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EC 101.01 - Summer 2015
Review Questions 2
Question 1
The following table shows the demand curve facing a monopolist who produces at a constant
marginal cost of 1 TL.
Quantity
Price (TL)
1
13
2
10
3
7
4
4
5
1
a. What price would the monopolist charge and what output would it produce?
b. If the monopolist has fixed costs of 6 TL, how much profit will it make?
c. What happens to the monopolist’s price, output and profit if its fixed costs increase to
8 TL?
d. How many additional units of output would be sold if this market was perfectly
competitive?
e. How much profit would the monopolist make if it was able to perfectly price
discriminate?
Question 2
a. When does a natural monopoly occur?
b. Provide some examples of industries that are natural monopolies.
c. Explain why it is difficult to achieve the perfectly competitive outcome in such
markets.
d. Outline the alternative ways of regulating a natural monopolist.
Question 3
Develop the equilibrium adjustment to the profit maximising output under the following
scenarios:
a) An increase in marginal costs at all levels of output.
b) An increase in marginal revenue at all levels of output.
c) A reduction in telecommunication costs.
d) An increase in tastes and preferences for the good or service being made.
e) An increase in transport costs following an increase in oil prices.
f) The impact of a recession on the consumption of normal goods.
Question 4
Suppose Sarah works as an economic consultant. In one year, she incurs direct costs of 55,000 TL
for travels to clients and other services, and gets revenue of 83,000 TL. Sarah has 45,000 TL of
financial capital tied up in the business during the whole year. Alternatively, Sarah could have
worked for a large company in her town where she could have earned 22,000 TL. Given that the
current market interest rate is 10 per cent, answer the following questions:
(a)
What is Sarah’s accounting profit?
(b)
What is Sarah’s economic profit?
(c)
Should Sarah continue working as a consultant or should she accept an offer by the
big company in her town?
Question 5
As output increases, why might marginal costs start high, then fall, then rise again?
Question 6
Indicate which of the following statements is true. If the price of X rises, and all other prices and
income remain constant:
a. if X is an inferior good, the quantity demanded will increase.
b. if X is a Giffen good, the substitution effect alone will lead to an increase in quantity
demanded.
c. the income effect alone will decrease the demand of X regardless of whether X is a
normal or an inferior good.
Question 7
Suppose Anne consumes milk and cookies only.
a. Can milk and cookies both be inferior goods?
b. Suppose that milk is an inferior good and cookies are a normal good. If the price
of cookies decreases, what happens to Anne’s consumption of milk and of cookies?
c. Anne starts a new job in a supermarket and her income increases. Explain what
happens to the relative consumption of milk and cookies if milk is an inferior good
and cookies are a normal good.
Question 8
What shape are indifference curves for:
a. Perfect substitutes
b. Perfect complements
Question 9
Suppose that a recent study has determined that the price elasticity and the income elasticity of
demand for Levi’s jeans are 1.5 and 2, respectively. The supply of jeans is elastic. Explain whether
the following statements are true or false:
a. A 5% increase in the price of jeans will reduce quantity demanded by 10%.
b. An increase in consumers’ income will increase the price and quantity sold but total
revenue will go down.
Question 10
Which of the following products would you expect to have the more inelastic demand:
a. Petrol today or petrol in five years time?
b. Cigarettes or coffee?
Question 11
llustrate, using a diagram, how each of the following events affects the equilibrium price and
quantity of ice creams:
a.
The price of milk rises.
b.
A new medical study has shown the health hazards of chocolate used in ice
cream.
c.
The incomes of consumers rise and ice creams are an inferior good.
d.
Summer suddenly turns out to be very hot.
e.
The government sets a maximum price for ice creams during this very hot
summer.
Question 12
Illustrate, using a diagram, how each of the following events affects the equilibrium price and
quantity of ice creams:
a.
The price of milk rises AND a new medical study has shown the health hazards of
chocolate used in ice cream.
b.
The price of milk rises AND the summer suddenly turns out to be very hot.
Question 13
The ice cream producers association believes that the price of ice cream is too low in winter.
They lobby the government to impose a minimum price in the market. What affect would this
have on equilibrium price and quantity of ice creams?
Question 14
Consider an economy with workers who can make cars and beer. The table below shows the
combinations of cars and beer made if all workers have jobs:
Beer workers
3
2
1
0
Output
13
11
7
0
Car workers
0
1
2
3
Output
0
10
18
22
i)
Draw the production possibility frontier for this economy.
ii)
What is the opportunity cost of increasing beer output from 7 to 11 units?
iii)
Adding an extra beer worker increases beer output, but each extra worker adds
less to output than the previous extra worker added. Why?
iv)
Plot the following output levels on your diagram:
A: 5 units of beer & 5 cars
B: 15 units of beer & 20 cars
C: 11 units of beer & 10 cars
Are each of these points efficient, inefficient or unattainable?
Question 15
Consider two individuals: Fred and Ernie. Both can produce two different goods, bread and
cheese. Fred is very good at cheese production and he can make 8kg in 1 hour. Alternatively, he
can bake 4 loaves of bread in 1 hour. On the other hand, Ernie can produce 2kg of cheese in 1 hour
or alternatively can bake 4 loaves of bread. Suppose that both cannot work more than 12 hours a
day.
i)
Who has an absolute advantage in producing cheese?
ii)
Who has an absolute advantage in producing bread?
iii)
What does Fred have a comparative advantage in producing?
iv)
What does Ernie have a comparative advantage in producing?
v)
Calculate total production if they each split their time equally between producing
bread and cheese.
vi)
Now assume that they specialize entirely in the producing the product for which
they have a comparative advantage. Calculate total production of each product
and show that there are gains from trade.