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# INTERMEDIATEMICROECONOMICS ECON1100

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This 9 page Class Notes was uploaded by Quentin Huel Jr. on Monday October 26, 2015. The Class Notes belongs to ECON1100 at University of Pittsburgh taught by LiseVesterlund in Fall. Since its upload, it has received 62 views. For similar materials see /class/229422/econ1100-university-of-pittsburgh in Economcs at University of Pittsburgh.

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Date Created: 10/26/15

Econ l 100 Lise Vesterlund Chap 90899 WNH Chap 1 Review Questions Second Midterm ter 818 7 Slutsky Equation For a given price change what does the income effect measure For a given price change what does the substitution effect measure What is the sign of the substitution effect What is the sign of the income effect Are all ordinary goods inferior goods Explain Are all Giffen goods inferior goods Explain Are all inferior goods Giffen goods Explain Draw a picture illustrating the income and substitution effect for a price increase when two goods are perfect complements How large is the substitution effect Draw a picture illustrating the income and substitution effect for a price increase when two goods are perfect substitutes How large is the substitution effect Find the income substitution and total effect when the price of good x increases from pf to p 2 when income is m100 and xm2 px First nd the original demand when pf Determine how large an income is required if the consumer were to buy the old bundle at the new price m What is optimal demand at m and p X How much does the consumer demand at p 2 and m100 ter 98 99 Labor Supply Let w denote the wage rate and p the price of other goods Draw a picture of an individual s budget constraint overL leisure and C consumption How does this budget line change when wage increases Assume that leisure is a normal good and explain why an increase in wage may result in people working fewer hours Be sure to use the Slutsky equation and explain the sign of the income and substitution effect When does the labor supply curve have a positive slope When is it negative When do we know for certain that an increase in the tax on labor will increase the tax revenue that we are collecting from this source When might we see an increase in tax causing revenue to decrease Explain why overtime is more effective in increasing labor supply than a straight increase 1n wages Chapter 1435 I4 7 49 Consumer Surplus l 2 What does a consumer s consumer surplus measure Suppose Al has a demand function D07 10 2p What is Al s consumer surplus when p1 How much money does he spend on the good What is the producer surplus when the supply curve is S07 22p and the price is p5 Chapter 55 156 1591510 Market Demand 1 2 3 Chap 1 What does the price elasticity of demand measure Is demand elastic or inelastic when the price elasticity of demand is less than 1 Suppose Al s demand is D A0710 2p Find the price elasticity of demand for Al Find the price where Al s demand is unit elastic For what range of prices is Al s demand inelastic Elastic At what price is a linear demand function unit elastic At what price is it elastic When is it inelastic Find the price elasticity of supply when Sp3p2 Will revenue increase decrease or remain the same when quantity increases and the price elasticity of demand is 2 l l2 Suppose a producer currently is producing at a point where demand is inelastic Would you recommend that she increases or decreases the quantity that she is currently selling Why What type of goods has an income elasticity less than 0 Greater than 0 Between 01 Greater than 1 What kind of preferences are we looking at when the income elasticity of demand equals 1 Draw a graph of total revenue TRpy when the inverse demand function is pa by How many units should be produced to maximize total revenue Holding price constant Which of these two demand functions is more elastic pa by or pa1 by ter 1 6 Equilibrium Find the equilibrium price and quantity when demand is given by D07100 2p and supply by Sp pZ Determine the excess supply when p44 Determine the excess demand when p10 Given the demand and supply in question 1 what is the equilibrium quantity when we impose a 5 tax per unit on the producer Draw a graph to illustrate the equilibrium with and without a tax At what price do transactions take place How large a share of the tax is paid by the consumers and by the producers Calculate the price elasticity of demand and supply at the notax equilibrium question 1 Use the price elasticities to explain the difference in tax share paid by the consumers and the producers How large is the