Econ 101.02 Fall 2005

Tutorial Questions Bilkent University

Selin Sayek Böke

Topics to be covered:

  1. Elasticity: price elasticity of demand, price elasticity of supply, cross price elasticity of demand, income elasticity of demand.
  2. Consumer surplus, producer surplus, deadweight loss.

3.  Definition of market structures

4.  Concepts of total product (TP), marginal product (MP), law of diminishing returns, average product (AP), total cost, variable cost, fixed cost, short-run and long-run.

Questions:

  1. When the price of good X falls from TL 3 million to TL 2 million the quantity of good Y demanded increases from 550 units to 650 units
  2. What can you infer about the type of these two goods: are they inferior, normal, substitutes, complements?
  3. Calculate and interpret the cross price elasticity of good Y.

2.  The demand and supply schedule for “tadelle” is given as follows:

Price (in millions of TL) / Demand (units per week) / Supply (units per week)
1 / 90 / 20
2 / 80 / 45
3 / 70 / 70
4 / 60 / 95

a)  Find the equilibrium price and quantity. Explain the market forces and mechanisms that lead to that market equilibrium.

b)  Calculate the price elasticity of demand at each point for the demand schedule.

c)  Calculate the price elasticity of supply at each point for the supply schedule.

d)  If the price of “dido” goes up from TL 1 million to TL 1.5 million the demand for tadelle increases by 35 units each week, at each price level.

a)  What is the new equilibrium in the market? Explain how the market adjusts to the new equilibrium point. In doing so write the new demand schedule explicitly.

b)  Calculate and interpret the cross price elasticity of tadelle.

e)  Use the original demand and supply schedule and assume the following: If income goes down from TL 100 million to TL 80 million the demand for tadelle decreases by 35 units each week at each price level.

  1. According to this information what type of a good is tadelle?
  2. Calculate and interpret the income elasticity of demand for tadelle.

3.  Define and explain consumer surplus, producer surplus and deadweight loss conceptually.

4.  Draw a demand and supply schedule and graphically show the free market equilibrium. On the same graph show the consumer surplus area, the producer surplus area and the deadweight loss area when the free market is in equilibrium.

5.  Assume in the market defined in question 5 the free market equilibrium implies the price is TL 6 million and the equilibrium quantity is 25 units. There is a sudden increase in oil prices, which significantly increases the cost of production of this good.

  1. Explain the short-un impact on this market. In what direction will the equilibrium price and quantity change?
  2. If the government does not impose any policies and allows the markets to adjust in the long-term and sufficient time passes by, explain the long-run adjustment in the market. In doing so you should explain the market conditions at each stage of time.
  3. Now assume the government imposes a price ceiling in the short-run instead of waiting for the markets to adjust:
  4. If the price ceiling is to be effective should it be less than or higher than TL 6 million? Why?
  5. Show the change in welfare for the consumer, the producer, the government and the overall society when the price ceiling is effective. Explicitly state the assumptions underlying your analysis (hint: is there a black market or not?). Explain who loses and who gains in this situation.
  6. Did the price ceiling solve the short-run market inequilibrium correctly? Explain.

6.  Define the following market structures and give examples for each:

a.  Perfectly Competitive market

b.  Monopoly

c.  Monopolistic competition

d.  Oligopoly.

7.  What is the difference between economic and accounting profit? Explain.

8.  Explain what you measure with:

a.  Marginal product of labor

b.  Marginal product of labor

c.  Average product of labor

d.  Average variable cost

e.  Total fixed cost

9.  The total production function in a factory producing pens is as follows in the

short-run, where the factory owns 3 units of machinery:

Labor (per day) / Total Product (per day)
1 / 30
2 / 74
3 / 124
4 / 183
5 / 232
6 / 272
7 / 302
8 / 322
9 / 334
10 / 344

Using this table:

i.  calculate the marginal product and average product of labor at each level of labor.

ii.  Graph the three curves: the total product curve, the marginal product curve and the average product curve.

10.  Assume that you are still interested in the above pen factory (in question 5). You know that the per day cost of labor is TL 30 million and the cost of each machine used in pen production is TL55 million. Using this information:

a.  Calculate the total variable cost, the total fixed cost and the total cost of production for this factory.

b.  Draw the graphs of the three curves: the total variable cost (TVC), the total fixed cost (TFC) and the total cost (TC).

c.  Calculate the marginal cost of production (MC), the average fixed cost (AFC), the average total cost (ATC) and the average variable cost (AVC).

d.  Draw the graphs of the four curves: MC, AVC, AFC and ATC.

11.  Explain:

a.  The “law of diminishing returns” both from the productivity perspective and the cost perspective.

b.  At which point of labor does the returns to labor start diminishing in question 5?

12.  Assume that now you are in the long-run and still concerned about the pen factory in question 5. The factory owners tell you that they have the following information regarding total production:

Labor / TP –Plant 1 / TP –Plant 2 / TP –Plant 3 / TP –Plant 4
1 / 30 / 50 / 65 / 75
2 / 74 / 99 / 118 / 126
3 / 124 / 142 / 157 / 169
4 / 183 / 212 / 229 / 243
5 / 232 / 242 / 250 / 252
6 / 272 / 302 / 327 / 347
7 / 302 / 314 / 324 / 325
8 / 322 / 344 / 359 / 373
9 / 334 / 354 / 371 / 382
10 / 344 / 348 / 351 / 353
No. of machines / 3 / 4 / 5 / 6

i.  Calculate the marginal product of labor and capital. Explain what you are measuring.

ii.  Draw the short-run average total cost curves for each plant.

iii.  Draw the long-run average total cost curve. Explain how you derive it.

iv.  What is the minimum efficient scale of production in the long-run?

v.  At which range of output do we observe increasing returns (economies of scale) in the long-run? At which range do we observe decreasing returns (diseconomies of scale) in the long-run?

13.  Explain the following:

a.  Economies of scale

b.  Economies of scope

c.  Increasing returns

d.  Diseconomies of scale

e.  Constant returns to scale