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Econ 211/ Econ 201: Mid Term Review

1. Change in quantity supplied as a result of change in current price is a movement along the supply curve. Its part of the slope of direct supply with respect to price, that is, (Q/ P). Here QS is on the horizontal axis. So its a movement long the curve. 2. Change in supply = shift in the entire supply as a result of changes in factors other than the current price (factors not on the axes). The changes include: Decrease in costs of production shifts the supply curve to the right ( because profit = RC - TC increases). P D E1 P*1 P*2 S1

S2

E2

Q*1

Q*2

Improvement in technology shifts the supply curve to the right ( an increase in supply). Equilibrium price decreases and equilibrium quantity increases. Decrease in prices of related goods (say wheat) (Corn Vs. Wheat). Supply curve of corn will shift to the right as a result of the decrease in price of wheat. Price decreases and quantity increases. Increase in Pe (expected price): It depends on the storability of the good. If the good is storable such as oil, gold or land the increase in the expected price shifts the supply curve to the left ( decrease in supply) not graphed here.

3. Price ceiling. The ceiling is below the equilibrium price and it causes a shortage. PC < P* Shortage= Qdc - Qsc

If p*= $20 which of the following is a price ceiling: $25; $20; OR $18. The answer is $18 because it is below $20. 4. Price floor. The floor is above the equilibrium price. Pf > P* Surplus. In question # 3 above, Pf is $25. 5. Change in quantity demand as a result of change in current price. This is a movement along the demand curve. Its part of the slope of DIRECT demand with respect to the price ( Qd/ P). 6. Within the framework of S and D. Change in demand = shift in the entire demand. The shifters include: Increase in taste for an increase in the entire demand. Both equilibrium P* and Q*are up.

Increase in income. Normal good: Demand shifts up to the right (and income elasticity is EDI > 0) Inferior good: Demand shifts down to the left (and EDI < 0) Examples of inferior goods: Bus trips, discount clothes, used books, corned beef.

Prices of related goods for demand Substitutes: Cross price PY increases, demand for X shifts up (and cross EDxPy >0) Complements: PY increases, Demand for X shifts down (and EDxPy < 0)

7.

Shifts on PPC Increases in resources. PPC shifts up Improvement in technology. PPC shifts up. 8. Points on the PPC represent efficiency and full employment. 9. Calculate the opportunity cost of increasing Y by an extra unit is the sacrificed X 2

X/Y X 1 0 9 8 Y 0 5 7

X/Y
Opp. Cost of increasing Y= --Sacrifice in X / Increase in quantity of Y = (9-10/5-0) =abs.(1/5) (8-9) / (7-5) =

10. If the coefficient of price elasticity of demand EDP 0.45 = ( inelastic less than 1 in abs. value) then an increase in the price would increase the total revenue. Price and total revenue move in the same direction. If EDP 3 = ( elastic) then an increase in price would decrease total revenue (inverse relationship). Price and total revenue move in opposite direction. If EDP = -0.34, -0.9, -2.2, -1. Under which of these elasticities should we decrease the price to increase total revenue (TR)? 11. Mid Point (arc) elasticity P 11 = P1 10 = P2 QD 50 = Q1 60 = Q2

EDP = {(Q2 Q1) / [ ( Q1 + Q2)]} / {(P2 - P1) / [ ( P1 + P2)] } = {(60 -50) / (50+60)} / [(10 11) / (10 + 11)] = ? (-0.19 inelastic because in absolute value it is less than 1) 11. Which price shifts the supply curve for a storable good? Current price or expected price? Expected price. Within the framework of supply and demand, if there is an expected price increase and the good is storable such as oil, gold and land, then the supply curve shifts to the left, leading to an increase in the equilibrium price and a decrease in the equilibrium quantity. For a non-storable good, an increase in Pex shifts supply to the right

