Problems Sets
How could the shoe firm shift their PPF outward to produce more shoes?
All of the above would shift the PPF outward.
Compare the costs of production. Is the unregulated natural monopoly desirable or undesirable from an economic point of view?
Both A and B are true
Do mergers among firms increase economic efficiency?
Both a and b could be correct.
An unregulated natural monopoly will be able to become a monopoly because of which of the following?
Both b and d.
If consumers anticipate shortages of a good, how might they react when they see a stock of that good on the shelves of a grocery store?
Buy a lot more of the good than they need today and hoard it.
Consider a negative externality in which SteelCo is polluting. Describe the order of events in which a negative external cost could be reduced.
By standers (or third parties) complain to local officials that they are negatively affected by the activity of SteelCo. The government regulates or taxes SteelCo. SteelCo changes its production methods or reduces its output activity The amount of pollution created by SteelCo is reduced
Use the New Output table above to fill in the blanks for the marginal product of each employee.
Cell A 15 Cell B 18 Cell C 16 Cell D 10 Cell E 8
Based on the table, find the original marginal cost curve function values when the wage rate is $360 for the indicated cells in the Marginal Cost column of the table above.
Cell A 36 Cell B 30 Cell C 36 Cell D 45 Cell E 60
Using the New Output table above, match the new marginal cost to the cell indicated from the Marginal Cost column.
Cell F 24 Cell G 20 Cell H 22.5 Cell I 36 Cell J 45
In economics, what do we mean by "capital"?
Factories, machines, and manufactured equipment that firms use in the production process.
Colorado has a lower opportunity cost for producing computers than Montana.
False
People bought a lot more toilet paper all of a sudden. Identify which of the following scenarios represents an increase in demand vs. an increase in quantity demanded.
Increase in demand-People knew they would just need more toilet paper because they would be spending more time at home. Increase in quantity demanded-People wanted to buy more toilet paper than normal since the price was lower than normal.
Assume toilet paper production costs didn't change and prices are allowed to change. If there is an increase in demand for toilet paper, how would the supply side of the market see this as the market adjusts to a new equilibrium?
Increase in quantity supplied.
The firm is planning their future inputs and can now adjust both labor and capital. How should they adjust inputs?
Increase labor and decrease capital
What effect does the new machine have on the firm's output and why?
Increased output since the new machine adds more resources for production capability.
Assume that the municipality decides to place a tax on individual incomes. Suppose that the tax is a fixed sum for everyone regardless of income. Explain how you might describe the fairness of the tax. Select all that apply.
Regressive. Would tax a larger percentage of smaller incomes.
You've been waiting in line for a roller coaster ride at the amusement park for 60 minutes. You're at the front of the line when you hear an announcement that the ride is broken and will take 30 minutes to repair. Upon hearing this announcement, what is your opportunity cost of going on the ride?
The 30 minutes to wait for repairs.
Why would option 'a' in Problem 2.4 be correct or incorrect? Select all that apply.
There may be economies of scale in some industries. A merged firm may be able to produce at lower costs, and thus enhance technical efficiency.
How would pasta makers in Derby be affected by the trade with Okun?
They won't be able to compete with the price for Okun pasta.
If the elasticity of supply was 1.5 instead of 2, would the surplus created by the floor be ______ before?
less than
What does this outcome mean for the firm? Marginal costs are now ____, meaning their average cost has _______.
lower, decreased
If DeBeers is profit maximizing, they produce where marginal revenue is equal to . This point on the marginal revenue curve is the demand curve.
marginal cost / below
When the waiter comes to take their order, he tells them they are running a special on spanakopita (spinach pies), and they are the same price as the Greek salads (before the price change they were more expensive). Instead of a Greek salad, they decide to order a spinach pie. What must be true about the marginal utility of spinach pie relative to Greek salads?
marginal utility of spinach pie is greater than Greek salads
n the supply and demand model, we would expect the price of toilet paper to____ because of the increase in ____
rise, demand
In times of emergency, it might be illegal to raise prices. If there is an increase in demand for toilet paper and prices are not allowed to rise, the result will be a(n) _______ of toilet paper.
shortage
Grant started a business this year. He earned $200,000 in revenues and had $150,000 in expenses. His other alternative would have been to go back to his old job, where he earned $70,000. What are Grant's "true" profits from his business?
