Download 1998 Micro Essays

1998 Micro Essays
1. Assume that the market supply and demand curves for wheat are price inelastic,
but not perfectly price inelastic at the equilibrium price. For ALL parts of the
question, assume that price remains in the relatively inelastic portions of the
supply and demand curves.
a. As a result of favorable growing conditions, the number of bushels of
wheat produced increases. Use a graph to explain the results of this change
on each of the following.
1. Market price of wheat
2. Industry output of wheat
3. Revenue of wheat farmers
b. Use a new graph to show what happens in the wheat market if the cost of
fertilizer used in the production of wheat increases, and if the government
announces the consumption of wheat products greatly reduces the risk of
having a heart attack. Explain the impact these events will have on each
of the following.
1. Market price of wheat
2. Industry output of wheat
c. Assume now that the government establishes an effective price floor for
wheat. Use a new graph to indicate where an effective price floor will be
set. Explain the effects of such a program on each of the following.
1. Consumer surplus in the wheat market
2. Allocative efficiency
2. Suppose that the table below presents the production schedule of Company XYZ,
where labor is the only variable input.
Number of Workers
1
2
3
4
5
6
7
8
Units of Output
50
150
300
600
1000
1300
1500
1200
a. Define the law of diminishing marginal returns.
b. Explain why diminish marginal returns occur.
c. With reference to the number of workers in this production
process, at what point do diminishing marginal returns set in?
d. What is the typical relationship between the average product
and the marginal product curve?
e. What is the typical relationship between the average product
curve and the average variable cost curve?
3. Some businesses often charge one group of customers a higher price than they do
another group of customers for the same good or service, even thought the costs of
providing the good or service are the same.
a. Explain how the elasticities of demand for the two different
groups affect the different prices they are charged.
b. Graphically demonstrate how the firm would determine the
profit-maximizing price and output in each market.
c. Identify two conditions, other than different elasticities of
demand, that are necessary for businesses to charge different
groups of customers different prices for the same good or
service.