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ECO 384
Fall 2013
Homework Problems #3
Due November 20
This assignment, like all others, is a learning experience. As such, you will not find the answers
easy to come by. If they were, then you wouldn't be learning anything new. However, once you
have completed the task, then you will convince yourself that you can and have learned some
complex material. Be patient with yourself and your teammate, and the rewards will come
through.
Complete the following questions. Label all graphs completely. 10 points each.
1. Using a general example, prove the profit maximizing decision rule for determining
the output level. Note: a mathematical (calculus) proof is neither necessary nor
sufficient - you must include economic definitions for the terms you use. See also
question #4 on page 405
2. Fully explain the short-run and long run adjustments – using the relevant graphs – for
a market beginning in long run competitive equilibrium when the income elasticity is
equal to -1.2 and the average income for the market increases. The market in question
is an increasing cost industry.
3. Fully explain the short-run and long run adjustments – using the relevant graphs – for
the corn market beginning in long run competitive equilibrium when the cross price
elasticity between corn and potatoes is equal to +1.2 and the potato market faced
severe weather disruptions causing a several year reduction in harvests. The market
for corn is an increasing cost industry.
4. Question #4 on page 321
5. “Ok, this economics stuff is really silly. Now they say the market is in equilibrium
when firms earn zero profits. Who will stay in business when they aren’t making any
profit? We should have a communist system.” Being sure to define economic profits,
comment wisely.
6. “A firm wants to be at the minimum of the LRAC at all times because that is the
equilibrium point. Man, is this economics stuff easy.” Comment wisely.
7. Question #8 on page 321
8. Use a set of graphs to explain the structure of a two-market segmentation for the
purposes of price discrimination. (If your graphs are properly constructed, you really
don’t have to explain the construction.) How does the price discrimination outcome
vary from the combined single market solution? Who pays the higher/lower price and
why?
9. Professor Greenhut argues that the most important measure in microeconomics is that
of demand elasticity. Given the Phlips determination that all firms have some
monopoly power, can you explain why Professor Greenhut is so focused on the
elasticity measures for demand? (Answering “No” is not a good strategy for points!)
Consider the markets discussed in class that price discriminate, how do the firms in these
industries utilize the elasticity measures? (Do NOT give an encyclopedic answer!)
10. Overheard at the water cooler. “This character Smith, with his new degree in
economics from NAU is an idiot. He knows we are in a competitive market and the
price of our output is $10. But our average cost is only 8 dollars at our current output
level of 10,000 units. I think we should increase output to 15,000 because at that
level average costs equals $10, which matches price. Then we should think about
raising our price to $15.” Comment wisely. (Assume a competitive market. Graph the
data you know and think about it.)