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DEMAND AND ELASTICITY EXERCISES
Homework Assignment I
Due Date, Session 4
Part I. Write out your response to the Review Questions (Text, pp. 103-104) that address topics
discussed in class. Submit answers to questions 4-1, 4-2, 4-3, 4-4, and 4-6.
4-1: What is the difference between a demand function and a demand curve?
4-2: How will each of the following affect the position of the demand curve for videocassette recorders
(VCRs)?
a. An increase in the price of VCR tapes.
b. A decrease in the price of VCRs.
c. An increase in per capita income.
d. A decrease in the price of movie tickets.
4-3: If the demand for a product is inelastic, what will happen to total revenue if price is increased? Explain.
4-4: What sign are the cross elasticities for substitute products? Explain.
4-5: Distinguish between normal and inferior goods.
4-6: How can cross elasticities be used to help define the relevant firms in an industry?
Part II. Answer the following elasticity questions.
1. Yemayhem yoyos became exceedingly popular after the $2.00 price fell by a dime. At least, sales
rose from 110 to 118 units. What was the price elasticity of the product?
2. Persephone’s quality ping pong balls were moving slowly in February, but she found the secret of
boosting sales when she lowered the price from above the dollar barrier (at $1.05) to just below it (at
$.95). Sales jumped from 9,000 units to a more acceptable 11,000. Calculate the elasticity.
3. The demand schedule for wax candles is as shown below. What is the price elasticity of demand
between $3 and $4? Assume the manager has been charging $3.00. Make the case for keeping that
price or changing the price to $4.00. If you choose to change, demonstrate the businessman’s
unfailing proof that the change is appropriate.
Px
Qx
$5.00
600
4.00
700
3.00
800
2.00
900
1.00
1,000
4. When the price of Seedy’s CDs dropped from $10 to a mere $8, sales increased by a healthy 12%.
What was the elasticity of demand here?
Team “Micro Math” Homework Problems.
Homework Assignment II
Due Date, Session 13
1. With TC = 20,000 + 4Q + .5Q2, find
a. AFC
b. AVC
c. AC (=ATC), and
d. MC
2. With a Total Fixed Cost of 10 and an AVC of 26 - 5Q + .5Q2, find
a. TVC,
b. ATC, and
c. MC.
3. By way of reminder, the formula for price elasticity of demand is
E = dQ/dP(P/Q). At Q = 10 and P = 1000 + 3Q - 4Q2, find E.
4. A firm in a purely competitive industry faces a fixed price of $70 for its product. With a TC
function
TC = 150 + 25Q - 6Q2 + 1/3Q3.
Show how this firm maximizes profit. (Hint: Equate MC and MR. When you encounter an
expression with a Q2, factor it, getting two roots. The larger one is the profit-maximizing output.)
Show what short-run profits will be.
5. Determine the profit-maximizing price and quantity for a firm with demand function, P = 1625 6Q and MC = 25 - 12Q + Q2.
DIAGRAMS
Homework Assignment III
Due Date, Session 22
On a separate sheet, draw diagrams as instructed below. Be mindful in your work of labeling axes and curves.
Draw diagrams carefully, paying attention to the kinds of relationships illustrated for you in the diagrams presented. For
example, you should never draw a set of marginal and average cost curves where the MC intersects the AC at any point
other than where AC is at a minimum.
1. Here are views of a purely competitive firm and industry. Show on similar diagrams the case of a firm enjoying
positive net revenues.
$
$
S
AC
MC
Pc=mr=ar
D
0
qc
2. Here is a monopolist making
positive net revenues. Show one
with losses.
Q
0
Q
Q
3. The kinked demand curve shown below shows a profit making
equilibrium. Show one with higher costs and smaller profit.
$
$
P
P
MC
AC
MC
AC
c
MR
0
Q
D
D=AR
Q
0
Q
MR
Q
4. Redraw this diagram for a
monopolistically competitive firm
in a product group “spoiled”
by free entry.
5. Show this revenue maximizer’s
profit constraint when it is consistent
with the largest possible sales revenue
and no losses.
NR
$
$
AC
P
TR
MC
D
MR
0
Q
Q
0
A
C
B
NR
Q
HOMEWORK ASSIGNMENT 4
Due Date, Session 26
Issues in Incentive Conflicts and Contracts
10-1. What is a firm?
10-2. Give examples of incentive conflicts:
a. Between shareholders and managers
b. Between coworkers on teams
10-3. What is asymmetric information? How can it limit contracts from solving incentive
conflicts?
10-4. Name the two parties involved in an agency relationship.
10-5. What potential problems exist in agency relationships?
10-6. Is it worthwhile for shareholders to seek to completely eliminate incentive problems with
managers and directors through means such as monitoring? Why or why not?
10-7. What is adverse selection? Give an example.
10-8. How do reputational concerns aid in the enforcement of contracts?