EC 101.08 – REVIEW QUESTIONS 1
Question 1
Ramona designs web pages, and needs the caffeine in cola drinks to keep herself awake and alert. The
total product curve for the relationship between her cola consumption per day and the number of
pages she can design in one day is given in the following figure:
a. Fill out columns (2) and (3) of the table below, referring to the graph above.
(1)
Quantity of
Variable
Input: Cans
of Cola
0
1
2
3
(2)
Quantity of
Output:
(pages)
(3)
Marginal
Return
(pages)
(4)
Fixed
Cost
($)
(5)
Variable
Cost ($)
(6)
Total
Cost
($)
--
b. Ramona’s employer pays her $50 per day whether she is productive or not, and provides her
with all the cola she wants to drink. Cola costs her employer $2 per can. Add to your table
information on the fixed, variable, and total costs of Ramona producing from zero to three
web pages.
c. Graph the total cost curve.
d. Using information on the marginal return from your table above, calculate the marginal cost
per page of output in two additional columns:
(7)
Cost of
Additional
Cola
(8)
Marginal Cost
in Dollars per
Page
= Column (7)
÷ Column (3)
--
-2
2
2
Question 2
The Top Notch Grill’s marginal costs of producing take-out meals are described below:
Quantity of meals
0
1
2
3
4
5
6
MC ($)
-
6
5
7
10
12
17
a. Assuming that the Grill has fixed costs of $7, what is the total cost at each level of production?
b. Assuming that the meals sell for $10 each, what are the Grill’s total revenue, marginal
revenue, and total profit, at each level of production?
c. What number of meals should the Grill produce, to maximize profits? Explain.
Question 3
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 4
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 5
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 6
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 7
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.
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 8
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 9
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 10
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?