Download Econ 106 * SI review questions for exam 2

Econ 106 – SI review questions for exam 2
Hint: These questions are all based on class notes. Try to answer them on your own but refer to your
notes if you get stuck or if my question is not clear. This is a good way to study on your own – turn
everything you have been taught into a question, and then see if you can write a good answer. If you
can, no need to study that concept anymore. If you can’t, re-read your notes on that concept or look it
up in the book.
1. For any type of elasticity, there is a change, and a response to that change. Draw this as a
fraction.
2. The answer to question 1 is what you will use to construct the three types of elasticity that we
discuss – what are these three types and how are they represented as fractions?
3. When is elasticity positive? Negative? Greater than one? Between 1 and 0? Hint: draw the
response/change fraction, and then compare how the numerator and denominator are
increasing/decreasing.
4. Why would a firm care about elasticity? Draw a graph to show your answer visually. Hint: Think
about total revenue.
5. Draw a price/quantity graph showing supply, demand, and equilibrium. Now indicate the areas
of producer as well as consumer surplus.
6. Now shift the supply curve to the left – show the area of lost trades, or a loss in efficiency.
7. What is the definition of a luxury good? A normal good? An inferior good?
8. What do economists mean when they use the word ‘utility?’
9. What is the difference between total utility and marginal utility? What does diminishing
marginal utility mean?
10. Write the formula for the rational spending rule. Write what this means in your own words. Why
is diminishing marginal utility important for this rule to be true?
11. Draw a graph with utility on the y-axis and quantity on the x-axis. Now draw two curves: one for
total utility and another for marginal utility.
12. What is a reservation price, and how does it relate to supply and demand curves?
13. Draw a bowed-out production possibilities curve (PPC) (we always draw them this way in class)
with two goods (such as peanuts and cotton, but hopefully something more interesting…). Now,
draw the supply curve for one of the goods. How does the shape of the PPC determine the
shape of the supply curve? Hint: think about how the opportunity cost of a good changes as you
make more or less of it.
14. Does a firm exist to minimize cost? To maximize revenue? To maximize profit?
15. What are the conditions which make a market perfectly competitive?
16. Draw a supply and demand graph for an entire perfectly competitive market, and then draw the
supply and demand graph for an individual firm.
17. Why should a firm facing a perfectly competitive market follow the rule of producing a good up
until the point that marginal cost equals marginal benefit (MC=MB)?