Download Sample Questions (ECN 101)

Sample Questions 2 (ECN 101)
1. Fill in the blanks in the following statements:
a). The cross price-elasticity of demand for soda and newspapers is -0.4. Therefore soda and
newspapers are
goods.
b). Goods with very close substitutes exhibit a more
demand.
c). Mary's income elasticity of demand for ham is +0.9. Ham is therefore a
for Mary.
good
2. EXPLAIN if and why the following statement is true or false:
The price elasticity of demand is the same thing with the slope of the demand curve.
Zoe has $10 each week to spend on junk food. For Zoe this reduces to hamburgers and candy
bars. Each hamburger costs $2 and each candy bar costs $1. Last week she bought 2
hamburgers and 6 candy bars.
a).
Draw her budget constraint and show her opportunity set and equilibrium quantities.
b).
McDonald's is having a special on hamburgers this week. The new price for hamburgers is $1,
and Zoe bought 3 hamburgers and 7 candy bars with her $10. Draw Zoe's new budget
constraint, and show her new equilibrium quantities.
c). Sketch Zoe's demand curve for hamburgers given all the information you have above.
Include all information you have in your graph.
3. A firm's cost curve is given by the following table:
Q
TC
6
210
7
240
8
280
9
330
10
390
TVC
AVC
ATC
MC
where Q is the quantity of output produced and TC is the total cost of production.
a). (5 points) If the total fixed cost of production is 100, complete the table by calculating the
TVC (total variable cost), AVC (average variable cost), ATC (average total cost = average cost),
MC (marginal cost).
b). (5 points) Suppose that the market price for this good is $50. How much will the firm
produce in the short run? How much are the firm's total profits, and why?
4. State if the following statements are true or false and briefly explain why (Use diagrams
where helpful).
a) The production possibility frontier is concave because different quantities of the two goods
are produced at each point along the frontier.
b) As our income increases we are consuming more movies and less videos than before. This
means that videos are a giffen good.
5. Tom can prepare 50 hamburgers per hour or wait on 25 tables per hour. Mike can prepare
20 hamburgers per hour or wait on 15 tables per hour.
a). For Tom, what is the opportunity cost of preparing a hamburger? For Mike? Who has the
comparative advantage in the preparation of hamburgers?
b). Assume that Tom works 20 hours a week in the hamburger stand. Graph the possible
combinations of hamburger preparation and table waiting for Tom. Do the same for Mike.
c). If Tom and Mike devoted half of their time (10 out of the 20 hours) to hamburger
preparation and half of their time to waiting tables, what would their individual outputs be in a
week? What would the aggregate production be for both partners?
d). If Tom and Mike were to open a hamburger stand, who should be the cook? What would
the aggregate production of both partners in a week be if they were to specialize (completely)
and work 20 hours a week each?
6. Suppose a severe drought hit the sugarcane crop. Predict how this would affect the
equilibrium price and quantity in the market for sugar and the market for honey. Draw supply
and demand diagrams to illustrate your answer.
7. There are only two main suppliers of comic books in Toontown, Goofy and Roger Rabbit.
Suppose that the demand and supply curves for comic books in Toontown are given by the
following equations:
QD = 105 - 20 P
QS1 = 10 + 20 P
QS2 = 20 + 10 P
where
QD is number of comic books Toontown residents would like to buy;
QS1 is number of comic books supplier Goofy would like to sell each year;
QS2 is number of comic books supplier Roger Rabbit would like to sell each year.
a). Fill in the following table:
Price per
Unit
US $
Quantity
Demanded
QD
Quantity Supplied
by Goofy
QS1
Quant. Supplied
by Roger Rabbit
QS2
Aggregate Quant.
Supplied
QS = QS1 + QS2
.50
1.00
1.50
2.00
2.50
b). Use the information in the table to find the equilibrium price and equilibrium quantity.
c). Graph the market (aggregate) demand and (aggregate) supply curves and identify the
equilibrium price and quantity on your graph.
d). Solve for the equilibrium price and quantity algebraically.
e). If Toontown were to impose a price ceiling of $1 per comic book in the market for comic
books, would there be an excess supply or an excess demand for comic books? Give its
numerical value.
f). Under the price ceiling, quantity supplied and quantity demanded are different. Which of
the two will determine how many comic books are purchased? Briefly, why?
8. A movie theater estimates that at a price of $ 8.5 per ticket, it will sell an average of 500
tickets per day, while at $ 7.5 per ticket, it will sell 600 tickets per day. What is the price
elasticity of demand for movies at this theater for a price change from $ 7.5 to $ 8.5?
9. State if the following statements are true or false and explain why: (Use graphs where
necessary).
a. The price of winter boots falls from $100 to $90 and quantity demanded rises to 550 units.
With only this information we can conclude nothing about the elasticity of demand for winter
boots.
b. Suppose that the absolute value of the price elasticity of demand for haircuts is 2.5 when
there is a 30 percent increase in quantity demanded. The percentage decrease in price
necessary to increase quantity demanded by 30 percent is 10.5 percent.
c. If the price elasticity of demand for apples is greater than 1 in absolute value, an increase in
apple prices will decrease total revenue from apple sales.
d. If a price increase from $100 to $200 for color television sets increases the quantity
supplied of color television sets from 8,000 to 12,000, the supply elasticity for color television
sets in that price range is 0.6.
e. The cross price elasticity for tennis rackets and tennis balls is negative because when the
price for tennis rackets increases the demand for tennis balls decreases.
f. A leftward shift in the demand curve for strawberries is expected to decrease the
equilibrium quantity exchanged to a greater degree when the supply curve is more elastic.
10. Explain why the elasticity of a straight line demand curve varies from one part of the
curve to another.