Download Study Guide for Exam 1

ECON 3710: Intermediate Microeconomic Theory
Study Guide for Midterm
Major Topics:
1. Basics of Decision Making
a. Opportunity Costs
i. What they are and why they matter
b. Sunk Costs
i. What they are and why they don’t matter
c. Marginal Costs vs. Marginal Benefits
i. What they are and why they matter
2. Supply and Demand
a. Finding MB and MC for any quantity
b. Solving for equilibrium price and quantity
c. Why equilibrium is pareto efficient
i. Allocative and Rationing Functions of Prices
d. Shifters of supply/demand
i. How prices and quantity change given any shifter of supply/demand
e. Price ceiling and price floors
i. When they’re effective and what happens when they’re imposed
ii. Why economists are against them
f. Effects of Taxes
i. Finding equilibrium price and quantity
ii. Consumer and Producer Burdens
3. Consumer Choice
a. Budget Constraint
i. How it shifts given changes to Px, Py, I
b. Indifference Curves
i. Properties of individual preferences
ii. Marginal rate of substitution
1. Diminishing Marginal Utility
iii. Shape for different utility functions
1. Perfect Substitutes
2. Perfect Complements
3. Cobb-Douglass
c. Utility Maximizing Condition
i. Solving for utility maximizing consumption bundle
4. Individual/Market Demand
a. Price consumption curves
b. Income vs. Substitution Effects
i. Normal vs. Inferior Goods
c. Elasticity
i. Price Elasticity
ii. How it changes along linear demand curve
iii. Relationship with revenue (expenditures)
iv. Determinants of elasticity
v. Cross Price Elasticity
vi. Income Elasticity
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Study Guide Problems. Note: The exam will be composed of 20 multiple choice questions and
approximately 8 short answer questions. The study guide problems are intended to help you
practice some of the questions you’ll be asked on the exam, but do not comprise all of the
material/types of questions you’ll be asked on the exam, and therefore, should not be the only
thing you use to prepare for the exam. The answers to these study guide problems will be posted
on the class website on Monday afternoon. HAVE FUN!
1) What is the opportunity cost associated with you working on this study guide right now?
2) If it costs $10 to get into a bar, and the price of beer is $3/bottle, what is the average cost of
the second bottle?
You will continue to drink beer as long as ______ is greater than ______?
Use the following table to answer question 3.
Q Marginal Benefit Marginal Cost
Total Benefits
Total Costs
0
---30.00
1
40.00
_____
_____
50.00
2
25.00
_____
_____
70.00
3
15.00
_____
_____
90.00
4
10.00
_____
_____
110.00
5
0.00
_____
_____
130.00
a.) The table above represents the benefits and costs associated with playing rounds of golf in a
month. Fill in the blanks in the table.
b.) How many rounds of golf will this person play? What are his net benefits.
c.) If there was a membership cost of $50 to join this golf club, how many rounds will this person
play?
d.) If marginal costs increased to $26.00 per round, how many rounds would he play?
Use the following demand and supply table to answer the following questions.
Price
Qdemanded
Qsupplied
$0.25
$0.50
$0.75
$1.00
500
400
200
100
200
400
600
800
4a.) What is the equilibrium price and quantity in the market shown above?
4b.) If the price is currently $0.75, then there will be an excess____________, the market price
will __________, quantity supplied will _________, and quantity demanded will ________.
5) When there is an excess demand (shortage) in a market, what can you predict will happen to the
price, quantity supplied, and quantity demanded in that market?
6a) The reservation price to consumers represents _____________ and is based on ___________.
6b.) The reservation price to producers represents _____________ and is based on ___________.
7) An individual will buy a good as long as the price is (greater than or less than) their reservation
price? A seller will sell a good as long as the price is (greater than or less than) their reservation
price?
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8) The supply of good A is lower than the supply of good B. If the two goods face equal demand
curves, which good will have the higher price? If the market price of good B higher than good A,
what does this mean as far as demand for the two goods?
9) Assume the price of milk increases. What do you expect to happen to the equilibrium price and
quantity in the market for cheese (milk is used as an input in the production of cheese)?
10) A decrease in equilibrium price and a decrease in equilibrium quantity could be produced by
a(n) _________, other things constant?
11) a) If demand equals: P = 20 – 2Qd and supply equals: P = 4 + 2Qs, what is the equilibrium
price and quantity?
b) What is the new equilibrium price and quantity if a tax of $2/unit is imposed on sellers.
c) What is the effect of a price ceiling equal to $14 is imposed on the market?
