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Short Answer – 2 points for each blank The graph below shows two production possibilities curves for a nation which produces two goods, Y and Z. Using the points on the curves above, describe what...

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Short Answer – 2 points for each blank
  1. The graph below shows two production possibilities curves for a nation which produces two goods, Y and Z.


  1. Using the points on the curves above, describe what would happen if the economy moves from full employment into a deep recession.

  1. Using the points and curves shown above, describe what would happen if the population becomes more educated over time as the number of high school dropouts falls and the number of college graduates rises.

  1. If Good Y is military goods and Good Z is consumer goods, describe happened when the end of the cold war led to cuts in military spending?

  1. Describe in words how one can recognize the market equilibrium point in a graph of a demand schedule and a supply schedule.

  1. What effect will each of the following most likely have on the supply of corn in a competitive market? State both what happens to supply (increase, decrease or no change) AND the applicable supply determinant.

a. the development of an improved corn seed that resists drought conditions.
b. an increase in government payments for growing corn
c. an increase in the price of fertilizer
  1. If demand is elastic, an increase in price will do what to total revenue?

  1. What is the meaning of perfectly inelastic demand?

How would it be graphed?
  1. The owner of a restaurant is considering lowering menu prices to draw in more customers. He is debating between lowering the price for the steak entrée or the salmon entrée. When he lowered prices last year, a $2.00 decrease in price for the $15 steak resulted in a growth in steak sales from 75 per week to 100 per week. A $2.50 decrease in the price of the $17 salmon entrée increased sales from 40 to 75 meals per week. Which entrée should he choose to put on sale and WHY?

  1. Based on the determinants of elasticity (as discussed in the text), explain what the price elasticity of demand of the following products would be:
  1. Crest toothpaste

  1. Diamond rings

  1. What is the difference between marginal and total utility?

  1. The following table shows marginal costs and benefits of the optimal quantity of pollution abatement that will occur at a local factory.
Quantity of pollution abatement Marginal cost Marginal benefit
700 tons $100,000 $ 20,000
600 tons 60,000 30,000
500 tons 40,000 40,000
400 tons 20,000 60,000
300 tons 10,000 80,000
200 tons 5,000 160,000
  1. What is the optimal level of pollution abatement? Why?
  1. If the marginal benefit of pollution abatement were to increase by $30,000 at each level because of the factory’s desire to improve its image and environment, what would the optimal level be? Why?
  1. What might cause the optimal level of pollution abatement to be 400 tons?

  1. Assume that a person only purchases two goods, food and clothing, and has a fixed budget. Both goods are normal goods. If the price of food decreases, what will happen to the consumption of clothing based on the income effect?

  1. What is the difference between the short run and the long run?

  1. Jane quit her job at IBM where she earned $50,000 a year. She cashed in $50,000 in corporate bonds that earned 10% interest annually to buy a mini-bus. Jane has decided to buy the mini-bus and set up a commuter service between Lincoln and Omaha. There are 1000 people who will pay $400 a year each for the commuter service; $280 from each person goes for gas, maintenance, insurance, depreciation, etc.
    1. What are Jane’s total revenues?
  1. What are Jane’s explicit costs?
  1. What is Jane’s accounting profit?
  1. List one important implicit cost that Jane has not included.
  1. What is Jane’s pure economic profit or loss?

  1. Answer the questions below on the basis of the diagram:

  1. What is Average Variable Cost (AVC) at 6000 units of output?
  1. What is Total Variable Cost (TVC) at 6000 units of output?
  1. What is Total Fixed Cost (TFC) at all levels of output? Hint: you must use ATC and AVC to compute this.
  1. When do diminishing marginal returns set in?

  1. Explain what happens to the AFC, AVC, ATC and MC curves when there is a variable cost increase. How do they shift (or do they stay the same)?
  1. AFC
  1. AVC
  1. ATC
  1. MC

  1. In terms of marginal revenue and marginal cost, where does the purely competitive firm maximize profits?

  1. What are the four characteristics of pure competition?

1:
2:
3:
4:
  1. A pure monopolist determines that at the current level of output the marginal cost of production is $2.00, average variable costs are $2.75, and average total costs are $2.95. The marginal revenue is $2.75. What would you recommend that the monopolist do to maximize profits?

  1. Why is a monopolist a price maker?

  1. What do economists mean when they say that economic resources or factors of production are scarce or limited in supply?

