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Econ 101.02
Tutorial Questions
Selin Sayek Böke
Fall 2005
Bilkent University
Topics to be covered:
1. Elasticity: price elasticity of demand, price elasticity of supply, cross price
elasticity of demand, income elasticity of demand.
2. Consumer surplus, producer surplus, deadweight loss.
3. Definition of market structures
4. Concepts of total product (TP), marginal product (MP), law of diminishing
returns, average product (AP), total cost, variable cost, fixed cost, short-run
and long-run.
Questions:
1. When the price of good X falls from TL 3 million to TL 2 million the quantity
of good Y demanded increases from 550 units to 650 units
a. What can you infer about the type of these two goods: are they inferior,
normal, substitutes, complements?
b. Calculate and interpret the cross price elasticity of good Y.
2. The demand and supply schedule for “tadelle” is given as follows:
Price (in millions of TL)
1
2
3
4
Demand (units per week)
90
80
70
60
Supply (units per week)
20
45
70
95
a) Find the equilibrium price and quantity. Explain the market forces and
mechanisms that lead to that market equilibrium.
b) Calculate the price elasticity of demand at each point for the demand
schedule.
c) Calculate the price elasticity of supply at each point for the supply
schedule.
d) If the price of “dido” goes up from TL 1 million to TL 1.5 million the
demand for tadelle increases by 35 units each week, at each price level.
a) What is the new equilibrium in the market? Explain how the
market adjusts to the new equilibrium point. In doing so write the
new demand schedule explicitly.
b) Calculate and interpret the cross price elasticity of tadelle.
e) Use the original demand and supply schedule and assume the following: If
income goes down from TL 100 million to TL 80 million the demand for
tadelle decreases by 35 units each week at each price level.
a. According to this information what type of a good is tadelle?
b. Calculate and interpret the income elasticity of demand for tadelle.
3. Define and explain consumer surplus, producer surplus and deadweight loss
conceptually.
4. Draw a demand and supply schedule and graphically show the free market
equilibrium. On the same graph show the consumer surplus area, the producer
surplus area and the deadweight loss area when the free market is in
equilibrium.
5. Assume in the market defined in question 5 the free market equilibrium
implies the price is TL 6 million and the equilibrium quantity is 25 units.
There is a sudden increase in oil prices, which significantly increases the cost
of production of this good.
1. Explain the short-un impact on this market. In what direction will the
equilibrium price and quantity change?
2. If the government does not impose any policies and allows the markets
to adjust in the long-term and sufficient time passes by, explain the
long-run adjustment in the market. In doing so you should explain the
market conditions at each stage of time.
3. Now assume the government imposes a price ceiling in the short-run
instead of waiting for the markets to adjust:
a.
If the price ceiling is to be effective should it be less than or
higher than TL 6 million? Why?
b.
Show the change in welfare for the consumer, the producer,
the government and the overall society when the price
ceiling is effective. Explicitly state the assumptions
underlying your analysis (hint: is there a black market or
not?). Explain who loses and who gains in this situation.
c.
Did the price ceiling solve the short-run market
inequilibrium correctly? Explain.
6. Define the following market structures and give examples for each:
a. Perfectly Competitive market
b. Monopoly
c. Monopolistic competition
d. Oligopoly.
7. What is the difference between economic and accounting profit? Explain.
8. Explain what you measure with:
a.
b.
c.
d.
e.
Marginal product of labor
Marginal product of labor
Average product of labor
Average variable cost
Total fixed cost
9. The total production function in a factory producing pens is as follows in the
short-run, where the factory owns 3 units of machinery:
Labor (per day)
1
Total Product (per day)
30
2
3
4
5
6
7
8
9
10
74
124
183
232
272
302
322
334
344
Using this table:
i.
calculate the marginal product and average product of labor at each level
of labor.
ii.
Graph the three curves: the total product curve, the marginal product curve
and the average product curve.
10. Assume that you are still interested in the above pen factory (in question 5).
You know that the per day cost of labor is TL 30 million and the cost of each
machine used in pen production is TL55 million. Using this information:
a. Calculate the total variable cost, the total fixed cost and the total cost
of production for this factory.
b. Draw the graphs of the three curves: the total variable cost (TVC), the
total fixed cost (TFC) and the total cost (TC).
c. Calculate the marginal cost of production (MC), the average fixed cost
(AFC), the average total cost (ATC) and the average variable cost
(AVC).
d. Draw the graphs of the four curves: MC, AVC, AFC and ATC.
11. Explain:
a. The “law of diminishing returns” both from the productivity
perspective and the cost perspective.
b. At which point of labor does the returns to labor start diminishing in
question 5?
12. Assume that now you are in the long-run and still concerned about the pen
factory in question 5. The factory owners tell you that they have the following
information regarding total production:
Labor
1
2
3
4
5
6
7
TP –Plant 1
TP –Plant 2
TP –Plant 3
TP –Plant 4
30
50
65
75
74
99
118
126
124
142
157
169
183
212
229
243
232
242
250
252
272
302
327
347
302
314
324
325
8
9
10
No. of
machines
i.
ii.
iii.
iv.
v.
322
334
344
3
344
354
348
4
359
371
351
5
373
382
353
6
Calculate the marginal product of labor and capital. Explain what you are
measuring.
Draw the short-run average total cost curves for each plant.
Draw the long-run average total cost curve. Explain how you derive it.
What is the minimum efficient scale of production in the long-run?
At which range of output do we observe increasing returns (economies of
scale) in the long-run? At which range do we observe decreasing returns
(diseconomies of scale) in the long-run?
13. Explain the following:
a. Economies of scale
b. Economies of scope
c. Increasing returns
d. Diseconomies of scale
e. Constant returns to scale