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Chapter 4 elasticity of demand and supply
1. The table below shows demand for hamburgers at Hassan Drive-In at prices from $8 to $0.
TABLE
Quantity
Price Demanded
$8
0
7
2
6
4
5
6
4
8
3
l0
2
12
1
14
0
16
Price
Total
Elasticity
Revenue
of Demand
______0________ ________0_______
______14________ ________0_______
______24________ ________7_______
_______30_______ ________3_______
______32________________17_______
______30________ ________1_______
_____24__________________0.6______
______14_________________0.3______
______0________________0.14_______
a. Calculate the total revenue received by Hassan’s at each price in the table.
TR=p*q
b. Calculate the price elasticity of demand at the midpoint between the prices listed in the table.
ED=CHANGE IN QUANTITY –Q- CHANGE IN PRICE –Pc. Use your results and explain the relationship between price, elasticity of demand, and total revenue.
If we say the demand is price inelastic, an increase in price it will be lead to increase in revenue because
the percentage increase in price will cause a smaller decrease in quantity demand. If we say the demand
is elastic, an increase in price will be lead to a decrease in revenue because the percentage increase in
price will cause more decrease in quantity demanded
Chapter 5 Choice and Utility Theory
1. If the total utilities associated with the consumption of 1, 2, and 3 units of B were to be, respectively, 100,
160, and 200, then answer the following questions:
a. the corresponding marginal utilities would be ___100____, __60_____, and ___40____.
b. Which of the following sets of total utility figures (designated for 1, 2, 3, and 4 units of B consumed)
illustrates the idea of diminishing marginal utility?
(1) 200, 300, 400, 500.
(2) 200, 450, 750, 1100.
(3) 200, 400, 1600, 9600.
(4) 200, 250, 270, 280.
It refers to the stage when MU starts to decrease after it reaches a limit, reasons behind this decrease is that
the first units all the time gives the highest utility then more extra units gives less utility, as a result MU starts
to turn down
c. Which of the following sets of marginal utility figures (once again defined for 1, 2, 3, and 4 units of B
consumed) would likewise illustrate the diminishing marginal utility principle?
(1) 200, 150, 100, 50.
(2) 200, 300, 400, 500.
(3) 200, 200, 200, 200.
(4) 200, 250, 270, 280.
2. A consumer has $50 per week to spend on either commodity X, whose price is $5, or commodity Y, whose
price is $4. For each of the four cases below, indicate whether or not this consumer is “at equilibrium,” i.e.,
deriving the maximum-attainable satisfaction. If you lack sufficient information to answer, explain why. If
you know the consumer is not at equilibrium, indicate the required direction of movement (e.g., “buy more of
X and less of Y,” “buy less of X and more of Y,” “buy more of both,” etc.).
a. Purchases are now 2 of X and 10 of Y. Total utility of X at this level is 500 utils; total utility of Y is 400
utils
there are no marginal unity
b. Purchases are now 6 of X and 5 of Y. Total utility of X at this level is 400 utils, and the marginal
utility of X is 60 utils. Total utility of Y is 800 utils, and the MU of Y is 30 utils
.it is not at the equlilbrium , buy less y and more of x
c. Purchases are now 6 of X and 5 of Y. The MU of X at this level is 25 utils; the MU of Y is 20 utils
It is at the equilibrium mu/p are equal for x and y
d. Purchases are now 6 of X and 4 of Y. The MU of X at this level is 25 utils; the MU of Y is 20 utils.
It is not at the equilibrium mu/p are equal but there are income left
1. Assume that the law of diminishing returns holds. Are the following statements true or false (T or F)? And
explain why?
_f__ a. If average product exceeds marginal product, then average product must be rising.
If the marginal product is less than the average product then the average product declines so the product
rising until its becomes equal marginal product
__t_ b. If marginal product is equal to average product, average product must be maximized.
_f__ c. When marginal product is maximized, total product is also maximized.
The total product will continue to increase until marginal product equal 0 then it will start decreasing
_t__ d. Diminishing returns starts where total product begins to fall.
2. The following table provides the data for a production function that relates the employment of capital (K) and
labor (L) to maximum output levels of some good Y. Answer the following questions.
4 Units of Capital Employed
Labor
TP
MPL
APL
0
0
1
22
22
22
2
42
20
21
3
60
18
20
4
76
16
19
5
90
14
18
6
102
12
17
7
112
10
16
8
120
8
15
9
126
6
14
10
130
3
13
8 Units of Capital Employed
Labor
TP
MPL
APL
0
0
1
22.5
22.5
22.5
2
44.0
21.5
22
3
64.5
20.5
21.5
4
84.0
19.5
21
5
102.5
18.5
20.5
6
120.0
17.5
20
7
136.5
16.5
19.5
8
152.0
15.5
19
9
166.5
14.5
18.5
10
180.0
13.5
18
a.
Fill in the blanks for the marginal and average products of labor given capital employment of 4 units and 8
units.
b.
Use your results and explain the relationship between APL and MPL.
The incrase in total product as a results of adding one more unit of input as long as marginal prudcts above
Average product , if marginal product is below average product average product is falling
Chapter 7 Costs of Production
1. Suppose that in a given class of students, the average examination grade is always 70. Now we add a few
new students (some extra, or “marginal,” students) to this class. They are weaker students; they always score
between 50 and 55 on examinations. What will happen to the class average? What can you say about the
relationship between the marginal and the average grades in this class?
It will decrease , The average will go down
2. The numbers in the following table indicate the estimated total cost incurred in producing quantities of output
from 0 to 20 units weekly. This firm produces widgets using labor and a fixed capital base.
TABLE
Output
0
2
4
6
8
10
12
14
16
18
20
Total
Cost
50
70
85
95
100
110
125
145
170
200
235
Total
Variable
Cost
AVC
_0__
X
20
_10__
35
__8.75_
45__
7.50
_50__ __6.24_
_60__
__6_
_75__ _6.25__
_95__ __6.79_
__120_ _7.50__
_150__
8.33
_185__
9.25
ATC
X
_35__
21.25
15.83
12.50
11
10.42
10.36
10.63
11.11
11.75
AFC
X
_25__
12.50
8.33
6.25
5
4.17
3.57
3.12
2.78
2.50
MC
X
_20__
17.5
5
2.50
5
7.50
10
12.5
15
17.50
a. Fill in the missing figures for TVC (total variable cost), AVC (average variable cost), ATC (average total
cost), and AFC (average fixed cost).
b. Fill in the missing figures for MC (marginal cost). Hint: Remember that marginal cost is change in total
cost divided by change in quantity.