deadweight loss of the 5 tax How much revenue is collected from the tax Would the deadweight loss be larger if the demand function was more elastic What if both the demand and supply function were more elastic Write an equation to describe how the consumers price relates to the producers price when we put a per unit tax t on the consumers Does the equation change if we instead put the tax on the producers Do the producers care whether the tax is imposed on them Chap 1 2 Chap 1 Elk59 or on the consumer Explain Write an equation to describe how the consumers price relates to the producers price when we pay the consumers a per unit subsidy 3 How does this equation change if we gave the subsidy to the producers fer 2113 Cost Functions Are marginal cost always decreasing when the average cost are decreasing Are the average cost increasing or decreasing when the marginal costs are larger than the average cost Explain What is the relationship between average variable cost average cost and average fixed cost What happens to average fixed cost as output increases How does the gap between average variable cost and average cost change when output increases When is the average cost equal to the marginal cost At what two points are the average variable cost equal to the marginal cost FindAVC AC AFC and MC when the cost function is 00 y2 100 What is the minimum average variable cost and minimum average cost Suppose the cost function is Cy4y2 100 y 100 What is the average variable cost of producing 25 units of output Is the average fixed cost curve ever Ushaped Why fer 2217 Firm Supply Explain in plain English what MR and MC measures Why should MRMC at the profit maximizing output level How does a firm in a perfectly competitive market perceive the market demand curve What is the MR for a firm in a perfectly competitive market Illustrate all of the cost curves for a firm with a U shaped average variable cost curve Label all the curves carefully On the same graph illustrate the firm s supply curve Pick a point on the supply curve where the firm is making positive profit Illustrate the profit on the graph Now choose a point on the supply curve where the firm is making a negative profit yet stays in business Finally choose a point on the supply curve where the firms negative profit is so large that the firm is better off not producing any output A firm has a cost function Cy y2 and the price ofy is p20 How much will the firm supply How much profit will the firm make At what price level will the firm choose to produce zero output A firm has a short run cost function Cy y2 2y30 The cost of producing zero units of output is 002030 If the price is p10 how much will the firm supply How much profit will the firm make If the price is p4 how much will the firm supply How much profit will the firm make Explain why a firm may operate in the short run even if it is losing money A firm has a short run cost function 00 y2 4y 20 The cost of producing zero units of output is Cy 020 At what price would this firm stop doing business in the short run You are working as a consultant for a firm which has a cost function c y 20y2 and the price of y is p100 The rm is currently producing 40 units of output how would you suggest that they increase their current pro t Explain why this change will increase the rms pro t Chapter 2416 Monopoly l 2 E How does the MR for a monopolist differ from that for a rm in a perfectly competitive market Explain the difference Suppose the market demand function is p10 2y and that the per unit cost of producing y is 2 What level of output will maximize the monopolist s pro t What price will the consumers pay What is the rm s pro t Illustrate the demand curve the MR and MC curves the total cost of production and the associated revenue at the profit maximizing output level Find the Marginal Revenue Curve when the market demand function is pa by Will a monopolist ever operate on the inelastic part of the market demand curve Explain Why might a monopolist choose a supply that does not maximize revenue Is a monopolist markup relatively larger or smaller when the market demand is more elastic What is the monopolists pro t maximizing markup when the market demand function is Dp 34p395 Suppose the market demand is p150 y and the monopolist s cost function is Cy05 Find the monopolist s pro t maximizing output choice and the price that the consumer will pay What would the optimal output and price be if this was a competitive market What is the dead weight loss from having a monopoly in the market Explain why a monopoly is inef cient Suppose a pro tmaximizing monopolist chooses an output level that maximizes total revenue Under what conditions will pro t