-$20,000
Imagine DeBeers is currently selling 200 diamonds at a price of $1,000. To sell 10 more diamonds, DeBeers has to lower the price (of all diamonds) by $50. What is the marginal revenue from selling those additional diamonds?
-50.0
For each worker employed, Colorado has to give up ___ pairs of skis in order to produce one computer. Montana has to give up __pairs of skis to produce one computer.
.5; .2
If consumers in Derby want to consume 450 pounds of pasta, how many shirts must Derby stop producing to free up enough resources and labor? Answer as a whole number.
1800
They need a cab home but have no idea how much it will cost (Uber is not allowed in Athens). They discuss it and agree that between the two of them, they would be willing to pay 40 euros for a taxi. After a few minutes, they are able to flag down a cab. When they get back to their hotel, the cab driver tells them it will be 12 euro. How much is their consumer surplus?
28
If Derby wants to produce both shirts and pasta, how many shirts must it give up for every pound of pasta it produces? Answer as a whole number.
4
Based on the attached graph, calculate the consumer surplus if the price is 1.50 euros
4.5
Elasticity of demand is -2 and elasticity of supply is 3. Quantity demanded will increase ______ % and quantity supplied will decrease by_____ %
40; 60
The price of an effective price floor goes from P1 to P2 (an increased price of 25%). Assume that the elasticity of supply is 2 and the elasticity of demand is -3. What is the percentage change in quantity supplied?
50
What is the percentage change in quantity demanded?
75
When trading with Okun, how many shirts does Derby give up to buy 450 lbs of pasta?
900
What are some plausible strategies for the pizza parlor to apply in order to meet the new demand? (select all that apply.)
A. Hire another worker. b. Buy a new oven. d. Remain open for longer.
In economics, how do we arrive at the concept of opportunity cost?
All people have limited resources but unlimited wants. We as a society face scarcity. Scarcity forces us to make choices. When we make a choice‚ we forego some unchosen next-best alternative. Opportunity cost is the next-best alternative that we didn't choose.
The reason people bought more toilet paper at the beginning of the COVID-19 pandemic was due to:
An increase in demand.
Restaurants can be considered to be in monopolistically competitive markets. Imagine Panera is currently making a positive economic profit. Place the following in order of how the market will adjust.
Another firm (or multiple other firms) will enter the market. The demand curve for Panera will decrease and become more elastic. Panera will cut back and produce where the new marginal revenue is equal to the marginal cost. A long-run equilibrium will be reached where the demand curve just touches the average cost curve. Overall economic profits are zero and the price is lower.
What keeps firms from entering the market when a monopoly is able to produce where price is greater than average cost?
Barriers to Entry
Jessica and Sarah have picked out groceries at the market knowing the prices. They are buying tomatoes and feta cheese. They then find out that the price of feta cheese is twice what it was before. Walk through the change in their preferences.
Before the price change‚ the marginal utility per dollar of all goods in their basket are the same. With the price change‚ the marginal utility of each good has not changed‚ but now the marginal utility per dollar of feta cheese is less than tomatoes. They decide to put some of the feta cheese back. This increases the marginal utility of the feta cheese they have. They decide to buy a couple more tomatoes instead‚ which decreases their marginal utility of tomatoes. They settle on a new basket of goods where they have more tomatoes and less feta than before‚ but where the new marginal utility per dollar of feta is equal to the new marginal utility per dollar of tomatoes.
Imagine running shoe businesses, which include Nike, Adidas, and Asics, and are operating as monopolistically competitive firms. On Cloud enters the market and becomes a serious competitor to the other shoe businesses, including Nike. Describe what happens to the demand curve for Nike Shoes.
Demand decreases and becomes more elastic
Based on your graph above, the firm is experiencing:
Diseconomies of scale
What implications does this have for the firm and how would you describe it using economic terminology? (Select all that apply.)
External cost
At the profit-maximizing level of output, the monopoly would charge the price where:
Finding the point on the demand curve with the highest price where they can still sell all of their output.
Maria has three choices of what to do for the next hour. She prefers to watch TV. Her next choice would be to go for a walk and her third preference would be to study. Maria watches TV. In this scenario, what is Maria's opportunity cost?
Going for a walk.
