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Date Created: 11/01/15
N 9quot 4 1 V39 999 Review Questions Chapter Seventeen AdarketFa ures An ardent environmentalist might argue that the optimal amount of industrial air and water pollution is zero pollution Do you agree or disagree Explain your answer using a diagram Is it possible that your answer may differ for different kinds of pollution Explain Many environmentalists believe that the Brazilian rain forests provide a signi cant portion of the earth s oxygen supply and they express concern about the ongoing destruction of these forests What type of good is a rain forest Why are the rain forests being destroyed if they are such an important source of the oxygen that we need to live Use a diagram to illustrate your answer Consider two types of divorce laws Law A allows either the husband or the wife to obtain a divorce without the other person s consent Law B permits a divorce only if both parties agree to the divorce Will there be more divorces under law A or law B or will there be the same number of divorces under both laws Why People have a demand for sweaters and the market provides sweaters There is evidence that people also have a demand for national defense yet the market does not provide national defense What is the reason the market does not provide national defense Give an example of each of the following and explain A good rivalrous in consumption and excludable A good nonrivalrous in consumption and excludable A good rivalrous in consumption and nonexcludable A good nonrivalrous in consumption and nonexcludable NOTES Review Questions Chapter Ten Oligopoly 1 According to the President of Delta Airlines When you ve got somebody in your market you cannot let them take all the tra ic away Unfortunately it gets down to a question of who can bleed the most a Given this philosophy how is Delta likely to respond to a fare cut by a competing airline b In deciding whether to reduce fares does a competing airline consider Delta s likely response Why is Delta s response relevant 2 Compac Computer Corporation slashed its suggested retail prices by as much as 34 percent Toshiba quickly followed with its own round of cuts on selected models as did IBM Even scrappy Dell Computer Corporation already a lowprice manufacturer reduced systems by as much as 900 Is the reaction of these other computer makers consistent with price leadership Explain 3 Analysts claim that consumer loyalty in the computer industry has eroded recently Whereas consumers once had a strong preference for a particular brand of computer consumers today are more interested in price a How will this loss of brand loyalty affect elasticity of demand for IBM computers b Is there anything IBM and other computer makers can do to restore brand loyalty Explain 4 Although collusion in the United States is generally illegal agricultural marketing orders allow Sunkist and other fruit growers to form cartels For some crops boards limit the amount of output each producer in the United States can legally sell a Discuss two factors that are likely to determine the success of these cartels b If successful how are the cartels likely to affect price and quantity 5 Two rms Firm A and Firm B operate in the same market If they collude and hold prices at 10 each will earn pro ts of 5 million If A cheats on the agreement lowering it s price but B does not A will get 75 of the business and earn pro ts of 8 million and B will lose 2 million Similarly if B cheats and A does not B will earn 8 million and A will lose 2 million If both cut prices they will end up with 2 million each in pro ts Draw a matrix which represents the possible strategies and outcomes for the two rms Which strategy minimizes the maximum potential loss for Firm A For B Explain If you were Firm A which strategy would you choose Why If Firm A cheats what will Firm B do IfB cheats what will A do What is the most likely outcome of such a game Explain rug96x Review Questions Chapter Three Supply and Demand 1 In the corn market demand often exceeds supply and supply sometimes exceeds demand The price of corn rises and falls in response to changes in supply and demand In which of these two statements are the terms supply and demand used correctly Explain your answer NOTE you should draw at least one diagram for each of these statements as part of your explanation 2 You are given the following information about the market for beer in Oxford Quantity Quantity a Depict this situation in a diagram Label the equilibrium and explain why it is an equilibrium b Miami University announces that they are increasing the enrollment for the university by 10000 students At the same time Oxford announces that two uptown bars to be named later will be closed in order to use the space for tourism centers Depict this situation in your diagram from part a and explain your answer Make sure you tell what happens to equilibrium price and quantity 3 The freeze which destroyed a good portion of the South American coffee crop in the mid 19705 increased the price of tea Explain using supply and demand diagrams 4 Critique the following statement In comparing the two equilibrium positions in the diagram below I note that a larger amount is actually purchased at a higher price This refutes the law of demand 5 The US government administers two programs that affect the market for cigarettes Media campaigns and labeling requirements are aimed at making the public aware of the health dangers of cigarettes At the same time the Department of Agriculture maintains a program of price supports for tobacco Under this program the supported price is above the market equilibrium price and the government limits the amount of land that can be devoted to tobacco production Are these two programs at odds with each other with respect to the goal of reducing cigarette consumption Explain carefully As part of your answer illustrate graphically the effects of both policies on the market for cigarettes Your Name 3 worth Review Questions Chapter Two Opportunity Cost and the PPF Professor Platt ECO 201 Section Explain how a production