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Essay Examination 2
Microeconomics

These questions are from the test bank. An "A" answer requires at least three or four intelligent sentences. Some questions may require more sentences if they have multiple parts.

Lecture 6 - Elasticities and Welfare

1. Please define the following terms.

(a) Price elasticity of demand -

(b) Relatively elastic demand -

(c) Relatively inelastic demand –

(d) Unitary elastic demand -

2. What do the following numbers mean.  Write a sentence explaining how elasticity explains the relationship between the market price and market quantity.

(a) Elasticity of demand for California Residential Water, ED = -0.42

(b) Elasticity of demand for California cherries, ED = -4.27

(c) Elasticity of demand for California almonds, ED = -1.0

3. What is the difference in elasticity for demand functions that are linear and nonlinear?

(a) Why are elasticities so useful?

(b) How does the substitution and income effects impact elasticities?

(c) What is the Second Law of Demand?

4. Please draw a linear demand function for the Apple market.  Then label each region on the demand function in terms of elasticity.

5. (20 points) Please draw a linear demand function for the Apple market.  Then below the graph for the demand, please graph the corresponding total revenue function.

(a) On the demand function, please draw a point on the elastic portion that represents one price.  Explain in words and show graphically how a firm could increase its total revenue.

(b) On the demand function, please draw a point on the inelastic portion that represents one price.  Explain in words and show graphically how a firm could increase its total revenue.

6. The linear demand function has two exceptions or special cases.  Please graph and explain what these special cases are.

7. Please draw a nonlinear demand function and select two points on the function.  Explain how a price change changes the revenue a firm receives.  You are comparing two regions on the graph.

8. You have the following price elasticities of demand.  Explain how firms could increase their revenue by a corresponding price strategy.

(a) Elasticity of demand for California Residential Water, ED = -0.42.

(b) Elasticity of demand for California cherries, ED = -4.27.

(c) Elasticity of demand for California almonds, ED = -1.0.

9. Please define the income elasticity of demand.

(a) What is an inferior good in terms of income elasticity?  Please give an example of an inferior good.

(b) What is a normal good in terms of income elasticity?

(c) What is a necessity in terms of income elasticity?  Please give an example of a necessity.

(d) What is a luxury good in terms of income elasticity?  Please give an example of a luxury good.

10. You have the following income elasticities of demand.  Please explain what these elasticities mean.

(a) Income elasticity of demand for margarine, EI = -0.2.

(b) Income elasticity of demand for California almonds, EI = 1.05.

(c) Income elasticity of demand for California table grapes, EI = 0.51.

11. Please define the cross price elasticity of demand.

(a) What are independent goods in terms of cross price elasticity?  Please give an example of independent goods.

(b) What are substitute goods in terms of cross price elasticity? Please give an example of substitute goods.

(c) What are complement goods in terms of cross price elasticity?  Please give an example of complement goods.

12. You have the following cross price elasticities of demand.  Please explain what these elasticities mean.

(a) Cross price elasticity of demand for chicken and beef, EXY = -0.50.

(b) Cross price elasticity of demand for tooth paste and tooth brushes, EI = 0.0.

(c) Cross price elasticity of demand for motor oil and women’s shoes, EI = 2.0.

13. What is the difference between the short run and long run?

(a) How does the long run and short run play a part in the price elasticity of supply?

(b) How is the Law of Supply imbedded in the price elasticity of supply?

Lecture 7 - The Theory of Consumer Behavior

14. Please define and show on a graph the following terms.

(a) What is consumers' surplus?

(b) What is producers' surplus?

(c) What is total social welfare?

15. Please draw the market for breakfast cereals.  The Food and Drug Administration regulates how many insect parts that end up in breakfast cereals.  What happens to the market if the government agency relaxes this restriction and allows more bug parts to end up in the cereals?  What happens to social welfare?

16. (20 points) Please graph the breakfast cereal market.  With no taxes on the market, the market price is $3.

(a) What is statutory incidence of tax?  Government imposes a tax of $0.50 on breakfast cereals and the statutory incidence falls on producers.

(b) Please clearly label producers' surplus, consumers' surplus, government revenue, and the deadweight loss of taxation.

(c) What is the tax incidence?  How does it show up on the graph?

(d) What is the tax base?  Where does the tax base show up on the graph?  What happens to the tax base if government increases a tax?

(e) Is the new market price for breakfast cereals $3.50?  What impact does taxes have on the market?

(f) How do we know taxes reduce the social welfare of society?

17. (20 points) Please graph the beef market.  With no taxes on the market, the market price is $5 per kilogram.

(a) What is statutory incidence of tax?  Government imposes a tax of $1.00 on beef and the statutory incidence falls on consumers.

(b) Please clearly label producers' surplus, consumers' surplus, government revenue, and the deadweight loss of taxation.

(c) What is the tax incidence?  How does it show up on the graph?

(d) What is the tax base?  Where does the tax base show up on the graph?  What happens to the tax base if government increases a tax?

(e) Is the new market price for beef $6.00?  What impact does taxes have on the market?

(f) How do we know taxes reduce the social welfare of society?

18. Economists view a consumer as an optimization problem.  Please explain this optimization problem?

19. Which factors influence a consumer’s preferences?

20. What is the Law of Diminishing Marginal Utility? 

21. Please explain the equation below:

(a) What happens if a consumer is faced with the equation below and they have one more dollar?

(b) Using the equation above, how do we know the consumer has maximized his utility relative to his income and product price?

22. What is the water-diamond paradox?  In your discussion, include the equation for marginal utilities and prices.

Lectures 8 - Production Costs

23. Please define the following concepts.

(a) Contracting

(b) Team production

(c) Shirking

24. Please define the following costs.  Also give an example of each.

(a) Explicit costs

(b) Implicit costs

(c) Opportunity costs

25. What is the difference between accounting profit and economic profit?  Which profit is always larger?

(a) What is a normal rate of return?

(b) If economic profits are negative, what does this signal?

(c) If economic profits are positive, what does this signal?

26. Please explain and graph the following cost functions.  For the average cost functions, you may give the formula in lieu of a written explanation.

(a) Total Fixed Costs (TFC)

(b) Average Fixed Costs (AFC)

(c)Total Variable Costs (TVC)

(d) Average Variable Costs (AVC)

27. Please graph and define the Marginal Cost (MC) function.

(a) Please define and show on the graph the specialization of labor.

(b) Please define and show on the graph the Law of Diminishing Returns.

(c) Why does the Law of Diminishing Returns only apply to the short run?

28. Please graph the Average Total Cost (ATC) and Marginal Cost (MC) functions.  Explain how the ATC and MC functions are related.

29. What is the long-run Average Total Cost (ATCLR) function?  Please graph three short-run Average Total Cost Functions and how to derive the ATCLR.

30. Please graph an elongated long-run Average Total Cost (ATCLR) function. 

(a) What is economies of scale and where is it displayed on the ATCLR?  Give an example of an industry.

(b) What is constant returns to scale and where is it displayed on the ATCLR?  Give an example of an industry.

31. Please graph an elongated long-run Average Total Cost (ATCLR) function. 

(a) What is constant returns to scale and where is it displayed on the ATCLR?  Give an example of an industry.

(b) What is diseconomies of scale and where is it displayed on the ATCLR?  Why does this occur?

32. Which four factors shift a firm’s cost functions?  Please define them in detail.

 

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