Doug goes grocery shopping. He sees that each apple is $1 and each banana is 50 cents. His marginal utility for the first apple is 5 and his marginal utility of the first banana is 4. First, what is his marginal utility per dollar of the first apple and the first banana? He has $10 and he spends all of it on apples and bananas. Describe his decision making process for how many apples and bananas he will buy and why. (Note: You will not be able to solve a numeric answer for how many of each he will buy, but you can describe why Doug decides to buy more of one).
His marginal utility per dollar of his first apple is 5 and the marginal utility per dollar of the first banana is 8 (=4/.5). If he only had $1, he would buy two bananas, but since he has $10, he will be able to buy more. For each banana he buys, his marginal utility for that banana goes down. He will continue putting bananas into his basket until his marginal utility per dollar of bananas is less than or equal to 5. At that point, if he still has some of his $10 left, he will put some apples in the basket. With each apple, his marginal utility per apple will go down. He'll continue buying apples and bananas until the bang for buck of each fruit is equivalent and he has spent his whole budget.
Consider a tax on individuals. Under which of the following circumstances would the tax cause the least effect on economic efficiency?
If the demand for the product is inelastic.
Consider a tax on producers. Under which of the following circumstances would the tax cause the least effect on economic efficiency?
If the supply of the product is inelastic.
Assuming raising prices is illegal, how can grocery stores prevent people from buying more toilet paper than they need in an effort to make sure everyone has a chance to buy?
Impose quantity buying restrictions on customers.
Discuss the differences in perfect competition, monopolistically competitive, oligopoly, and monopoly markets regarding whether firms can make profits in the long run, and which markets are the most efficient. Discuss the assumptions of each market structure which drive the result.
In perfect competition, all products are identical and there is free entry and exit. If firms are making a positive profit, then other firms will enter the market until there is no profit to be made. The price (which is equal to the marginal revenue for perfect competition) will be equal to the average cost. Because the firms are operating where price = marginal revenue = marginal cost = minimum of average cost, they are operating efficiently. In a monopoly, there are no other firms and the firm faces a downward sloping demand curve. Because of this, marginal revenue is less than the price (to sell more goods, they need to lower the price). In the long-run, a monopoly can make a positive economic profit because of barriers to entry. Monopolies are not operating at an economically efficient point because price > marginal cost and price > average cost. Similarly for oligopolies, there are barriers to entry, which again allow firms in the long-run to make economic profits. For monopolistically competitive firms, there are low barriers to entry. Firms sell unique products, so each firm faces a downward sloping demand curve (which means marginal revenue is less than the price). In the long run, firms will enter the market if other firms are making positive economic profits. The long-run equilibrium will occur with zero economic profits, but where they are producing and economically inefficiently quantity as well.
A perfectly competitive firm is profit-maximizing in the long-run. Capital costs decrease in the short run, but the firm cannot adjust their capital. Explain both the short-run and long-run decisions for the firm, assuming that their only two costs are capital and labor. What happens and why to overall long-run costs of production?
In the short run, the firm cannot adjust their capital, so they will continue producing with the same amount of labor and capital. In the long run, the firm will adjust their ratio of labor and capital until the marginal product of labor divided by the cost of labor is equal to the marginal product of capital divided by the cost of capital. Because the cost of capital went down, that means that they will increase capital and decrease labor relative to what it was before. Overall, their costs will be lower.
Describe rationality and the decision-making rule. What goal do people have in their decision making? Can you think of some logical fallacies or pitfalls that people sometimes fall victim to in their decision making?
Intuitively, a rational person may be someone who is logical, thinks soundly, and makes good decisions. In economics, we generally say that rationality involves the application of cost-benefit analysis in one's decision-making. This means that a person will do an activity if the benefits are greater than the costs. When we introduce marginal analysis, we can modify this to say "that person will continue to do an activity as long as the marginal benefits are greater than the marginal costs". If we follow this cost-benefit analysis in our decision-making, we can always make choices that leave us better off, with the goal of maximizing our well-being. However, we are not perfect decision-making robots and sometimes have biases and fallacies in our thought processes. A common pitfall is "the sunk cost fallacy". A sunk cost is a cost we paid in the past and cannot undo. For example, there may be time or money spent in the past that we can't get back. Because we cannot get the time or money back, we should NOT include those sunk costs in our current and future decision-making processes. However, it can be hard for us as humans to ignore sunk costs, especially if we view them as large. In summary, we should only consider the possible future costs and benefits when making a decision about that future.