possibility curve illustrates the following economic concepts a scarcity b choice c opportunity cost d increasing opportunity cost For this question you are given the following production possibilities table Draw the production possibilities frontier for this economy Put weapons production on the vertical axis Indicate the area of unattainable production combinations Indicate the area of production combinations attainable with some resources unemployed Calculate the perunit opportunity cost for increasing weapons production from zero to 100000 units from 400000 to 500000 units and from 800000 to 900000 units Explain why these results occur and how they are graphed Use the concept of resources scarcity to explain in words why this society can t currently produce 500000 units of weapons and 1750000 units of food Suppose over time the amount of productive resources available to this society expanded enough so that the production combination in part d became possible Draw the new production possibilities frontier into your original diagram Explain why you drew it where you did Assume for this question that initially the country of Fredonia is producing 35 billion of food and 5 billion worth of weapons In addition assume that if Fredonia only produced food it would be able to produce 40 billion worth while if it only produced weapons it would be able to produce 15 billion worth a De ne a production possibilities frontier PPF Depict the situation described above in a PPF Make sure you point out all of the above positions b List and explain all the assumptions you made when drawing the PPF c Suddenly a war starts increasing the demand for weapons Illustrate how this increased demand for weapons affects the PPF you drew in part a Explain your answer d The war is dramatically ended when Xanadu drops a nuclear bomb on Eastern Fredonia killing 10 million people and making 500000 acres of land unlivable and unusable How does this change Fredonia s PPF Draw this into your diagram you drew in part a and explaining your answer 4 Suppose that an economy produces only two goods Pizza and Beer a Draw a reasonable production possibilities frontier for the economy Explain why you drew it as you did b Suppose that a new technological advance makes the economy much more productive in producing Beer Show how this discovery might affect the production possibilities frontier that you drew Explain c Does this technological change permit society to produce more of good Pizza d Pick a point on the original production possibilities frontier and label it A After the technological change occurs is A an efficient production point Why or why not e Explain what the opportunity cost of producing more Pizza is at point A before and after the technological change occurs 5 Suppose that an economy produces on two goods baseball bats and 2 X 4 s Also the only input needed to make these goods is trees Here 1 tree makes 10 baseball bats and 1 tree makes 20 2 X 4 s If there are 50 trees in the economy draw the production possibilities frontier for this economy Does this frontier illustrate the principle of increasing opportunity costs Economics 201 More Supply and Dem and and Tax Problems rev Feb 2008 As a general rule you should draw even if only in a rough form the supply and demand curves for each problem The principal benefit of doing so will be to clarify the very important notion of a shift versus a movement along the demand or supply curve If needed review the earlier handout on Algebraic S amp D In what follows the distinction between the demand price and the supply price plays a crucial role The demand price is the price faced by ie paid by the demanders the buyers including any sales taxes Recall the supply price is the price faced by the suppliers the sellers net of any sales taxes For example if the sales tax is 200 per ton of some product then Pd P5 200 or in general Pd P5 per item tax Part I Review of S amp D with No Taxes Let s suppose the Supply and Demand for Robert Earl Keen Jr CDs eg Walking Distance available from Amazoncom are Qd 12000 7 5000 Pd 2 INCOME 200 Price of Jerry Jeff Walker s Gypsy Sangman CD a substitute good Q5 15000 7000 P5 10 INDEX OF TECHNOLOGY INCOME is 28000 SUBSTITUTE GOOD HW Gypsy Sangman CD s Price is 1000 TECHNOLGY INDEX is 100 NOTE there are 2 shift variables in the demand curve and 1 shift variable in the supply curve above Understanding how these operate will further clarify your understanding of Supply amp Demand For instance note that given any value of the Demand Price for every dollar increase in the price of the substitute good the Qd of REK CDs rises by 200 ie the graphed demand curve shifts to the right by 200 which is what we call an increase in demand for every 1000 increase in income Qd rises by 2000 CDs 1 What is the equilibrium price of REK CDs 2 What is the equilibrium quantity Now let income rise to 40000 3 What is the equilibrium price 4 What is the equilibrium quantity With income at 40000 etc let technology improve such that the index rises to 150 5 What is the equilibrium price 6 What is the equilibrium quantity GO TO NEXT PAGE Part II S amp D with Taxes Note a fixed dollar per unit tax is genrally referred to as an excise tax Examples include the federal tax on gasoline of 184 per gallon and the Ohio tax on gasoline of 28 per gallon Let a tax of 100 per CD be imposed and let the original values of INCOME SUBSTITUTE GOOD PRICE and TECHNOLOGY INDEX exist Make use of the relationship Pd P5 Tax 7 What is the quantity of CDs bought and sold Hint here and below remember to draw the S D curves 8 What price do the sellers receive net of tax 0 What is the price paid by customers L 0 What happens if income rises from 28000 to 30000 i i What happens to the price paid by customers if there is an improvement in technolgy such that the TECHNOLOGY INDEX rises to 180 Extra An algebraic example of a Price Floor In the original case with no taxes and with INCOME 28000 SUBSTITUTE GOOD PRICE 1000 and TECHNOLOGY INDEX 100 What Will happen if the government imposes a minimum price on all CDs of 10
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