then disintegrate The price of output will be 6 next year and 7 the year after The interest rate is 8 3 points b A farmer needs a tractor The farmer is a price taker in the output market and faces a price of 050 per unit With the tractor the farmer can increase his output by 40000 units per year The farmer can rent a tractor for 18000 per year or buy one for 70000 that will last 4 years then disintegrate lfthe interest rate is 10 should the firm rent buy or not use a tractor 6 points c Explain why your answer to b could be different ifthe tractor still had value after 4 years 3 points Exam Information Some information concerning the 1S midterm exam on March 7th 1 NOTES ON PROBLEMS IN TEXTBOOK FOR MIDTERM EXAM Below is a list ofthe relevant pages in the text and problems that will help you in studying for the exam Page numbers in parenthesis italic are for the custom version The criteria for grading the questions is the same as on the review for the initial midterm Note from this reading that the exam is not directly cumulative Only material from the previous exam that has directly been delt with in this section ofthe class will be relevant Also remember that your first priority for studying for this exam should be looking over homeworks 2 and 3 and the sample exam questions CHAPTER 4 Pages 111 120 Material from this chapter will be only on the multiple choice section of the exam End of chapter problem set 3 T 8 H CHAPTER 6 Pages 153 162 172 176149 158 168 172 Material from this chapter will be covered in multiple choice section and 1St choice problem End of chapter problem set 2 T 4 S 5 S 7ac S 9 S 10 H 13 S 16 S 17 S Appendix problem set 1 S 2 S 3 H 4 H 5 T 6 S CHAPTER 7 Pages179 190175 187 Material from this chapter will be covered inthe multiple choice section and the 15tandor 2ndchoice problem Problem set 1 S 2 T 4 S 5T 7 H 10 S 12 8148 15 S 17 S 18 T 20 S 21 8 CHAPTER 8 Pages 231 249227 245 Material from this chapter will be covered inthemultiple choice section and the 2nd choice problem Problem set 1 T 2T3S 4S7S 889 H 10 H 11 H 12T 15 S 168 17 S 18 S 19 S 20 H CHAPTER 9 Pages 221 238217 234 Material from this chapter will be covered in the multiple choice section and the 2nd choice problem Problem set 1 S 2 S 3 S 5 S 7T 8 S 98 14 S 15T 16 H 17 S 18 S 19 H 21 T 22 S 2 Relevant problems on blackboard Currently there are 3 sample midterms with answers and a sample final and the other class s lnitial Exam without answes in the course documents section of the blackboard pages The relevant problems for this exam are lnitial MT Section MC 7 Midterm 1 All problems except Section MC 4 and 7 MT 2 Section IMC 1 Chapter 4 0 Price system 0 Price rationing Allocating goods and services to consumers when Qd exceeds Qs That is when a shortage exists in a free market the price of the good will rise until Qs equals Qd Equilibrium 0 Price Ceiling A maximum price that sellers can charge for a product or service usually set by the government Price ceilings lead to shortages o Other nonprice options for allocating resources 0 Queuing Waiting in line Ex People waited at a gas station Under this system gasoline went to those people who were willing to pay the most but the sacrifice was measured in hours and aggravation instead of dollars Favored Customers Those who receive special treatment from 0 dealers Ex During gasoline crisis many gas stations owners decided not to sell their scarce supplies to general public Rather they reserved the supplies to friends and favored customers 0 Ration Coupons Tickets that entitle individuals to purchase a certain amount of a given product 0 Price Floors A minimum price below which exchange is not permitted Price floors lead to excess supply If the price floor is set above the equilibrium price the result will be excess supply Qs gt Qd Chapter 6 0 Perfect Knowledge The assumption that the households possess knowledge of the qualities and prices of everything available in the market and that firms have all available information concerning wage rates capital costs and output prices 0 Three basic decisions 0 How much of each product or output to demand 0 How much labor to supply 0 How much to spend today and how much to save for the future 0 Several factors influence the Qd of a given good or service demanded by a single household 0 The price of the product 0 The income and wealth o The prices of other products 0 The household s tastes and preferences 0 The household s expectations about future income wealth and prices 0 Budget Constraint The limits imposed on household choices by income wealth and product prices 0 Equation of Budget Constraint 0 Px X Py Y Price of X Quantity of X consumed Price of Y Quantity of Y consumed Household Income 0 Slope PxPy YintlPy XintlPx 0 Example on pg 156 o E cannot afford o D inefficient o What is required to make a Budget Constraint 0 The income and Prices A good choice is something on the line But the ultimate choice always depends on the consumers likes and dislikes Utility or total utility The total amount of satisfaction obtained from consumption of a good or service Marginal utility MU The additional satisfaction gained by the consumption or use of one more unit of something Law of diminishing marginal utility The more of any one good consumed in a given period the less satisfaction utility generated by consuming