Quiz 1

1. / Question: / (TCO A)There is an increase in the cost of materialsfor producing bicycles.
(4 pts.) What happens to bicycle supply?
(6 pts.) What happens to bicycle demand?
Your Answer: / What happens to bicycle supply? When prices of materials required for unit production increase we will see a shift in the entire supply curve because costs of resources is one of the six detriments of supply. In this case as prices of materials increase the entire supply curve will shift to the left indicating that it will now cost more than it did before to achieve the same number of outputs. As this happens average costs of production increase as does marginal cost. What happens to bicycle demand? When prices of materials increase this in it of itself does not impact demand or the demand curve will not shift. However, now that the supply curve has shifted to the left due to higher production prices firms might not be as willing to produce as many units as before so supply will fall. When supply declines and demand remains the same then prices will rise which in turn might decrease demand. Supply and Demand are always interacting with each other so in this case demand will likely respond to the shift in supply.
Instructor Explanation: / Since a change in costs to produce the productis a supply factor,an increase in costs would be expected todecreasebicycle supply. Remember that supply is a schedule of how many units suppliers are willing to offer at different prices. When costs rise, the supply curve decreases or shifts to the left.
Since changes in producer costs is not a demand factor, there would be no impact on demand.
Points Received: / 10 of 10
2. / Question: / (TCO A) Digital cameras and memory cardsare complements in consumption. The price of digital cameras falls.
(4 pts.) What happens to the demand for memory cards?
(6 pts.) What happens to the demand for digital cameras?
Your Answer: / What happens to the demand for memory cards? Since cameras and memory cards are complimentary goods meaning that they are goods that are typically consumed together. So in this case as the price of digital cameras falls the demand for digital cameras will likely increase and thus the demand for memory cards will increase along with the increase for digital cameras. What happens to the demand for digital cameras? Depending on the elasticity for digital cameras as prices for this product falls there will be a change in quantity demanded corresponding to the change in price. The law of demand states that all other factors being held equal when the price for a good falls the demand for that good will increase. This inverse relationship indicates that in this case the lower price of digital cameras will result in an increase in demand for digital cameras.
Instructor Explanation: / When the price of a complimentary good falls, the demand for the other good rises. Price of digital cameras falls -- demand for memory cards rises.
This tests your ability to distinguish between a change in demand and a change in quantity demanded. When the price of digital cameras falls THERE IS NO EFFECT ON THE DEMANDfor digital cameras. Only the quantity demanded would change -- rise in this case. Remember that a change in demand means that THE WHOLE CURVE SHIFTS.
Points Received: / 5 of 10
3. / Question: / (TCO A) The number of corn producers increases.
(4 pts.) What happens to the supply of corn?
(6 pts.) What happens to the demand for corn?
Your Answer: / What happens to the supply of corn? The number of sellers in a given market represents one of the six detriments of supply. In the case of the corn market if everything is held constant and the number of supplier’s increases then the supply of corn on the market will also increase. This is represented graphically as the supply curve shifts to the right meaning that more corn will be offered for sale at every price. If demand remains constant than the increase in supply will likely lower prices and depending on the willingness of the suppliers to produce and sell at a lower price it might create a new equilibrium or clearing price. What happens to the demand for corn? Since supply and demand together determine the prices and quantities of goods bought and sold demand will likely change as supply changes. There is usually some sort of time lag from changes in supply resulting in changes in demand. If demand remains the same and there is more supply on the market then this will result in a surplus. Thus overtime producers will react to this surplus by reducing supply.
Instructor Explanation: / The supply of corn would increase, or shift to the right. The number of suppliers is obviously a supply factor, so themore suppliers thare are, thelarger would be the supply.
The demand for corn remains the same as before because the number of suppliers is a supply factor, not a demand factor.
Points Received: / 10 of 10
Comments: / Sound argument... but watch out for QD vs. D
4. / Question: / (TCO A) A market is in equilibrium with equilibrium quantity Q* and equilibrium price P*.
(2 pts.) What happens to P* if there is an increase in supply?
