Download Introduction to Microeconomics Assignment 2 and Sample Midterm

ECO 101: Introduction to Microeconomics
Assignment 2 and Sample Midterm 2 Examination
Instructor: Naveen Abedin
Complete problems 4, 5 and 8 and submit on 12th July (ST) / 13th July (MW)
1. Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand.
Suppose that technological advancement doubles the supply of both products (that is, the
quantity supplied at each price is twice what is was).
(a) What happens to the equilibrium price and quantity in each market?
(b) Which product experiences a larger change in price?
(c) Which product experiences a larger change in quantity?
(d) What happens to total consumer spending on each product?
2. John’s income rises from $20,000 to $22,000 and the quantity of hamburgers he buys each
week falls from 2 pounds to 1 pound. What is his income elasticity of demand for
hamburgers? Are hamburgers inferior goods or normal goods?
3. Suppose you learned that the price elasticity of demand for wheat is 0.7 between the current
price for wheat and a price $2 higher per bushel.
(a) Do you think farmers collectively would try to reduce the supply of wheat and drive the price
up $2 higher per bushel? Why?
(b) Assuming that they would try to reduce supply, what problems might they have in actually
doing so?
4. The New York Times reported (Feb 17, 1996) that subway ridership declined after a
fare increase: “There were nearly four million fewer riders in December 1995, the first
full month after the price of a token increased 25 cents to $1.50 than in the previous
December, a 4.3 percent decline.”
(a) Use these data to estimate the price elasticity of demand for subway rides. (3 points)
(b) According to your estimates, what happens to the Transit Authority’s revenue when the
fare rises? (3 points)
(c) How might people’s price elasticity of demand towards subway change in a few years?
(1 point)
5. Assume the marginal utility of good A is 4 utils and its price is $2, and assume that the
marginal utility of good B is 6 utils and its price is $1.
(a) Is the individual consumer maximizing (total) utility if she spends a total of $3 by
buying one unit of each good? (2 point)
(b) If not, how can more utility be obtained? Explain using the ratios. (3 point)
6. Consumer A buys only two goods – Good 1 and Good 2. Price of Good 1 is $2 and the price
of Good 2 is $1. What quantity of each good should she buy to maximize her utility?
Units of
Good 1
MU of Good
1
1
MU/Price of
Good 1
Units of
Good 2
MU of Good
2
24
1
9
2
18
2
8
3
12
3
5
4
6
4
1
MU/Price of
Good 2
7. Your aunt is thinking about opening a hardware store. She estimates that it would cost
$500,000 per year to rent the location and buy the stock. In addition, she would have to quit
her $50,000 per year job as an accountant.
(a) Define opportunity cost.
(b) What is your aunt’s opportunity cost of running a hardware store for a year?
(c) If your aunt thought she could sell $510,000 worth of merchandise in a year, should she open
the store? Explain.
8. Nimbus Inc. makes brooms and then sells them door-to-door. Here is the relationship
between the number of workers and Nimbus’s output in a given day:
Workers
Output
0
1
2
3
4
5
6
7
0
20
50
90
120
140
150
155
Marginal
Product
Total
Fixed
Cost
Total
Variable
Cost
Total
Cost
Average
Total Cost
Marginal
Cost
(a) Fill in the column of marginal physical products. What pattern do you see? How might
you explain it? (3 points)
(b) A worker costs $100 a day, and the firm has fixed costs of $200. Use this information to
fill in the columns for TFC, TVC and TC. (3 points)
(c) Fill in the column for average total cost. What pattern do you see? (2 points)
(d) Now fill in the column for marginal cost. (1 point)
(P.T.O)
(e) Compare the column for marginal product and the column for marginal cost. Explain
the relationship. (2 points)
(f) Compare the column for average total cost and the column for marginal cost. Explain
the relationship. (2 points)
9. Consider the following table of long-run total cost for three different firms:
Firm A
Firm B
Firm C
1
$60
$11
$21
2
$70
$24
$34
3
$80
$39
$49
QUANTITY
4
$90
$56
$66
5
$100
$75
$85
6
$110
$96
$106
Does each of these firms experience economies of scale or diseconomies of scale?
7
$120
$119
$129