Title - Dean of Students Office€¦ · Web viewSketch an indifference curve (that adheres to the continuity or substitutability assumption) on the budget constraint so that Lisa

Final ReviewSupplemental InstructionIowa State University (pg. 1)

Leader: LuisCourse: Econ 101

Instructor:Date: 12/7/17

Short Answer

1. Supply/demand: Illustrate using supply and demand diagrams (with all necessary labels)

how each of the following scenarios affect the price and quantity of Nike sweatshirts.

Briefly explain what is happening.

a. The price of sweatshirts is expected to decrease as Nike introduces a new sports

jacket.

b. A hurricane destroys 60% of the annual cotton crop (assume sweatshirts are made

from cotton)

c. The Rock Johnson is signed as Nike’s official spokesperson (assume the Rock is

famous)

d. The invention of hybrid trucks decreases Nike’s transport costs, and cleat prices go

down (assume cleats and sweatshirts are compliments)

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2. Externality: The demand curve (D), private supply curve (MPC), and external supply curve

(MEC) of a chemical plant near a river are shown in the graph below.

0 1 2 3 4 5 6 7 8 9 100

5

10

15

20

25

30

MPC MEC D

Quantity of goods produced

Price

per

uni

t ($)

a. What is the competitive market price and output?

b. How much and at what price should fire extinguishers be produced?

c. What is the deadweight loss from producing at the competitive output? Find the area

on the graph and calculate the amount lost.

d. How could the government force the market to produce at the suggested price and

quantity?





3. Monopoly market: Below is are the short run cost curves for a specific monopolist.

a. How many units will the monopolist produce?

b. At what price will they be sold?

c. How much profit, if any, is the monopolist making?

d. Is this price-quantity combination efficient? If not, where (on the graph) and how

much is the inefficiency?

e. How much more surplus could this monopolist make if they price discriminated

perfectly?





4. Simple game: Suppose Kellogg’s and General Mills are both trying to figure out if they

should spend money on a Super Bowl ad campaign. The possible choices and outcomes

(annual economic profits) are:

- If neither firm airs a commercial, General Mills generates $33 billion and Kellogg’s

generates $38 billion

- If General Mills advertises but Kellogg’s doesn’t, General Mills earns $35 billion and

Kellogg’s earns $33 billion

- If Kellogg’s advertises but General Mills doesn’t, General Mills earns $28 billion and

Kellogg’s earns $40 billion

- If both companies advertise, General Mills generates $30 billion and Kellogg’s earns $35

billion

a. Draw a payoff matrix related to the ad campaign for the Super Bowl for these two

firms.

b. Find the dominant strategy for both Kellogg’s and General Mills, if they have one,

assuming there is no sharing of information.

c. What would be the outcome if both firms followed their dominant strategy?

d. Would collusion be beneficial to the firms in this situation?





5. Demand schedule and graph for a factor: Cattle Cakes is a small cake company that faces a

labor supply curve, shown below in the table along with the marginal product per unit of

labor.Units of Labor Wage ($) Marginal product

0 0 301 18 272 36 243 54 214 72 185 90 156 108 127 126 98 144 69 162 3

10 180 0

a. What is the equilibrium wage and quantity employed if the price of cake is $9?

b. How much rent is being paid to employees? How much transfer earnings?

c. What would be the equilibrium wage and quantity employed if the price of cake

dropped to $6?





6. Budget constraints and consumer theory: Lisa’s budget constraint for pounds of apples is

shown below.

0 5 10 15 20 25 30 350

20

40

60

80

100

120

140

Apples (lbs)

Inco

me

($)

a. How much does a pound of apples cost?

b. Sketch an indifference curve (that adheres to the continuity or substitutability

assumption) on the budget constraint so that Lisa reaches her equilibrium

combination after spending $40 on apples.

c. If that equilibrium is reached, how much money does Lisa have left to spend?

d. On top of the given graph, sketch Lisa’s new budget constraint if the price of apples

increased to $6 per pound. Compared to her current equilibrium, does Lisa have to

move to a preferred or unpreferred combination of goods?





