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S. Margolis
Spring 2009
North Carolina State University
Economics 201 H
Problem Set 2
1. Elasticity and Revenues.
a. In a given market, the demand for widgets can be written as follows:
Q = 100 - 4P. Compute the price elasticity of demand when the price is 10. Suppose
the price is 10, and price falls slightly. Can you say anything about what happens to
expenditures on widgets? Explain very briefly.
b. A recent issue of a consumer magazine tested six mainstream family sedans. They are
all similarly equipped and have prices that fall within a narrow interval. The magazine
compared these cars because a purchaser of any one of them is likely to consider
seriously one or more of the others.
Suppose the elasticity of demand for this group of mainstream family sedans was –0.8.
This would mean, for example, that if the prices of all family sedans went up by 10%, the
number of such sedans sold would fall by 8%. One of the cars, finishing just above the
middle of the group, was the Nissan Altima. Suppose that Nissan changed the price of the
Altima while the prices of the other sedans in this group remained unchanged. What can
you say about the elasticity of demand for the Altima with respect to this price change? In
particular, would you expect it to have an absolute value that is greater than 0.8? Less
than 0.8? Equal to 0.8? Explain.
2. What is the answer to question 7, chapter 5 on page 132? Explain.
3. Define marginal product and state the law of diminishing marginal product. Draw a
total product curve. What about your diagram reflects the law of diminishing marginal
product?
4. For a typical case, draw the ATC, AVC, and MC curves. Explain why the marginal
cost curve must pass through the minimum point of the average total cost curve.
5. What is the difference between the long run and the short run? Can a firm’s short-run
total cost curve lie below the firm’s long-run average cost curve over some range?
Explain.
6. What is the relationship between marginal cost and marginal product?