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Unformatted text preview: Econ 200 Quiz 2: Answer key 1. Jenny took up knitting and can knit scarves. She usually keeps them for herself and the marginal value schedule below represents how much value she gets from her scarves. Recently a friend offered to let Jenny sell her scarves in his shop. a). If she has made 10 scarves so far (and won’t make any more), fill in how many scarves will she sell at his shop for the prices listed below? (4pts) b). Draw Jenny’s supply curve and label her total cost, total revenue and rent when the price she can sell scarves at is $11. (3pts) P Supply P=11 rent total revenue= total cost + rent total cost Q
7 c). Why would she get a rent if she were able to sell scarves for $11? (3pts) Jenny would get a rent because the total revenue she would get paid for her scarves ($7*11=$77) is higher than the total cost to her of providing them (TC=$1+3+5+7+9+11=$36). 2). When you buy a plane ticket, there are about $20 worth of taxes and fees that are added to the advertised price. These fees apply equally to both to first class flights, which average around $360, and coach flights, which average around $100. What effect do you think these fees have on the proportion of first class flights taken? Use the numbers above to support your argument. (5pts) When you add the extra $20 worth of taxes and fees on to the cost of both first class and coach flights, the first class flights become relatively less expensive, so the proportion of first class flights purchased will increase. Before the fees and taxes, the taking a first class flight meant giving up 3.6 coach flights. After the $20 of charges, a first class ticket will cost $380 and a coach class will cost $120, meaning taking a first class requires giving up 3.167 coach flights. The relative cost of the first class flight has decreased, so by the law of demand, the quantity of first class flights demanded will increase. 3). Explain why we say an economy is operating at its economically efficiency level if the price and quantity bought and sold are determined by the point where the supply curve intersects the demand curve. (5pts) At the point where the supply curve intersects the demand curve, the marginal value of consumers who want to purchase a good is exactly equal to the marginal cost to suppliers to provide a good. After this point there will be no more purchases that take place since the amount consumers are willing to pay for goods is less than the cost of providing those goods. Therefore the gains from trade are exhausted, meaning the economy is at its efficient point. ...
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This note was uploaded on 02/06/2010 for the course ECONOMICS 200 taught by Professor Stiban,f during the Winter '10 term at University of Warsaw.
- Winter '10