maximization and total revenue maximization result in the same output choice The demand for a monopolist s output is D071 0 000 p39z The monopolist produces at a constant marginal cost of 5 What is the pro tmaximizing supply and price How much will the monopolist s price increase when the government imposes a sales tax of 10 per unit on the monopolist s output A pro tmaximizing monopolist faces a downwardsloping demand curve that has a constant elasticity of 3 The rm finds it optimal to charge a price of 72 for its output What is its marginal cost at this level of output The inverse market demand for goody is p140 6y The cost of making the good is Cy 4y2 What is the Marginal Revenue Function for y What is the monopoly output and the monopoly price What output and price would maximize the sum of Producer s and Consumer s surplus Econ 1100 Professor Lise Vesterlund Review Questions for Material Covered after Second Midterm Chapter 25 4 25 6 Monopoly Behavior 1 Suppose a monopolist offers a price p1 to one group of customers and a price p2 to another distinguishable group of customers If p1 lt p2 what do we know about the price elasticity of demand for group 1 as compared to group 2 2 The demand by Danes can be described by the equation pD 100 yD and the demand by Swedes can be described by pS 50 yS2 The average and marginal cost of production equals 20 If a monopolist can distinguish the two types of customers what price will she charge each of the two groups What price will she charge if she can t distinguish the two groups What pro t will she make in each of the two cases 3 Suppose the individual demand for rides at an amusement park can be described by the demand function p10y where y is the number of rides and the marginal cost per ride is zero How much would a monopolist charge per ride How large an entrance fee would he charge Chapter 27 1 27 227 5 27827 10 Oligopoly l The market demand is given by p14 2y and there are two identical rms producing the output The per unit cost of producing y is 2 Suppose the two rms simultaneously choose how much to produce How much will each rm produce What price will the product sell for How much pro t will each rm make 2 How do your answers to question 1 change when rm 1 rst decides how much to produce and rm 2 selects its preferred output level after having observed rm 1 s decision 3 Draw a picture of the two rm s best response functions and illustrate the Cournot and Stackelberg equilibria as well as the outcome that would result when rm 2 is the only one producing in the market 4 How much is produced in total if the two rms collude and choose an output level y1 y2 that maximizes the joint pro t for the two rms Why would it be dif cult to sustain this production level 4 Suppose there are n identical rms who simultaneously decide how much to produce The market demand is p100Y where Y y1 y2 y3 yn The marginal cost of production is 1 Find the individual rm s best response function and determine the Cournot equilibrium What price is charged when n oo Chapter 28 amp 291 29 6 Game Theory 1 Are all Nash Equilibria also Dominant Strategy Equilibria 2 Are all Dominant Strategy Equilibria also Nash Equilibria 3 Find the pure and mixed strategy Nash Equilibria for each of the 3 games listed below In each case you should illustrate the equilibria by drawing the best response functions for each of the two players Player B Left Right Player A Top 53 22 Bottom 42 43 Player B Left Right Player A Top 21 00 Bottom 00 212 Player B Left Right Player A Top 44 07 Bottom 70 11 4 Consider the prisoner dilemma game What should criminal A do if he thinks that criminal 2 will deny the charges deny or confess to the charges 6 A general has two possible pure strategies sending all his troops by land or all his troops by sea Is it a mixed strategy to send 14 of his troops by land and 34 of his troops by sea 7 What is a Nash equilibrium 8 There are Ngt2 inhabitants in a small town Each has 100 They are told that they can voluntarily contribute to a fund that will be evenly split between all residents If F are contributed to the fund the local KMart will match the private contributions so that the total amount to be diVided is 2F That is each resident will get back a payment of 2FN when the fund is diVided If people in town only care about their own net incomes in Nash equilibrium how much will each person contribute to the fund 9 Are there pure strategy Nash equilibria in the game listed below Suppose the game is being played sequentially Such that player A first chooses Top or Bottom and player B then chooses Left or Right What is the subgame perfect equilibrium of this game Player B Left Right Player A Top 12 50 Bottom 21 40 10 