(4 pts.) What happens to Q* if there is a decrease in supply and a decrease in demand?
(4 pts.) What happens to P* if there is an increase in demand followed by a decrease in supply followed by another increase in demand?
Your Answer: / What happens to P if there is an increase in supply? The new equilibrium price will be lower or P will fall as supply increases. What happens to Q if there is a decrease in supply and a decrease in demand? There will be a new equilibrium point and since both demand and supply have shifted to the left because of a decrease there will be a new point Q that also shifts to the left. Q will be less at this new equilibrium point. What happens to P* if there is an increase in demand followed by a decrease in supply followed by another increase in demand? At this point P will incerase. When demand incerased the first time the new equilibrium point represented an increase in P. Then when supply decreased P increased again as demand remained constant and supply fell. At this point there was less supply with constant demand causing increased P. Then demand increased again moving P to an even higher point. At this final point demand increased while supply reamained constant forcing P up as demand shifted to the right.
Instructor Explanation: / An increase in supply will create a surplus at the price of P*. Surplusesput pressure on prices to fall. Hence, the new market equilibrium will be at a price that islower than P*.
The result will be that Q* will fall. A decrease in supply will decrease the equilibrium quantity (Q*), and a decrease in demand will also decrease the equilibrium quantity (Q*). Clearly Q* must fall.
Both an increase in demand and a decrease in supply put upward pressure on P*. Therefore, the new market equilibrium will be at a higherP* price.
Points Received: / 10 of 10
5. / Question: / (TCO B) The following table shows part of the demand for tickets to a local sporting event:
Price(P)...Quantity(Q)
15...... 40
10...... 100
6...... 150
3...... 250
(2 pts.) Is demand elastic in the $6 - $10 price range?
(4 pts.) Ed = 0.75 in the $3 - $6 price range.In this range of demand, by what percentage would quantity demanded change if price changes by 20 percent?
(4 pts.) Price falls from $15 to $10. Does total revenue (TR) increase, decrease, or remain the same?
Your Answer: / Is demand elastic in the $6 - $10 price range? 150-100/100 = 33%, 10 - 6/6 = 66%, 33%/66% = .5 Demand is inelastic because as price increases demand falls proportionately. As price changes by 20% (.2) demand changes by .75. (.2 x .75 = .15) or 15% When Price falls from $15 to $10 TR will increase. TR at 15 = 15 x 40 = 600 TR at 10 = 10 X 100 = 1000 However in this case we do not know what TC is. However, usually TMC decreases as more units are produced because of economies of scale so TR would continue to rise as more units are produced until a certain point where diseconomies of scale would come in to play.
Instructor Explanation: / Demand is inelastic because Ed is equal to 0.80 which is less than 1.0. Ed = [chg in Q / sum of Q] / [chg in P / sum of P]
= [(150 - 100)/250] / [(6 - 10)/16] =.20/-.25 = -0.80.
Since Ed = %chg Q / %chg P, it must be the case that %chg Q = (%chg P)(Ed). Thus, in this case, %chg Q = (20)(0.75) =15 percent.
You could answer this in 2 ways. (1) You could calculate the elasticity in the $15 -$10 range. This is [(100 - 40) / 140] / [(15 - 10) / 25] = [60 / 140] / [5/ 25] = 0.42 / 0.20 = 2.1.Sincewe have elastic demand in this range we know that to lower the price the total revenue will RISE. or (2)You could simply calculate the total revenue at the two prices -- at $15 total revenue is $15 x 40 = $600, and at $10, total revenue is $10 x 100 = $1000. So obviously total revenue RISES when the price is lowered from $15 to $10.
Points Received: / 10 of 10
6. / Question: / (TCO B) Use a hypothetical example to illustrate whether you agree or disagree with the following statement, "Unemployment will go up more if the demand for labor isinelastic, because the demand for labor will decrease more when you have inelastic demand than if demand were elastic".Explain why, using hypothetical numbers to illustrate your case.