13. Consider the following two companies: Company X produces product X with a price elasticity of demand EDP = - 0.9 (inelastic), and Company Y produces product Y with a price elasticity of demand EDP = -3 (elastic). Which company should increase the price in order to increase total revenue? The company with the inelastic demand (company X). If demand is inelastic, an increase in the price will lead to an increase in TR because the price and TR move in the same direction in this case. 14. Which of the following is not a measure that business does to go around a price floor: a. Absorbing the surplus. b. charging for previously given free goods. C. offering free goods. d. hiding the brand to see branded goods at lower prices. 15. Suppose the price of used book fell from $15 =(P1) to $10 (=P2) while quantity demanded increased from 300 (=Q1) books to 500 (=Q2) books. Calculate the midpoint price elasticity of demand. E =[(Q2 - Q1)/(1/2(Q1 +Q2))] / [(P2 - P1)/(1/2(P1+ P2))]. E = [(500-300//1/2(300+500)] / [(10-15)/1/2(10+15)] = -1.25. Is this elastic? 16. Within the framework of supply and demand, suppose the demand for coke has shifted to the right (look at the factors that shift demand to the right). Which of these statements would you reject? (Recall: Coke and Pepsi are substitutes) The price of coke increased (reject this statement because its a movement along demand curve for coke. Not a shift) The price of coke decreased (reject. It is also a movement along the demand curve for coke. Not a shift) The price of Pepsi increased (yes, demand for Coke will shift up because Coke and Pepsi are substitutes and the price of Pepsi increased) The price of Pepsi decreased (reject because this shifts the demand for cake to the left) Income increased and coke is a normal good (yes). Price of water. ???? Are coke and water substitutes?

17. Price of hotdog increased. Then the demand for mustard shifted to the -----left or down.(Both are complements. Hotdog and Mustard are complements) 18. 6% increase in quantity demanded of cigarettes and 10 % decrease in the price of cigarettes. Then the price elasticity of demand for Crest

= (% change in Q / % change in P) = % Qd/ % P = - 6%/10% = ? -0.6% (elastic) 19. Consumer equilibrium for goods x and y that maximizes utility is determined by the following condition MUx/Px = MUy/Py
(make sure that the marginal utilities per dollar for the two goods are equal)

and then check the budget constraint that Income = Px *X + Py *Y so that you will not spend more than your income. Example. two goods: Y and Z. Suppose price of Y is $1 per unit of good Y and the price of Z is $2 per unit of good Z and income is $11. Q for Y and Z 0 1 MUY MUZ MUY/PY 30 (MU of ist 40 30/$1=30 per $ unit) 2 20(MU of 2nd 30 20/$1 = 20 unit) 20 16/1 = 16 3* (units of Z) 16 4 12 18 12 15 10 5*(units of Y) 10 6 5 10 5 The first condition MUy/Py = MUz/Pz This condition is satisfied three times (20=20; 10 =10; and 5=5) Check the budget constraint coefficient (condition two): Py*Qy + Pz*Qz = Income $1*5 + $2*3 = $11. 20. Cross price elasticity of demand between good S and good T is 1.5. Are those two goods substitutes or complements? They are complements because the cross price elasticity of demand is negative. Example of complements: Computers and printers. 21. Which of the following is likely to have the most elastic price elasticity of demand? (Hint: more substitutes, more elastic) A) Food. B) Fruit. (has more substitutes than food) C) Peaches. (has more substitutes that fruit) D) Farmer Betty's peaches (which are exactly like all the other farmer's peaches 5 MUZ/PZ 40/$2=20 per $ 30/2 = 15 20/2=10 18/2= 9 15/2 = 7.5 5

and has many substitutes). (Has more substitutes than peaches in general) Answer: D because Farmer Bettys peaches have all the other farmers peaches, and all other fruits (pears, apples etc) and food as substitutes. Then Farmers Bettys peaches are the most price elastic. The good with the most substitutes is the most price elastic. 22. Example on deriving MPPL (marginal physical product for labor). Workers 0 1 2 3 4 Total Products (Bushels of corn) 0 10 bushels 25 bushes for 2 workers 32 for 3 37 for 4 MPPL 10 bushels for 1st worker 15 for 2nd 7 for third 5 for 4th 1st 2nd 3rd 4th

What is the marginal product MPPL of the second worker? MPPL = Output / Workers = units of output = (25-10) / (2-1) = 15units of ouput. 23. At what point (the ith worker) do diminishing returns start? When MPPL starts to decrease. a. 3 b. 2 c. 1 24. .Suppose FC = $50 when output is zero. What is the fixed cost (FC) when output is 10 units? a. $50 b. More than $50 c. Less than $50 Answer questions 25 and 26 using Exhibit 101 Exhibit 101 Suppose Cindy owns and manages her restaurant. Total Sales = $200,000 (TR) Workers Salaries = $75,000 (VC) Materials Expense = $25,000 (VC) Foregone Salary = $40,000 (opportunity cost) 25. Calculate Cindys accounting profit = sales revenue explicit costs = $200,000 - $75,000 - $25,000 = $100,000

26. Calculate Cindys economic profit = sales revenues explicit costs implicit costs = 200,000 75,000 25,000 40,000 = $60,000

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