UNITS-1, 2, 3 and 4.
1. (Income Effects) When moving along the demand curve, income must be assumed constant. Yet one factor that can cause a change in the quantity demanded is the “income effect.” Reconcile these seemingly contradictory facts.
2. (Market Equilibrium) Determine whether each of the following statements is true, false, or uncertain. Then briefly explain each answer.
a. In equilibrium, all sellers can find buyers.
b. In equilibrium, there is no pressure on the market to produce or consume more than is being sold.
c. At prices above equilibrium, the quantity exchanged exceeds the quantity demanded.
d. At prices below equilibrium, the quantity exchanged is equal to the quantity supplied.
3. Explain what would happen to equilibrium price and quantity in the market for Pepsi if the following occurred (be sure to indicate WHY it happens as well):
a. The price of Coke decreases.
b. Average household income falls from $50,000 to $43,000
c. There are improvements in soft-drink bottling technology.
d. The price of sugar increases and the Pepsi launches an extremely successful advertising campaign.
4. Use the following equations for demand and supply to solve for market equilibrium price and quantity:
Demand: Qd = 100 – 4P
Supply: Qs = 10 + 6P
5. Using the diagram below, answer the following questions:
a. How much is the per-unit tax on cigarettes?
b. What price do consumers pay after the tax?
c. How much tax revenue is collected?
d. What is the amount of deadweight loss?
6. Explain the relationship between the price elasticity of demand and total revenue.
7. Is the price elasticity of gasoline more elastic over a shorter or a longer period of time? Explain.
8. Determine whether each of the following is an explicit cost or an implicit cost:
a) Payments for rented manufacturing equipment
b) A firm’s use of a warehouse that it owns and could rent to another firm
c) Wages paid to the firm’s workers
d) The wages the firm’s owner could earn if he worked for another company
9. Consider the following information in the table for Pat’s Pizza Restaurant and answer the questions below.
Marginal Product of Capital 4,000
Marginal Produce of Labor 100
Wage Rate $10
Rental Price of Pizza Ovens $500
a. Is the owner of Pat’s Pizza Restaurant minimizing cost?
b. Should he rent more ovens and hire fewer workers or rent fewer ovens and hire more workers? Explain.
10. How does the demand curve faced by a perfectly competitive firm differ from the market demand curve in a perfectly competitive market? Explain.
11. A perfectly competitive firm has the following fixed and variable costs in the short run. The market price for the firm’s product is $140.
Output FC VC TC TR Profit/Loss
0 $90 $ 0 ___ ___ ___
1 90 90 ___ ___ ___
2 90 170 ___ ___ ___
3 90 290 ___ ___ ___
4 90 430 ___ ___ ___
5 90 590 ___ ___ ___
6 90 770 ___ ___ ___
a. Complete the table.
b. What level of output should the firm produce to maximize profits?
12. How does the demand curve faced by a monopoly differ from the demand curve faced by a perfectly competitive firm? Explain.
13. The following table provides market share information about the soft-drink industry.
Company Market Share
Cadbury Schweppers 17
Do you think the Department of Justice and the Federal Trade Commission would approve a merger between any two of the first three companies listed?
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