Are there pure strategy Nash equilibria in the game listed below Suppose the game is being played sequentially Such that player A first chooses T M or Bottom and player B then chooses Left or Right What is the subgame perfect equilibrium of this game Player B Left Center Right Player A Top 04 40 53 Middle 40 04 53 Bottom 35 35 66 Econ l 100 Professor Lise Vesterlund Review Questions Consumer Theory Chapter 2 Budget Constraint 1 Suppose there are two goods x and y which are being sold for prices pg py and that the consumer has income m Write down the budget constraint What is the slope of the budget line What is the intercept with the vertical aXis vs the horizontal aXis How many units can you at most buy of y How does the budget line change when the price of good x increases How does the budget line change when income increases 2 Al has an income of m100 and he is faced with the following prices px4 and py2 rump99 s a What is the intercept with the xaXis b What is the slope of the budget line c Draw the budget line when Al gets a coupon to buy the rst ten units of X for only 2 a piece Chapter 3 Indifference Curve 1 Which two conditions need to be satisfied when preferences are well behaved 2 What do each of the conditions mean 3 What is an indifference curve 4 What is the Marginal Rate of Substitution 5 What does it mean that MRSXy 2 How many y s are you willing to give up for one x 6 What does it mean that the absolute value of MRSXy diminishes How would you explain this in plain English 7 Draw a representative indifference curve when preferences are perfect substitutes 8 Draw a representative indifference curve when preferences are perfect complements Chapter 4 Utility 1 What is a monotonic transformation 2 Why does U 1x y xy represent the same preferences as U2xy100 xy3 3 Will two utility functions that represent the same preferences always have the same RS xy 4 What does the Marginal utility of good x M UX measure 5 What is the M UK when the utility function is U x y 3 ny 10 6 IfMUX 2 andMUy 1 what is the MRSXy 7 If Uxy xy what is MUX MUy and MRSXy What is MRSXy when x4 y1 7 What is MRSXy when x4 y10 7 What type of preferences are these perfect substitutes perfect complements or CobbDouglas 8 Sal s preferences over apples Xa and bananas Xb can be described by the utility function U Xa Xb Please illustrate his indifference curve through the bundle Xa Xb 312 Be sure to indicate at least 4 precise bundles on his indifference curve 9 Draw a picture of the indifference curve through the bundle Xy 1010 when U x y x 2 y Are x and y perfect substitutes or perfect complements 10 Draw a picture of the indifference curve through the bundle Xy 1010 when U x y minx2 y Are x and y perfect substitutes or perfect complements 11 Suppose an indiVidual only cares about the total number of sodas that she has What would her utility function for siX packs and single cans look like 12 Suppose an indiVidual only cares about peanut butter and jelly if they are consumed together The consumer s preferred ratio is three times as much jelly as peanut butter What does his utility function look like Chapter 5 Choice 1 When is MRSXy pXpy 2 Suppose MRSXy 2 and pXpy 1 How can this consumer be made better off Should the consumer buy more x or more y Which two equations would you solve to find the demand function for x when U x y xy What is the demand function for x when U x y xly What is the demand function for x when U x y x y What is the demand function for x when U x yminx y What is the demand function for x when U x y x 2y What is the demand function for x when U x ymin10 x y Suppose we observe an indiVidual s consumption of x and y over three periods In all periods his income is 100 in the first period p 1 and py 1 in the second period p 2 and py 1 and in the third period px 1 and py 2 In the first period he consumes x y 6040 in the second period he consumes x y3040 and in the third period x y6020 What do you think his utility function might look like E 50008999 Chapter 6 Demand What is the Income Expansion Path What is the Engle Curve What does the Engle Curve look like for a necessity A luxury good What does the Engle Curve look like when preferences are homothetic What does the Engle Curve look like for an inferior good What does the Engle Curve look like for a normal good If there are only two goods can both of those goods be inferior goods Draw the Engle Curve for the following demand function xm2px when pf Are two goods that are perfect complements also necessities Why or why not Are x a substitute or complement for y when Fmp py Are x a substitute or complement for y when xm2px HHpW QM eP Nf quot53

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