Multiple Choice

1) When the price of a product is increased 15%, the quantity demanded decreases 10%. We

can therefore conclude that the demand for this product is

A) inelastic.

B) cross-elastic.

C) unitary elastic.

D) elastic.

2) One basic difference between "land" and "capital" resources is that land is

A) limited while capital is unlimited.

B) manufactured while capital is man-made.

C) unlimited while capital is limited.

D) natural while capital is man-made.

3) The basic truth that underlies the study of economics is the fact that we all face

A) risk.

B) death.

C) taxes.

D) scarcity.

4) Mia wants to buy a book. The economic perspective suggests that Mia will buy the book if

the

A) marginal cost of the book is greater than its marginal benefit.

B) marginal cost of the book is affordable for her.

C) marginal benefit of the book is a positive value.

D) marginal benefit of the book is greater than its marginal cost.

5) The wedding dress industry is monopolistically competitive. As a result:

A) thousands of dress suppliers all sell identical products

B) dresses tend to be differentiated among the many sellers serving this market

C) it has freedom of entry but not exit

D) prices tend to be lower than if the dress industry approximated perfect competition





6) If the firm shown in the figure Monopolistic Competitor maximizes its returns, it will:

A) earn a positive economic profit

B) break even

C) incur a loss

D) incur a loss equal to its MR

7) In the long run, monopolistically competitive firms will

A) earn zero economic profits

B) produce at the minimum of their ATC curves

C) set price where MC = MR

D) collude with other firms

8) In an oligopoly:

A) there are many sellers

B) there are no barriers to entry

C) firms recognize their interdependence

D) total surplus is maximized





Use the following graphs to answer the next question.

9) "The bigger the volume, the lower the cost, and we pass these savings on to you" is a familiar

slogan. Its idea is illustrated in which of the above graphs?

A) graph A

B) graph B

C) graph C

D) graph D

10) If the short-run average variable cost of production for a firm is decreasing, then it follows

that

A) marginal cost must be decreasing.

B) average variable cost must be above average fixed cost.

C) marginal cost must be below average variable cost.

D) average fixed cost must be constant.

11) A monopolistically competitive market has

A) a few firms

B) the ability to price discriminate

C) a higher ATC than any other market type

D) product differentiation

E) a constant average fixed cost





12) There is an excess supply in a market for a product when

A) quantity demanded is less than quantity supplied.

B) supply is less than demand.

C) the current price is lower than the equilibrium price.

D) quantity demanded is greater than quantity supplied.

13) When economists say that the demand for a product has decreased, they mean that

A) the product has become particularly scarce for some reason.

B) the product has become more expensive and thus consumers are buying less of it.

C) the demand curve has shifted to the right.

D) consumers are now willing and able to buy less of this product at each possible price.

14) What combination of changes would most likely decrease the equilibrium price?

A) supply increases and demand decreases

B) demand increases and supply increases

C) demand decreases and supply decreases

D) supply decreases and demand increases

15) If a price ceiling is set above the equilibrium price in a market

A) the quantity supplied will equal the quantity demanded.

B) rationing (allowing buyers only a fixed amount of the good) will be necessary.

C) the quantity demanded will exceed the quantity supplied.

D) surpluses of the commodity will develop.

16) True or false: In a market economy, wealth and income is equally distributed among

everyone.

17) True or false: Consumer theory is used to make and explain the demand curve.

18) True or false: For a perfectly inelastic supply of labor, all money paid to the laborers is

transfer earnings.

19) True or false: Horizontal summation of individual demand curves is used to find the industry

supply of a factor.


Documents

Title - Dean of Students Office€¦ · Web viewSketch an indifference curve (that adheres to the continuity or substitutability assumption) on the budget constraint so that Lisa