each additional marginal unit of the same good Assumptions 0 We assume that this analysis is restricted to goods that yield positive marginal utility or more simply that quotmore is better We assume a diminishing marginal rate of substitution The marginal rate of substitution is defined as MUxMUy or the ratio at which a household is willing to substitute X for Y We assume that consumers have the ability to choose among the combinations of goods and services available We assume that consumer choices are consistent with a simple assumption of rationality o Indifference CurveLikevs Budget ConstraintPrice O 0 BC is set of points that cost the same which the income we have but IC is a set of X and Y that the consumer feelsthe same about An IC is a set of points each representing a combination of some amount of good Y that all yield the same amount of total utility A BC separates what s affordable from what s unaffordable VS A lC separates what s better from what s worse Everything above the IC is better and everything below is worse VS Everything above the BC is not affordable and everything below is inefficient 0 As we move along an lC the amount of utility we gain from an additional good is offset by the loss in utility from the other 0 O O O MUx AX MUy AY AYAX MUxMUy The slope of an IC is the ratio of MUx to MUy and its negative This is also called Marginal rate of substitution Therefore the negative slope of an IC Marginal rate of substitution 0 Appendix 0 O O The shapes of lC s depend on the preferences of the consumer and the whole set of ICS is called a preference map Pg 174 Farther out lC have bundles with higher utility The farther out the IC the better of everything on fig 6A2 Consumer UtilityMaximizing Equilibrium Consumers will choose the combination of X and Y that gives maximum total utility I The slope of the IC The slope MRS of the BC 0 Utility Maximizing rule MUxPx MUyPy o How do you derive a demand curve from indifference curves and budget constraint 0 Take the X units and the Prices of them and draw a demand curve The basis of choice Utility 213 around 48 mins and 215 utility maximizing rule w for all pairs of goods PX PY MU MU X gt Y buy more X P X P Y MU MU X lt Y buy more y P X P Y Diamondwater paradox o The things with the greatest value in use frequently have little or no value in exchange 0 The things with the greatest value in exchange frequently have little or no value in use Chapter 7 The Production Process The Behavior of ProfitMaximizing Firms 0 Production The process by which inputs are combined transformed and turned into outputs o Firm An organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand Most firms exist to make a profit 0 To achieve a profit all firms must make three basic decisions 0 How much output to supply 0 Which production technology to use o How much of each input to demand 0 Profits and Economic costs 0 Profit total revenue total cost 0 Total revenue the amount received from the sale of the product q x P Number of units sold x Price per each unit 0 Total cost or total economic cost The total of I Outofpocket costs aka accounting costs I Normal rate of return on capital I Opportunity cost of each factor of production 0 Total economic profit total revenue total economic cost Total accounting profit total revenue total accounting cost 0 Two main costs not included in accounting cost I Owner s labor measure with opp Cost of time I Moneylong term assets invested in business measure opp Cost of using asset Normal rate of return A rate of return on capital that is just sufficient to keep owners and investors satisfied For relatively riskfree firms it should be nearly the same as the interest rate on riskfree government bonds The opp Cost of firm assets is oftennormal rate of returnvalue of assets 0 Accounting Profit is bad but 0 economic profit is ok Short run vs Long run decisions 0 Short run firm operates under fixed factors of production and firms can neither enter nor exit an industry 0 Long run no fixed factors of production firms can increase or decrease the scale of operation and new firms can enter and existing firms can exit the industry The production Process 0 The quantitative relationship between inputs and outputs is called production technology 0 Laborintensive technology technology that relies heavily on human labor Ex 50 guys with shovel o Capitalintensive technology technology that relies heavily on capital labor Ex one guy with money Production functions Total product Marginal Product and Average Product 0 Production function or total product function A numerical or mathematical expression of a relationship between inputs and outputs It shows units of total product as a function of units of inputs Marginal Product Theadditional output that can be produced by adding one more unit of a specific input ceteris paribus O 0 Law of diminishing returns when additional units of a variable input are added to fixed inputs after a certain point the marginal product of the variable input declines Average product the average amount produced by each unit of a 0 variable factor of production Average product total producttotal units of labor When AP lt MP increase in AP When AP gt MP decrease in AP Capital and labor can be complementary inputs as well as substitute inputs Chapter 8 Shortrun Costs and Output decisions