Essay – 5 points each
Formulate your responses in full sentence, paragraph format. Your answer should be 1-3 paragraphs. Be sure to answer the question.
  1. Why would an ounce of gold be priced higher than an ounce of coffee beans, even though coffee is generally considered more essential than gold? Explain the paradox in terms of marginal and total utility. (Hint: think back to the diamond-water paradox).

  1. What is the economic meaning of the saying, “Don’t cry over spilt milk“ and its implications for economic decision-making?

  1. Why is there a free-rider problem with public goods? Use the characteristics of public goods to explain your answer.

  1. How does oligopoly compare with the other market structures? (Remember, this is an essay. You should compare and contrast all the market structures here).

005_fdiba5o-542ejpdy.doc
Answered Same Day Dec 23, 2021

Solution

David answered on Dec 23 2021
117 Votes
Short Answer – 2 points for each blank
1. The graph below shows two production possibilities curves for a nation which produces two goods, Y and Z.
a. Using the points on the curves above, describe what would happen if the economy moves from full employment into a deep recession.
Any point on the production possibility curve is the full employmnet level of production. An economy which faces a production possibility curve PP1 as in the figure above and it falls ito deep recession, it can produces at any point left of PP1. In the figure it may produce at point D. This means that economy is not able fully utilise its available resources.
. Using the points and curves shown above, describe what would happen if the population becomes more educated over time as the number of high school dropouts falls and the number of college graduates rises.
Production possibility curve will shift from PP1 to PP2. Due to advancment in education the economy can move from any point on PP1 to any point on the PP2 curve. Improvement in education shifts the production possibility frontier outward, increasin the number both goods X and Y.
c. If Good Y is military goods and Good Z is consumer goods, describe happened when the end of the cold war led to cuts in military spending?
Point of production on PP1 will move from point B to C. This means increasing the production of consumer goods and decrease in the production of military goods.
2. Describe in words how one can recognize the market equili
ium point in a graph of a demand schedule and a supply schedule.
The equili
ium is found where the supply and demand curves intersect. At the equili
ium price, the quantity supplied equals the quantity demanded.
3. What effect will each of the following most likely have on the supply of corn in a competitive market? State both what happens to supply (increase, decrease or no change) AND the applicable supply determinant.
a.
the development of an improved corn seed that resists drought conditions.
Supply curve of corn will shift right and the quantity supplied of corm in the market will increase.
. an increase in government payments for growing corn
Supply curve of corn will shift right and the quantity supplied of corm in the market will increase.
c. an increase in the price of fertilizer
Supply curve of corn will shift left and the quantity supplied of corm in the market will decrease.
4. If demand is elastic, an increase in price will do what to total revenue?
With an elastic demand, an increase in the price leads to a decrease in quantity demanded that is proportionatly larger. Therefore, total revenue decreases.
5. What is the meaning of perfectly inelastic demand?
An increase or decrease in price leaves the quanitty demanded unchanged. Regardless of the price, the quantity demanded styas the same.
How would it be graphed?
The demand curve is vertical.
6. The owner of a restaurant is considering lowering menu prices to draw in more customers. He is debating between lowering the price for the steak entrée or the salmon entrée. When he lowered prices last year, a $2.00 decrease in price for the $15 steak resulted in a growth in steak sales from 75 per week to 100 per week. A $2.50 decrease in the price of the $17 salmon entrée increased sales from 40 to 75 meals per week. Which entrée should he choose to put on sale and WHY?
He should put salmon entree on sale because its price elasticity of demand is more than the price elasticity of demand of steak entree. In salmon entry percentage change in demand is more than percentage change price than the same in the case of steak entree. By choosing salmon entry he can attract more customers and through that he can increase the total revenue. Growth in sales of salmon entree is 87.50% as compared to 33.33% growth in the steak entree.
Price elasticity of demand = % change in quantity demanded
% change in price
Price elasticity of steak entree = 33.33 / 13.33
= 2.50
Price elasticity of salmon entree = 87.50 / 14.71
= 5.95
Therefore salmon entree is the right option
7. Based on the determinants of elasticity (as discussed in the text), explain what the price elasticity of demand of the following products would be:
a. Crest toothpaste
Crest toothpaste has higher elasticity. A commodity has closer substitutes and thus a higher price elasticity of demand the more na
owly the commodity is defined. Price elasticity of Crest toothpaste is much larger than toothpaste...
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