econ 1030 CHAPTER 7

If we have a demand curve represented by the following equation, how much would be sold if the price is 12? Q = 30 - 1/3P

26

If we have a demand curve represented by the following equation, how much would be sold if the price is 6? Q = 30 - 1/3P

28

Consider a firm with fixed costs of production. Which of the following statements about its average cost (AC) and marginal cost (MC) is correct?

When AC = MC, the AC curve has a zero slope.

Under these rules, what would the producer and consumer surpluses be?

producer surplus would be decreasing while consumers are increasing

What is the effect of a 10% subsidy on low calorie vegetables? (What is the percentage change in quantity?)

11.28

By what percentage would his demand for high-calorie milk products fall?

17.93%

Calculate the quantity he consumes, in grams, before and after the price change.

2.57 kg before and 2.27 kg after

What is the marginal cost of the 6th unit of input?

20

Calculate his total expenditure on high-calorie milk products before and after the price change. You should find that expenditure falls.

$2.32 before, $2.09 after

What is the effect of a 10% tax on unhealthy snacks? (What is the percentage change in quantity?)

-2.95

A shop sells 20 hats per week at $10 each. When it increases the price to $12, the number of hats sold falls to 15 per week. Which of the following statements are correct?

-A 20% increase in the price causes a 25% fall in demand. -The elasticity of demand is approximately 1.25.

Consider a firm whose unit cost (the cost of producing one unit of output) is the same at all output levels. Which of the following statements are correct?

-Every price-quantity combination lies on an isoprofit curve. -Isoprofit curves slope downward when the price is above the unit cost.

Which of the following statements is correct?

-If a firm's technology exhibits constant returns to scale¸ doubling the inputs leads to doubling of the output level. -If a firm's technology exhibits economies of scale¸ costs per unit will fall as the firm expands its production. -If a firm's technology exhibits diseconomies of scale¸ doubling the inputs leads to less than doubling of the output level.

What events would contribute to economies of scale?

-Large supermarkets being able to drive down the cost of purchasing milk as it increases its scale of business. -A merger of two firms leading to savings on the costs of HR, IT, and legal departments. -The higher the number of users of Windows 10, the more likely it is that Microsoft will be able to achieve a higher sale of its operating system.

The diagram depicts two alternative demand curves, D and D′, for a product. Based on this graph, which of the following are correct?

-On demand curve D′¸ the firm can sell 70 units at a price of $3¸000. -At price $1¸000¸ the firm can sell 40 more units of the product on D′ than on D.

Suppose that in a small town a multinational retailer is planning to build a new superstore. Which of the following arguments could be correct?

-The new retailer argues that the close substitutability of some of the goods implies a high elasticity of demand¸ leading to healthy competition and lower prices for consumers. -The local protestors argue that once the local retailers are driven out¸ there will be no competition¸ giving the multinational retailer more market power and driving up prices.

If we have a demand curve represented by the following equation, how much would be sold if the price is 95? Q = 30 - 1/3P

0

Using the data for average costs, fill in the missing figures in the total cost column.

58,060,500 and 14,308,300

What is the total revenue generated by producing (and selling) 10 units?

800

Now choose a category for which the price elasticity is less than 1, and repeat the calculations. In this case you should find that expenditure rises.

After 71 kg and 2.89 Before 78 kg and 2.96

The figure depicts two demand curves, D_1 1 ​ and D_2 2 ​ . Based on this figure, which of the following statements are correct?

At E¸ demand curve D_1 1 ​ is less elastic than D_2 2 ​ . The elasticity is higher at E than at B.

How do average costs change as the numbers of students rise?

Average cost decreases

Which of the following statements is correct?

Consumer surplus is the difference between the consumers' willingness to pay and what they actually pay.

Draw the cost function (also called the total cost curve) for this case.

Horizontal going through $2

The table represents market demand Q for a good at different prices P. The firm's unit cost of production is $60. Based on this information, which of the following is correct?

The profit-maximizing output is Q = 400.

Can you think of any examples of goods that are sold in this way?