Fixed cost Any cost that does not depend on the firm s level of output These costs are incurred even if the firm is producing nothing There are no fixed costs in the long runSame as total fixed cost overhead and sunk costs Variable cost A cost that depends on the level of production chosen Same as total variable cost Total cost Fixed cost variable cost Average fixed cost Total fixed cost number of units of output No Marginal fixed cost Total variable cost the total of all costs that vary with output in the short run Total variable cost curve A graph that shows the relationship between total variable cost and the level of a firm s output Marginal cost The increase in total cost that result from producing one more unit of output Pretty much the change in variable costs Declining Marginal Product Increasing Marginal cost Average Total cost total variable cost the number of units of output ATC AFC AVC MC decreasing AVC decreasing MC increasing AVC increasing Perfect competition An industry structure in which there are many firms each small relative to the industry producing virtually identical products and in which no firms is large enough to have any control over prices Homogeneous products Undifferentiated products products that are identical to or indistinguishable from one another Total Revenue price x quantity Marginal revenue the additional revenue that a firm takes in when it increases output by one additional unit In perfectly competitive markets Price Marginal revenue Chapter 9 Longrun costs and output decisions 0 AVCTVCq o ATCTCq In a competitive equilibrium 0 Both SR and LR P MC and OS Qd O Key practice MT 2 SECTION Multiple choice 1d 20 3d 40 5a 60 70 8b SECTION II 18000 1800 1800 490185 lt 50000 So don t do this project even ifhave the money 105 105 105 Statement is false 9000 2000 b 7 7 108 1082 So statement is false 10048 gt 10000 Firm would do project 1 even if had to borrow the money C True from calculation in a d Since project 1 was good at 8 it will be good at 5 Already know project 2 no good 1000 22400 105 1052 10000 at 5 so statement false 193655 lt 20000 So no good and only invest Need to check project 3 2 a L 7 although 6 gives same pro t TC at L7 730 100 310 so pro t is 560 7 310 10 b MC at 46 309 33 MC at 54 308 375 MC at 60 306 5 MC at 64 304 75 Decimals ok as well C P MC true since P 5MC at Q 60 But 60 output is where L7 which was the answer to a d i At w60 firm will hire no labor since W gt mrp ii NowMRP 30 atL 9 iii No change so L7 SECTION III 1 a MR 6Q 90 b MRMC says 6Q90 4Q so Q 9 Plugging back into the demand gets P 39 90 63 Key practice MT 2 c 63 MCAVC 36 demand VR q 9 907 d 056336907 912157520772914 e TR106010 600 TRll 57ll627 so by these numbers MR 27 When you put 11 into the MR equation you get 906ll 24 These are different because the discrete method is an approximation of the slope of TR by nding the slope between two points Putting the quantity into the MR function gives the exact value of the slope of TR at 11 2 a At q 8 MC AC 25 so profit 0 at P MC 25 so q8 is the LRCE quantity b At q 8 MR 32 so negative marginal revenue cannot be maximizing quantity C At q 6 MRl6 MC so q 6 has profit of 676 7155 301 Firm will have same profit atq5 andp 139 d At q 7 price is 64 which represents the benefit of the good to the next person buying so how much society will benefit from 1 more unit The MC of that unit is only 20 which represents the cost to society Since the benefit of the 7th unit is greater than the cost to society society is better off with l more unit Practice MT 2 SECTION I MULTIPLE CHOICE DO ALL 8 QUESTIONS 1 A perfectly competitive rm is in long run equilibrium at a price of 28 and a quantity of 46 Which of the following statements must be true The rm s long run average cost of producing 47 units of output is less than 28 II No investor outside this industry could enter the industry and make a positive economic profit III A decrease in the market demand for the good will decrease the long run equilibrium price a All of them are true b Only and III are true c Only II and III are ture d Only II is true e Only is true 2 A rm that faces an increasing price of capital chooses to hire more labor Which of the following is true a The factor substitution effect and the output effect both caused the quantity of labor to increase b Capital and labor are complements in the production process c The size of the factor substitution effect is larger than the size of the output effect d The size of the factor substitution effect is smaller than the size of the output effect e The statement is incorrect because an increase in the price of capital always leads to a decrease in the quantity of labor 3 Determine whether or not the following statements are true based on the picture below A 25 389 300 V demand 48 60 q MR MC Practice MT 2 There is enough information in this picture to calculate the exact size ofthe monopoly burden ll lfthe firm is currently producing 48 units ofthe good society could bene t from an increase in production lll lfthe MR pictured is actually the MR ofthe rm then the rm is not a perfect price discriminating monopolist a None ofthem are true b Only II is true c Only and II are true d Only II and III are true e All of them are true 4 A monopolistically competitive firm is maximizing profit in the short run at a quantity of 10 and