Using your intuition and the Original and New Output tables, we can say the following about the relationship between marginal product of labor (MPL) and marginal cost of output (MC): There is an ______ relationship between MPL and MC. As MPL rises, MC will _____, and as MPL diminishes, MC will ______ . If there is an overall increase in MPL, there will be an overall _____in MC.
Inverse, fall, rise, decrease
Think about externalities in general. A common example of a negative externality is pollution. What is the optimal amount of pollution? Is it zero? Why or why not? Are there benefits to pollution?
It's tempting to just say that 'of course, the best amount of pollution is zero.' But with today's technological constraints, we quickly see that this isn't possible. To have zero pollution today would mean that we would have to end all activities that cause pollution. This means no more commercial air travel, no driving, and in many cases, even no electricity. Losing these things would greatly reduce our quality of life and goods available for us to produce and consume. There aren't any direct benefits of pollution. However, we must realize that there are benefits to the goods, services, and activities we enjoy, and some of these activities create pollution as an external cost. Clearly, there are benefits to driving and electricity.
What action is the government most likely to use to prevent the hoarding and arbitrage (reselling goods) of consumer goods like toilet paper that are in high demand during an emergency?
Make it illegal to price gouge and resell goods at higher prices.
If the government taxes or regulates this hot sauce firm to reduce the negative externality, what will happen to the market price and quantity of hot sauce?
Market price-increases quantity supplied-decreases
After the Raptors won the NBA championships, consumers bought 8,000 pairs of running shoes and 30,000 pairs of basketball shoes. Would this be possible for the firm to produce with their current production capabilities?
No
Given the PPF curve, would you expect the pizza parlor to meet the new demand?
No, it is not possible with the current inputs.
For the natural monopoly, the output will be less than the allocatively efficient amount. Why? Select all that apply.
Price will be greater than the marginal cost. Less pressure to hold costs to a minimum than a perfectly competitive firm faces.
For each of the following, explain whether they should be considered in the short-run decision making.
Revenue from selling the good-yes Cost related to a contract that has been signed to pay a set amount-no Labor costs that are variable-yes Costs for ingredients-yes Costs for equipment that cannot be immediately sold-no
They cannot adjust their capital, so are they in the short run or the long run?
Short Run
Based on the production capabilities of one worker in Colorado or Montana, indicate which state has a comparative advantage in producing skis or computers.
Skis-Colorado Computers-Montana
How did you adjust the above graph to represent the pizza parlor's decision to stay open longer hours?
Slid the curve upwards along the pizza axis, no change to the breadsticks axis.
Given the information above, should they stay open during the winter months this year?
Stay open during the winter, even though they are making a loss.
A tax on producers would result in the ____ curve moving to the _____. A tax on consumers would result in the _____curve moving to the_____.
Supply; left; demand; right
A farm grows apples and pears. It is fully utilizing its available land and other resources, such as tractors and machinery. Tastes change, and consumers demand more pears than apples. Put the following in the right order, from the first action to the last, that would describe the farm's response.
The farm is faced with an increased demand for pears and a decreased demand for apples. The farm decides to meet the new demand since their current resources allow them to produce more pears and still meet the reduced demand for apples. The farm uses less land for apples and more land for pears. The farm's apple output decreases and the pear output increases. The farm is able to produce at a technically and allocatively efficient point on their PPF.
A firm sets its efficient production plan of labor and capital but then finds out that capital costs have doubled. In the short run, it cannot adjust its production plan, but it can in the long run. Explain how the firm will adjust in the long run by placing the following statements in order.
The firm is now using a higher ratio of capital to labor than is efficient in the long run. Output is adjusted by decreasing their capital and increasing their labor. The marginal product of capital increases‚ and the marginal product of labor decreases. A new efficient ratio of labor to capital is found‚ which lowers costs in the long run.
