Unformatted text preview: Microeconomics
Fall 2015 Please put all answers on the answer sheet.
Good luck! @
Please refer to the graphs to the right to answer questions 1 and 2:
1) Which graph shows the total utility?
b) B 2) Which graphs shows marginal utility?
b) B 3) What has occurred between point B and point F on graph A?
)6 Total utility has increased.
b) Total utility has decreased, leading to disutility.
$1 Total utility stays the same.
4) Which of the following is true when a good has inelastic demand?
)K it is a luxury.
b) It must be a large % of the consumer’s budget.
C) It must be in the short run.
3): There are probably many substitutes. Questions 5 and 6 are based on the “indifference map” — graph of indifference curves — below: ~\ 5) Which line represents the highest overall level of utility?
d) 4 ‘ 6) Which line represents the consumer equilibrium?
6) lines 1 and 2 True or false: Answer “T” for true, “F” for false — no other letter or pseudoletter
will be accepted as an answer.
7) When one consumes more of a good, their total utility will always go up (marginal
utility will always be a positive number). 8) As additional units of a good are produced, the average ﬁxed costs fall.
9) When the tax on a good with elastic demand is increased, only buyers of that good
(smokers) and not stores that sell it will pay the tax.
10) When income increases and prices stay the same, consumers will reach a lower
level of utility. Microec—Qdig—wi—‘L—Jononﬁes
ANSWER SHEET 5);: 6)i“ 4Lf4
Fill m' the blank
t e quantity consumed of a good increases, the marginal
11) The law which states that a?
utility will decrease is called: JAM
~ , \ Lo “'4, , 13) List a good that would have an elasticity less than 1: 14) Curves
hav eLJthe same level _of utility along them are
.y\ 15) A Good with an income elasticity of -2 would be: _. _ 16) When
producing more causes a ﬁrms Average totals costs (cost per unit) to rise, it is
returns to scale. \ called 17) The lowest point of the Average total cost curve, where the Marginal cost intersects it, is
called _~ a 1 t ” [at]. / ' 5' J I Short answer: Show all work for partial credit.
1) Calculate the ﬁxed cost (remember the deﬁnition of ﬁxed cost), variable cost (VC), average
total cost (ATC), average ﬁxed cost (AFC), Average variable cost (AV C), and marginal cost
(MC) based on the information in the table below: output 0 \>100 200) ,oo
400 total cost ﬁxed cost
10,000 by, i-IU, 000
30,0009”; IDI 000
wow 0, 000
100,000 (0,000 Variable cost
L/ 0,00 0
or) AVC AFC DO [03
’.t L"(n’ .2 KOO
r. n k. l Total I' “.m. MC
.1 \J' ’
(it. M» Q . J.) (’9‘); \ If the price ofthe output in the problem almvejb’4'00 (and the ﬁrm is in perteet competition). at
"what quantity will they maximize their proﬁts? )_O_Q 2) Using the three determinants of elasticity, state when the demand for a good will be inelastic. , kg“) -' MMWI um} 5!) on:
3) When the price of Red Bull rises from $5 per canto $5.50, the quantity purchased
falls from 1000 to 800. What is the price elasticity?
“Cw <aoo 4000, -_,.;zoo
[00° : m2 ,uoo= «:70 ’ 550-5
5 _. Q0 :
IO :10 5 I
02 3b) Calculate the price elasticity for the above problem (#3b) using the Midpoint formula.
300' “’00 .- «>262 .2
1000 +800 = Moo-",7; €00
b.+5.50-‘/o.5 /.2: 5.25 "2“"; =L::lo?.33
9,5; 5.50 _ 5 t 6"
5'. as OL D
,4 ' u)
4) When incooLmDe faﬂllbsufrom $20,000 to $19,000 per year, the quantity of spam bought
rises from 100 to 125. Calculate the income elasticity and state if spam is a normal or
inferior good. 925':
,. @5400 : ‘075x/00= :15
.70.ooo ,. —,05x/oo ’— ~5 ’b a"b : r
Uﬁﬁﬂ/“J. tr“ h»; /;
(391') 3h“ New 0 o
5) When the price of turkeys falls from $1L a pound to $.90 a pound, the quantity of porkn-beans purchased goes from IMO cans to cans. Calculate the cross-price elasticity, and
state whether turkey and pork-n- cans are substitutes or compliments. 80400: _920
1.00 /o:.—.3'O‘ +7.
:02: gubs‘lum 6) Label the cost curves on the graph below: L! 7) identify increasing returns to
Scale, minimum efﬁcient scale,
efficient scale below
. r 3'- V .9 \ \ ,3. Group work:
1) Price of lima beans falls from $1 to $.30. The Quantity of lima beans purchased
rises from 100 to 310. Calculate the price elasticity of lima beans using the simple
method and the midpoint method. 2) The average income of Norwich residents rises from $20,000 a year to $25,000 a
year. They quantity of beer bought in Norwich rises from 10,000 cases a year to
12,500 cases a year. Calculate the income elasticity. Is beer a normal good or is it
an inferior good? 3) The price of sugar substitute rises at ShopRite from $2 a box to $2.40 a box. The
quantity of coffee purchased falls from 1000 cans a week to 900 cans a week. Calculate
the cross price elasticity. Are these goods compliments or substitutes? DETERMINANTS OF ELASTICITY: MICROECONOMICS
The formula for price elasticity is __g__Lty/°
o Chane in uanti
% change in price
(the formula for % change is new-01d x 100%)
old ***When the price elasticity is between 0 and 1, the demand for the good is inelastic,
meaning it is a necessity.
*** When the price elasticity is greater than 1, the demand for the good is elastic,
meaning it is a luxury.
For example, ShopRite lowers its price on ham from $2.00 a pound to $1.50 a pound.
Last week (old) people bought 1,000 pounds of ham; this week, (new) people bought
1,100 pounds of ham.
1_0% change in Quantity = .4 inelastic, necessity
25% change in P
Midpoint formula: % change in Q/% change in P
Step 1: Calculate midpoint P and midpoint Q new + old
Step 2: calculate the % changes based on the MIDPOINT P and Q, calculated in step 1
Step 3: Use the same price elasticity formula you did above
For example, let’s calculate the price elasticity using the MIDPOlNT formula for the
ShopRite problem above. Step 1: Midpoint P = $1.75 ($2.00+$1.50)/2 Midpoint Q —— 1050 ——(1000+1100)/2
step 2.- % change in price =' (1'.5-2)/1.75 —— .286 = 28.6%
% change in Q = (1100-1000)/1050——.095 = 95%
step 3: 9.5% = .33 = inelastic 28.6% INCOME Elasticity: % change in Q/% change in Income When positive: the good is a normal good
When negative, the good is an inferior good
For example: When the average Income in a town rose from $10,000 to $15,000, people
in that town bought 2000 boxes of Roman noodles, compared with 8,000 the year before.
chane in uantit = —1.5 = inferior good
+ 50% change in Income
CROSS Price Elasticity: % change in Q good a/% change in P good B
When positive, the goods are substitutes
When negative, the goods are compliments (consumed together, so if the price of one
good rises, people buy less of that good and so they buy less of the other good)
For example: The price of chicken falls to $.50 a pound from $1.00 a pound. The quantity
of beef people buy falls from 1000 pounds to 750 pounds.
Chane in Q beef = +5 = chicken and beef are substitutes
-50% change P chicken ...
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