Principles of Microeconomics
Principles of Microeconomics ECON 101
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This 4 page Class Notes was uploaded by April Jerde on Thursday September 17, 2015. The Class Notes belongs to ECON 101 at University of Wisconsin - Madison taught by Elizabeth Kelly in Fall. Since its upload, it has received 24 views. For similar materials see /class/205140/econ-101-university-of-wisconsin-madison in Economcs at University of Wisconsin - Madison.
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Date Created: 09/17/15
Economics 101 Practice Questions 4 Answer Key 1 a The pro tmaximizing output level of rm A is Q 10 b TR 200 TC 150 TVC 100 TFC 50 AVC 10 AFC 5 total economic pro t 50 c The shutdown price 8 the break even price 12 d In the short run rm A stays in the market since there is a positive economic pro t In the long run more rms enter into the market and then the market supply curve shi s to the right so that the longrun equilibrium price goes down to the level of the minimum point of the ATC which is 12 as shown in the following gure The long run market supply curve is SLR in the gure Firm A has zero economic pro t in the long run and the number of rms in the industry is more than in the short run P D P MC A C 339 lAVC 1 1 Qu y 1 00 Q QA a Market b Firm A 2 Find the market equilibrium price first We get P 30 and this is the demand function facing rm B b Equate A4 P 30 to MC 10QB and thus the pro tmaximizing output level of rm B is Q 3 c ATC SQB 3QB AVC SQB the xed cost is 3 d ATC at Q 3is 5X33316 Pro tperunitat Q 3 isP iATC 30 16 14 The total economic pro t 14 X 3 42 E Fquot 0 3 1 D Or you can compute TR 30 gtlt3 90 and TC 5gtlt 32 3 48 so the total economic pro t 90 48 42 Firm B should not shut down the business since at Q 3 TR 90 gt TVC 45 The shut down price 0 the minimum point of A VC Equilibrium price in the market increases since the demand curve shi s outward Thus in the short run rm C will increase output and enjoy a positive economic pro t In the long run outside rms will enter the market and this will drive the supply curve to the right Therefore the longrun equilibrium price is back to 10 rm C has no positive economic pro t and there are more rms in the market In the short run rm C can increase the production and enjoy a positive economic pro t because of its lower ATC and MC Since rm C is very small the market equilibrium does not change in the short run In the long run however other rms can duplicate the new technology and also will have an incentive to enter the market The market supply curve shi s outs to the right The longrun equilibrium price will become 9 at this price rms eam zero economic pro ts and there are more rms in the market than there were initially Since the excise tax is imposed on every producer the ATC and MC of rm C increase by 1 The market supply shi s upward by 1 too Therefore both in the short run and in the long run the market equilibrium price increases to the new level where the new supply and demand curve intersect but less than 11 Firm C has no positive economic pro t both in the short run and in the long run and the pro tmaximizing output level decreases The price ceiling is less than the original equilibrium price Firm C will have a negative economic pro t in the short run but as long as 9 is higher than the AVC at the pro t maXimizing output level it will stay in the market However since the policy is permanent in the long run all rms will exit and supply curve shi s to the left so that the longrun equilibrium quantity is 0 Equilibrium price in the market decreases since the demand curve shifts inward Thus in the short run rm C will produce less and have a negative economic pro t But as long as the market price is still higher than the AVC at the pro tmaximizing output level it will stay in the market In the long run this will cause the market supply curve to shi to the le restoring price to its initial level produce the pro tmaximizing quantity and earn zero economic pro ts and there are Price returns to its original level firms remaining in the industry fewer rms in the industry Fquot O D Type D Type E QD TC ATC AVC MC QE TC ATC AVC MC 0 6 0 12 1 12 12 6 6 1 30 30 18 18 2 22 11 8 10 2 46 23 17 16 3 36 12 10 14 3 60 20 16 14 4 56 14 125 20 4 84 21 18 24 5 80 18 148 24 5 110 22 196 26 6 114 19 18 34 6 144 24 22 34 For lms of type D the MC curve passes through the minimum poillt of ATC which is at approximately 11 and the minimum point of AVC which is at 6 Likewise for lms of type E the MC curve passes through the minimum point of ATC which is at approximately 20 and the minimum point of AVC which is at approximately 16 Both type D and type E will stay ill the market when the market plice is 24 Films of type D will produce 5 units of goods and the economic pro t is 40 Films of type E will produce 4 units of goods and the economic pro t is 12 Only type D will stay ill the market when the market plice is 14 since for lms of type E the market plice 14 is less than AVC at the pro t maximizing output level 16 Films of type D will produce 3 units of goods and the economic pro t is 6 Only type D will stay ill the market when the market plice is 10 Films of type E will shut down the business by the salne reason ill c For lms of type D the market plice 10 is still higher than AVC at the pro tmaximizing output level 8 and thus will stay Films of type D will produce 2 units of goods and the economic pro t is 2 ill other words a loss of 2 The long run equiliblium plice is the minilnum point of ATC of type D which is at approximately 11 1 2 3 r U 00 p H H H D H CO A l is clearly true Economics 101 Practice Questions 3 Answer Key D It is true that total utility is increasing7 however their marginal utility is decreasing B Marginal utility increases and total utility decreases as consumption decreases C You want to equate marginal utility per dollar spent across goods In this case the marginal utility per dollar spent on pizza is greater than that of soda7 so we need to eat more pizza to decrease our marginal utility of pizza C Marginal utility per dollar spent must be equal across goods for consumer equilib rium A The price of cola and the price of popcorn are the same Hence7 so should the marginal utility of each D Once you get to point B7 dog food is now twice as expensive as cat food Hence7 the slope of the budget line should be price of cat food over price of dog food7 or 12 B In increase in income is a parallel shift toward the northeast quadrant A This is just a de nition B If you have a constant rate of marginal substitution between two goods7 than the indifference curves for these goods are straight lines Therefore7 they are substitute goods B These are indifference curves for perfect complements7 such as right and left handed gloves B Total income is 24 so if they can buy 8 hamburgers the price must be 4 However ll is false The slope of the budget line is the same between points A and B7 but that is not necessarily the same as the marginal rate of substitution across di ferent indifference curves B The price of kiwi went down and Reggie consumed more Mango Therefore7 these two goods are complements
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