Suppose that eggs and oatmeal are substitutes in consumption. Explain, in step-by-step detail, what will happen in the market for oatmeal and the market for eggs if the price of oatmeal decreases
The law of demand says that all other things equal, there is an inverse relationship between the price and quantity demanded of a good. If the price of oatmeal decreases, consumers will buy more oatmeal. This is a movement along the oatmeal demand curve. We will want to buy more oatmeal because the rice is lower. If eggs and oatmeal are substitutes in consumption, it means that if we consume more of one good, we'll consume less of the other. In this case, consuming more oatmeal will mean reduced egg consumption. The market for eggs will experience a decrease in demand, a leftward shift. People are buying more oatmeal, so they're buying fewer eggs, no matter what the egg price. If the market for eggs was in equilibrium, there will now be a surplus at the current egg price. Over time, the price of eggs will fall, and the market for eggs will reach a new equilibrium. This new equilibrium will have a lower equilibrium price and a lower equilibrium quantity.
The government creates an effective price floor. Describe how the market adjusts by putting the following statements in order.
The new minimum price is now above the equilibrium price. Producers are willing to supply more‚ but consumers would be willing to buy less. The difference between quantity demanded and quantity supplied after the price floor comes into effect creates a surplus in the market. The size of the surplus depends on the elasticity of the producers and consumers‚ the more elastic either party is‚ the greater the surplus.
When making decisions about whether to renew their lease for the next year, and assuming that they anticipate the same level of revenue and costs in the future, what should the firm do?
The parlor will renew their lease because overall they make a positive profit over the year
Suppose the market for eggs is in equilibrium. Then, suppose there is an increase in consumer preferences for eggs. What happens?
There is an increase in consumer preferences for eggs. The market experiences a rightward shift in demand for eggs. At the current egg price‚ there will now be a shortage of eggs. The price of eggs in the market starts to rise. The egg market reaches a new equilibrium with a higher equilibrium price and a higher equilibrium quantity.
With regards to the firm's PPF, how would you describe the combination of shoes that the firm would need to produce in order to satisfy all shoe demands?
Unattainable.
The government has an effective price ceiling in place. The government then decides to decrease the price ceiling by 20%. Describe 1) what will happen to quantity demanded and quantity supplied with this change, 2) how elasticity relates to the changes, and 3) the resulting effect on the market. Where is price relative to where the equilibrium price would be if there were no price controls?
With an effective price ceiling, there is a shortage in the market because quantity demanded is greater than quantity supplied. If the price ceiling decreases, the decrease in price will cause quantity demanded to increase and quantity supplied to decrease. These changes collectively increase the shortage. The more responsive either side is to changes in prices (the more elastic they are), the more the shortage will increase. Overall the price is still below the equilibrium price and the shortage in the market has increased.
If Colorado had 200 workers available and Montana has 300 workers available, should Colorado specialize in one good?
Yes, Colorado should specialize in skis because Montana has a lower opportunity cost of producing computers.
Should Derby trade with Okun?
Yes, the opportunity cost per pound of pasta is lower when trading with Okun.
The word "marginal" means
additional
Firms producing where marginal cost is less than the price producing allocatively efficiently. Firms producing where price is greater than the minimum of average cost producing technically efficiently.
are not / are not
If the actions outlined in Problem 2.3 were the only available options, what would the firm have to consider when deciding which to take?
b. The cost of each action. d. How much each action increases output.
DeBeers could make a profit in the ______ run.
both long and short run
Which party is more elastic? The producers or the consumers?
consumers
Economies of scale occurs when long-run average costs are and diseconomies of scale occurs when long-run average costs are .
decreasing / increasing
They are starving and finish the order of tzatziki dip really quickly. They decide to place another order of tzatziki, but they realize they don't like it as much this time. What is the economic term to describe what happened to their decreased enjoyment of the tzatziki?
diminishing marginal utility
In the diamond industry, the monopoly price is and the quantity is relative to the price and quantity if the market were perfectly competitive.
greater / lower
The short-run costs are _________ (less than/greater than) or equal to long-run costs.
greater than
The option(s) selected in Problem 1.2 will meet the new demand because they:
increase inputs instead of reallocating them.
In the graph below, what happens to the surplus?
increases
Firms in a market have differentiated products, while firms in a have very similar products.
monopolistically competitive / oligopoly
In the long run, firms in markets can make a profit, but firms in markets cannot.
oligopolistic / monopolistically competitive
An individual should continue doing an activity as long as:
the marginal benefits are greater than the marginal costs.
If there is no effective costless solution to reducing the irritation, the firm will end up producing _______ hot sauce compared to the socially optimal and efficient quantity.
too much