a price of 20 The marginal cost of producing the 10th unit of output is 1 1 If the good can only be produced in whole quantities the price on the demand curve for the 9th unit can only be which ofthe following a 19 b 20 c 21 d 22 e 24 5 Whan market interest rates firms undertake investment projects a decrease more b increase more c decrease less d increase no e decrease no 6 A worker has to take a cut in her hourly wage from 50hr to 40hr Which of the following must be true The substitution effect would cause her to work more II There was a decrease in demand andor an increase in supply in the market for this type of labor Ill The price of the firm s output has decreased a None ofthem must be true b Only lll must be true c Only ll must be true d Only and II must be true e Only and Ill must be true Practice MT 2 7 An economy where all input and output markets are perfectly competitive is ef cient because I Each rm produces at the minimum of average total cost ll Different consumers face different prices for the same good lll Firms are free to enter and exit any industry a All of them are reasons perfect competition is efficient b None ofthem are reasons perfect competition is efficient c Only and III are reasons perfect competition is efficient d Only is a reason perfect competition is efficient e Only II is a reason perfect competition is efficient 8 A oneprice monopolist facing a linear demand curve is currently producing a quantity of 25 at price of 38 Which of the following must be true The marginal cost of the 26th unit ofoutput is largerthan the price on the demand curve for the 26th unit ofoutput II The marginal revenue ofthe 26th unit of output is less than 38 Ill The marginal revenue ofthe 26th unit of output is negative a Only II and III are true b Only II is true c Only and II are true d All of them are true e None ofthem are true SECTION II DO ONLY 1 OF THESE 2 QUESTIONS 1 page WRITE ANSWER IN APPROPRIATE PLACE ON ANSWER DOCUMENT 1 A firm has 3 possible investments available The firm can borrow from the bank with an 8 interest rate and save with the bank at a 5 interest rate Project 1 Paying 10000 today for employee training that will increase pro t 9000 next year and 2000 the year after Project 2 Paying 50000 for a new truck that will increase pro t starting next year 18000 a year for the next 3 years then disintegrate Project 3 Paying 20000 for new computers that decrease pro t next year by 1000 but increase profit the next year by 22400 Explain whether each ofthe following statements is true or false Be sure to use speci c numbers in your explanations a lfthe rm has 100000 on hand it should do the most expensive project first 3 points b The firm will never borrow money to make any ofthese investments 3 points c The rate of return on project 2 is less than 5 2 points d 5 30000 is a point on the rm s investment demand curve 3 points Practice MT 2 2 For the production schedule of a perfectly competitive rm given below answer the following Labor Output Labor Output 1 7 6 54 2 16 7 6O 3 27 8 64 4 37 9 67 5 46 1O 69 a Calculate the firm s MRP ifthe price of output is 5 Find the profit maximizing level of labor if the wage is 30 Also find the pro t of the rm if fixed costs are 100 and labor is the only source of variable costs 4 points b Calculate the MC of producing 46 54 60 and 64 2 points c Explain why the firm rule about finding the pro t maximizing level of output gives the same result found in part a 2 points d Find the new quantity of labor if i only the wage doubles ii only the output price doubles iii both wages and output prices double 3 points SECTION III DO ONLY 1 OF THESE 2 QUESTIONS 1 page WRITE ANSWER IN APPROPRIATE PLACE ON ANSWER DOCUMENT 1 A oneprice monopolist has a demand curve of p 3Q 90 and a marginal cost of MC 4Q a Find the equation forthe marginal revenue of the firm 1 point b Find the profit maximizing quantity and price ofa oneprice monopolist 2 points c Draw a picture of the demand marginal revenue and marginal cost In this picture put your answers to part b in the correct places Also identify in the picture the area representing the inef ciency of having a oneprice monopolist instead of the outcome of a perfectly competitive market 3 points d Find a number forthis area of inefficiency 2 points e Find the total revenue of selling 10 and the total revenue of selling 11 Use these numbers to calculate the marginal revenue of producing 11 Explain why this answer is not the same as what you get when you put Q 11 into the MR equation you found in a 3 points Practice MT 2 2 A rm has the cost structure given below q TC q TC 1 96 6 155 2 105 7 175 3 1 15 8 200 4 126 9 232 5 139 10 274 a Find the quantity ofoutput produced ifthe rm is in perfectly competitive long run equilibrium 2 points b Now assume the same firm is a monopolist that faces the following demand schedule Use speci c numbers to explain why if the monopolist produces the same quantity as in a they will not be maximizing pro t 2 points q P q P O 148 6 76 1 136 7 64 2 124 8 52 3 1 12 9 4O 4 100 10 28 5 88 c Find the profit maximizing price output and profit forthe monopolist 3 points d Explain referring to specific numbers from the table why society would be better off if the monopolist produced 1 more unit of output 4 points
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