Your Answer: / When something is inelastic it means that price has very little impact on demand. I think of the healthcare field in this example because for the most part people always need doctors so demand for doctors will remain constant regardless of the price of doctors. If this were not the case Doctors and increasing health care costs would only cater to the few who were willing to pay for the good or service as the price went up.
Instructor Explanation: / The unemployment impact would be greater in the case of elastic demand. Starting with an equilibrium quantity of labor equal to, say, 100 units, an increase in the minimum wage would reduce the quantity of labor demanded. Let us say that demand is inelastic and that Ed = 0.5. Supposethe minimum wage increases by 10 percent. The quantity of labor demanded would fall by (10)(0.5) = 5 percent.Alternatively if demand was elastic such that Ed= 2 (say), then the quantity of labor demanded would fall by (10)(2) = 20 percent. Clearly, unemployment is impacted far more in the latter case (elastic demand) than it is in the former (inelastic demand).
Points Received: / 10 of 10
7. / Question: / (TCO C) You have been hired to manage a small manufacturing facility which has cost and production data given in the table below.
No. of workers Total Labor Cost Output Total Revenue
1$550 100 $170
21100 108 350
31650 114 800
42200 119 1270
5 2750 123 1600
6 3300 125 1700
73850 126 1750
(2 points) What is the marginal product of the third worker?
(2 points) What is the marginal revenue product of the second worker?
(2 points) What is the marginal cost of the fourth worker?
(4 points) Based on your knowledge of marginal analysis, how many workers should you hire? Explain you answer.
Your Answer: / What is the marginal product of the third worker? 114-108 = 6. The marginal cost is 6 additional outputs for the additional worker What is the marginal revenue product of the second worker? 350-170 = 180. The marginal revenue is $180 additional revenue by going from 1 to 2 workers What is the marginal cost of the fourth worker? 2200 - 1650 = 550. There is an additional $550 in labor costs by going from 3 to 4 workers. In this example I would hire the 7th worker because at 7 we are still experiencing marginal gains in both output and total revenue.
Instructor Explanation: / (TCO C) You have been hired to manage a small manufacturing facility which has cost and production data given in the table below.
No. of workers Total Labor Cost Output Total Revenue
1$550 100 $170
21100 108 350
31650 114 800
42200 119 1270
5 2750 123 1600
6 3300 125 1700
73850 126 1750
What is the marginal product of the third worker?
The marginal product of the third worker is 6, the amount output increases when employment increases from 2 to 3 workers (114 minus 108).
What is the marginal revenue product of the second worker?
The MRP of the second worker is $180, the amount total revenue increases when the second worker is hired ($350 minus $170).
What is the marginal cost of the fourth worker?
The MC of the fourth worker is $550, the amount total labor cost increases when the fourth worker is hired ($2200 minus $1650).
Based on your knowledge of marginal analysis, how many workers should you hire? Explain your answer.
The firm should hire zero workers. At this MC of labor, the MRP is always less than the MC.
Points Received: / 4 of 10
8. / Question: / (TCO C) Answer the next question on the basis of the following cost data for a purely competitive seller:
Total ProductTFC TVC
0 $50 $0
1 50 70
2 50 120
3 50 150
4 50 220
5 50300
6 50390
Refer to the above data. If the product price is$85, at its optimal outputwill the firm realize an economic profit, break even, or incur an economic loss? How much will the profit or loss be? Show all calculations.
Your Answer: / I used an excel spreadsheet to calculate the total profit, marginal cost and marginal revenue at each level of production. MR = profit attained from moving from one unit of production to the next. The same calculations were used for TC. Without knowing what the value of the opportunity that the firm is missing by producing it is difficult to know if there is truly an economic profit. However, at its optimal output of 3 units the firm will realize a profit of $55. This level of production is the optimal output because it is the point where MR is the highest and MC is the lowest. Price Profit MR MC 0 0 -50 1 85 -35 15 70 2 170 0 35 50 3 255 55 55 30 4 340 70 15 70 5 425 75 5 80 6 510 70 -5 90