Insurance or and auction sale

What do the marginal and average cost functions look like?

MC is straight, AC is curved

A firm's cost of production is $12 per unit of output. If P is the price of the output good and Q is the number of units produced, which of the following statements is correct?

Points (Q, P) = (2,000, 20) and (4,000, 16) are on the same isoprofit curve.

This figure shows the marginal cost and marginal revenue curves for Beautiful Cars. Which of the following statements is correct, based on the information shown?

Profit is greater when Q = 20 than when Q = 10.

The following diagram shows the market demand curve of Apple Cinnamon Cheerios, the isoprofit curves of the producer firm, and the firm's profit function curve. Based on the graph, which of the following statements are correct?

The profit-maximizing choice for the firm is where the highest attainable isoprofit curve is tangent to the demand curve.

Draw diagrams to show how the curves in Figure 7.5a would change in each of the following cases: 1. A rival company producing a similar brand slashes its prices. 2. The cost of producing Apple-Cinnamon Cheerios rises to $3 per pound. 3. General Mills introduces a local advertising campaign costing $10,000 per week. To make sketching the curves easier, assume the demand curve is linear. In each case, can you say what would happen to the price and the profit?

The Demand curve will shift inward Isocurve shifts up by a dollar Advertising curve would shift up

Suppose that the unit cost of producing a pound of cereal is $2, irrespective of the level of output. Which of the following statements is correct?

The average cost and the marginal cost curves coincide.

Figure 7.11 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves. The quantity-price combination at point E is (Q^* ∗, P^* ∗) = (32, 5,440). The average cost of producing 50 cars is the same as the average cost of producing 32. Suppose that the firm keeps the price at P = $5,440 but now produces 50 cars instead of 32. Which of the following is correct?

The firm's profit is now reduced.

Suppose that the marginal cost of producing a pound of cereal is $2, irrespective of the level of output, but there are also some fixed costs of production. Which of the following statements is correct?

The marginal cost curve is a horizontal straight line.

The diagram depicts the marginal cost curve (MC), the average cost curve (AC), and the isoprofit curves of a firm. What can we deduce from the information in the diagram?

The price at C is 50.

Figure 7.11 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves. At point E, the quantity-price combination is (Q^* ∗, P^* ∗ )= (32, 5,440) and the profit is $63,360. Suppose that the firm chooses instead to produce Q = 32 cars and sets the price at P = $5,400. Which of the following statements is correct?

The profit is reduced to $62,080.

Figure 7.11 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves. Suppose that the firm decides to switch from P^* = $5,440 and Q^* ∗ = 32 to a higher price, and chooses the profit-maximizing level of output at the new price. Which of the following statements is correct?

The quantity of cars produced is reduced.

The following information is the data on a survey of demand elasticity for low calorie fruit and vegetables. The total expenditure of the consumer is $80 per week. Suppose now that the price of low calorie fruit and vegetables increases by 10%. Based on this information, we can conclude that:

The quantity the consumer consumes after the price change is approximately 876g per week.

Some firms charge different prices to different groups of consumers—for example, airlines may charge higher fares for last-minute travellers. Why would they do this and what effect would it have on the consumer and producer surpluses?

They take advantage of how desperate you are to be able to do something and try to push how much you will pay in order to do something. It lets them make more profit based off of your level of wantingness.

What is the reason for the difference in the shape of the isoprofit curves between the two firms?

changing prices and fixed prices

What are the main differences between the universities' cost structures for undergraduates and graduates?

cost increases

What are the shapes of the total cost functions for undergraduates and graduates? (You could sketch them using what you know about marginal and average costs.) Plot them on a single chart using the numbers in the total cost column.

downward

Can you think of any explanations for the shapes of the graphs you have drawn?

increase in students with a decrease in costs

Under these rules, how many cars would be sold?

less cars would be sold overall

In both cases the higher isoprofit curves get closer to the average cost curve as quantity increases. Why?

need to sell more cars

Why is this not common practice?

price and value vary

Suppose a competition policy has changed the rules of the game. How could this give consumers more bargaining power?

there are no more options