12) Fill in the blanks for the following scenarios. Further, list what will happen to equilibrium
prices and quantities.
a) An increase in the price of a complement will cause _____ to shift ______.
b) A decrease in income will cause ____ to shift _____ for an inferior good.
c) An improvement in the technology will cause _____ to shift ______.
d) A decrease in the price of an input will cause _____ to shift ______.
e) An increase in the price of a good will cause ______ to shift _____.
13. Suppose demand for seats at Ohio State football games is P=1900 – (1/50)Q and supply is
fixed at Q=90,000 seats.
a. Find the equilibrium price and quantity of seats for a football games.
b. Suppose the Ohio government prohibits ticket scalping (selling tickets above their face value)
and the face value of tickets is $50 (so it’s like a price ceiling set at $50). How many consumers
will be dissatisfied as a result of this policy?
c. Suppose for a big rival (Michigan) demand jumps to P= 2100 – (1/50)Q. How many
consumers will be dissatisfied for the big game?
d. How do the distortions of this price ceiling differ from the more typical case of an upward
sloping supply?
14. Studies on rats and mice have established that charred meat grilled over hot coals causes
cancer. Since the government cannot easily regulate home cooking methods, as an alternative
they propose to discourage consumption of barbecued meat by placing a 100 percent tax on bas of
charcoal briquets. Suppose the daily demand for charcoal was P=120-2Q and the supply was P =
30 + Q, where P is dollars and Q is number of 20 lb. bags sold.
a. What is the before tax equilibrium price and quantity?
b. What is the after tax equilibrium price and quantity?
c. How is the tax divided among sellers and buyers? Who bears the greater burden of this tax
and why?
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15. Given the following budget line, (I = Pf F + Ps S) where I = $200, Pf=$5, Ps=$25, show the
following by reformulating the equation. Assume f (food) is on the horizontal axis and S (shelter)
is on the vertical axis.
a. The vertical intercept is __________.
b. The horizontal intercept is __________.
c. The slope of the budget line is ___________.
16. Explain why indifference curves cannot be upward sloping.
17. Explain how the marginal rate of substitution changes as one moves downward along an
indifference curve (consumes more X, less Y).
18. Joe prefers oranges to apples, while Kelli prefers apples to oranges. What does this mean in
terms of the relative shapes of their indifference curves? (e.g. if apples is on the vertical axis,
oranges are on the horizontal axis, Joe’s indifference will be relatively ____ compared to
Kelli’s).
19. a.) If utility is given by U = 10X + 5Y, what is the marginal rate of substitution?
b.) What do X and Y represent?
c.) Explain why we expect the optimal consumption bundle to be a corner solution regardless
of the price of X or price of Y?
20. Boris budgets $9/week for his morning coffee with milk. He likes it only if it is
prepared with 4 parts coffee and 1 part milk. Coffee costs $1/oz, milk $0.50 oz. How
much coffee and how much milk will Boris buy per week?
21 a.)If utility is given by U=X1/4*Y3/4, what is the marginal rate of substitution?
b.)If the price of X is $10 and the price of Y is $20, and an individual has $200 to spend,
what is the utility maximizing combination of X and Y?
c.) What does their utility equal?
22.). The graph below illustrates the utility maximizing choices of an individual. Initially the
individual is consuming X0; then price of X increases and the individual consumes X1. On
the graph below, directly illustrate how much consumption of X decreased due to the
substitution effect and due to the income effect.
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Y
U0
U1
X1
X0
X
23. Draw a linear demand curve and label where demand is elastic, inelastic, and unit elastic.
24. Determine whether demand for the following goods are elastic, inelastic, or unit elastic:
a.) Price increases by 10% and revenue increases by 10%
b.) Price increases by $10 and revenue decreases by 12%
c.) Price increases by 10% and quantity demanded decreases 10 units
d.) Price decreases by 10% and revenue doesn’t change
e.) Price decreases by 10% and revenues increase from $400 to $500
f.) The demand for tennis balls is given by P=20 – 0.01Q and the price is currently $8.
g.) The demand for a furnace manufacturer is given by P=4,000 – 0.5Q and revenue is
currently $80,000.
25. The demand for candy bars is given by P = 5 - 0.01Q, where P is measured in dollars and
Q in candy bars.
a. How much revenue is collected at $3?
b. What is the elasticity of demand at $3?
c. At what point is revenue maximized?
d. If the supply curve is given by Q = 10P, what is the equilibrium price?
26.
a.
b.
c.
Indicate for the following goods which is likely to have the more inelastic demand:
Beck's beer or beer in general
insulin or Frisbees
gasoline over a 24-hour period or over a 6-month period
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