Download 6 of these will be on your exam.

Microeconomics 2302
Potential questions and study guide for exam 2
6 of these will be on your exam.
Potential questions are in Black Font. Study Guide stuff is in red font.
1. Elasticity question 1
a. What, in general, does elasticity measures?
b. Who might care about the price elasticity of demand and why?
c. Who might care about the price elasticity of supply and why?
d. Who might care about the cross elasticity of demand and why?
e. Who might care about the income elasticity of demand and why?
f. The formula to calculate the coefficient of elasticity of demand is (percentage
change in quantity demanded of product X) / (percentage change in the price of
product X). If your boss tells you she is planning a price increase in product X
and wants to know how many units will be purchased after the price change, does
the formula give you enough info to answer the question? If yes, why? If no,
why not?
i. Think about what the formula really says.
ii. Can you as the analyst actually collect all the information required to
calculate the answer?
iii. To what degree does it give you information about what might happen in
the future?
g. List and explain all the measures of elasticity that were covered in the slides,
including Elasticity of Demand, Supply, Income, and Cross Elasticity of Demand.
h. Please refer to the slides and audio to prepare this answer. Elasticity of demand
and supply should both have 5 interpretations of Elasticity. Income Elasticity
should have 2 interpretations, and Cross Elasticity of Demand should have 3.
2. Elasticity question 2
a. How could a firm benefit from understanding the Total Revenue Test?
i. How might the info help the firm make better decisions?
b. Given a downward sloping demand curve, explain why we see the 3 sections:
elastic demand, unit elastic demand, and inelastic demand?
i. A little high school math should help with this one.
c. List and explain the determinants of price elasticity of demand and give 2
examples for each one (do not use examples from the slides).
i. There are 4. Please refer to the slides and audio as you prepare your
answer.
d. Relative to Elasticity of Supply, please explain the importance of time to a tomato
farmer.
i. How does time impact elasticity and the input utilization choices available
to the tomato farmer?
e. Explain why a PepsiCo Sales Executive would benefit from understanding cross
elasticity of demand and elasticity of demand when evaluating a recommendation
to lower the price of Doritos.
i. How does understanding cross elasticity of demand and elasticity of
demand support better decision-making?
f. Explain why an Analyst working for the Anti-Trust Division of the Justice Dept.
would benefit from understanding cross elasticity of demand when evaluating the
proposed merger of Coca Cola Company and Pepsi.
i. How does understanding cross elasticity support better decision-making
by the analyst?
3. Cost of Production 1
a. Explain the difference between explicit costs and implicit costs and who would
care about these terms and why.
i. The slides and audio should help with this.
b. From the point of view of a firm, how would you explain the difference between
the short run and long run, and their impact on the decision-making of the firm?
i. How do you tell short run from long run and how will those distinctions
impact the decision-making of the firm?
c. Your boss asks you to document your companies’ production function. How
would you do that? What information would you need? Where would you get
that info? Be specific.
i. What does the production function consist of?
ii. What does it tell us?
iii. How would you approach defining your company production function?
d. List and explain the Short Run Production Relationships discussed in the slides.
i. There are 3. Please refer to the slides and audio as you prepare your
answer.
4. Cost of Production 2
a. Explain the Law of Diminishing Returns and how understanding that law might
help a business manager make better business decisions.
i. State the assumptions and state the definition of the Law of Diminishing
Returns.
b. Explain each of the short run production costs, and explain what they might mean
to a business manager.
i. Should be pretty straight forward.
c. Explain how the long run ATC curve is derived and how understanding that
concept might help a business manager make better decisions.
i. Please refer to the slides and audio to get the story on this. Two things to
consider
1. The definition of ATC
2. How would one would approach deriving the LR ATC. It might
help to draw a picture of this.
d. Explain economies of scale, constant returns to scale, and dis-economies of scale
and why understanding those concepts might help a business manager improve
their decision-making.
5. For the Pure Competition Market Structure 1
a. List and explain the characteristics of pure competition and why we study that
market structure.
i. There are 4. Please explain each.
b. List and explain the 3 decision process questions confronting the producer in pure
competition.
i. Please refer to the slide that discusses the 3 decision process questions
under the total revenue total cost approach and listen to the audio to
prepare your answer.
c. From the point of view of the business manager, explain the Total Revenue Total
Cost approach to determining the profit maximizing level of output and price for
the purely competitive firm.
i. Please refer to the Total Revenue Total Cost Approach slide and the audio
to prepare your answer.
6. For the Pure Competition Market Structure 2
a. List and explain the three characteristics of the MR-MC approach to determining
the profit maximizing output and price for the purely competitive firm.
i. Please refer to the slide that discusses short run profit maximization Key
Rule regarding the MC – MR approach and the audio to prepare the
answer.
b. From the point of view of the business manager, thoroughly explain how the
purely competitive firm in the short run would determine its optimal level of
output and price for the:
i. Profit maximizing case
ii. Loss minimizing case
iii. Shut down case
1. All three are documented in the slides and audio.
7. You are a business manager working for a firm in a purely competitive market and you
just hired a summer intern who does not understand how to derive the firms’ short run
supply curve from the firms’ marginal cost curve.
a. Please explain to the intern how the short run supply curve derived from the
firm’s marginal cost curve. Be specific.
b. Please explain to the intern the characteristics of long run equilibrium of a purely
competitive firm and how operating in a purely competitive market might impact
the decision-making of the firm. Please include the implications of long-run
equilibrium for productive and allocative efficiency.
i. Please refer to the slides and audio to prepare the answer. Please include
the 3 assumptions, as well as the implications for economic profit,
productive efficiency and allocative efficiency.
8. For the Pure Monopoly Market Structure 1
a. List and explain the characteristics of pure monopoly and how they differ from
the characteristics of the pure competition market structure.
i. Please include all 6
b. List and explain how a monopolist would use each of the barriers to entry and
include how using that barrier would actually accomplish the monopolists’
objective. Be specific.
i. Please include all 6
c. You are a business manager and you are considering lowering the price of your
product. How will knowing where your firm is currently operating on its demand
curve help you make a sound business decision?
1. Please refer to the slides and audio to prepare your answer. The
monopoly revenue and cost slide should help.
9. For the Pure Monopoly Market Structure 2
a. Explain how the monopolist determines the profit maximizing level of output and
price. Be specific.
i. Please use what you have learned about using the MR MC approach along
with the use of the appropriate cost curves to create your answer.
b. You are employed by a firm with monopoly power. The boss wants to increase
profits. Explain the power of price discrimination to your boss. Discuss the
requirements and assumptions for successfully implementing this approach, and
the likely outcomes.
i. You should explain price discrimination and its 3 forms, the conditions for
price discrimination, and the outcomes of price discrimination for the Pure
Monopolist.
c. You work for the government in the department that is responsible for dealing
with Monopoly issues. Please explain the dilemma of regulation. Please be
thorough.
1. Using the information you have learned about monopoly and how it is viewed
by government; please the nature of the dilemma, along with the 3 choices and
the implications of those choices.
10. For the Monopolistic Competition Market Structure
a. List and explain the characteristics of monopolistic competition and compare
them to the characteristics of pure competition and monopoly.
i. Please discuss monopolistic competition, list and explain the
characteristics.
b. List and explain the characteristics of product differentiation. Provide 3 examples
of companies actually using this technique and the impact of that differentiation
had on the firms’ performance.
i. Product differentiation is a key concept of microeconomics. Please list
and explain the characteristics.
c. You are a business manager at a monopolistically competitive firm. One of your
newly hired workers wants to know the conditions under which the
monopolistically competitive firm in the short run will maximize economic profit
or minimize economic loss. Please explain these two things to your new
employee. Be thorough.
i. Please use the MR MC approach in your answer.
11. For the Oligopoly Market Structure
a. List and explain the characteristics of oligopoly and compare them to the
characteristics of the other 3 market structures.
i. The oligopoly market structure is one of the most significant types in our
economy. Please discuss the oligopoly market structure, and list and
explain the characteristics.
b.
List and explain the conditions under which the Oligopolistic firm achieves profit
maximization and loss minimization. Be thorough.
i. Using the MR MC approach, discuss how to determine when the
oligopolistic firm maximizes profit or minimizes loss in the kinked
demand curve model.
c. You work for a firm that is a member of an oligopoly market.
i. Explain the issues of collusion.
1. Here you should discuss the role collusion (in its various types)
and how the firm might deal with the issue.
ii. Explain game theory and how the firm might use this tool to achieve its
business goals