# Prices and Markets Questions for Demonstration Lectures

Does the fall in the equilibrium price, which follows this shift of the supply curve, haft the demand curve and hence raise the consumption of Yum-Yum Chocolates? Prices and Markets Questions for Demonstration Lectures By yester

## Topic Two: Elasticity

Suppose the demand and supply curves for good Y are as follows: Q = 600 – 7. UP SQ ? -100 + IIOP where P is price per keg measured in dollars and Q is quantity measured in ‘kegs Sketch the demand and supply curves for good Y. Determine the equilibrium price and quantity. If the price of a substitute good for Y were to increase, outline the effect that this would have on the demand and supply curves you have drawn. What effect would it have on the equilibrium price and quantity? Assume that at the same time as (c) the price of labor used to produce good Y increased. Outline the combined effect that these would have on the demand and supply curves you have drawn. What effect would this have on the equilibrium price and quantity? The local movie rental store had been hiring out DVD’s at $4 each. On average, 1800 DVD’s were hired per week.

In response to an increase in running costs, the store increased their DVD hire to $5, resulting in the typical number of DVD’s hired per week falling to 1250. Calculate and interpret the arc own price elasticity of demand for this store’s DVD hire. Explain why the store’s revenue from DVD rentals has fallen despite increasing their price. “Demand curves are always negatively sloped ” . Discuss.

State whether you would expect demand for the following products to be relatively elastic or inelastic. In each case outline the factors likely to be important in determining the product’s price elasticity. Cigarettes M Chocolates Potato Chips 3 Wesson and Ooze are producers of pistols and automatic assault rifles, respectively. Assume that demand for Wesson guns is elastic. Explain the meaning of the underlined term. (it) Outline one important factor that you feel has helped to determine the size of this own price elasticity. (iii) How would a fall in Cozies price affect their total revenue? When the price of Wesson guns increased from $20 to $23, Cozies sales increased from 105 to 120. Calculate the arc cross price elasticity.

Are the two producers close substitutes? Explain. An increase in average weekly earnings of shady characters from $290 to $310 caused Cozies sales to increase from 120 to 130 guns per annum. Calculate and interpret the income elasticity.

## Topic Three: Applications of Demand and Supply

Suppose the demand and supply curves for good M are as follows: Q = 70 – UP SQ = -10 + UP where P is price per keg measured in dollars and Q is quantity measured in ‘kegs Sketch the demand and supply curves. Determine the equilibrium price and quantity.

Calculate the value of the consumer and producer surplus at the equilibrium price. Explain why governments may introduce a price ceiling Suppose a price ceiling of $1 5 were to be introduced. Calculate the consumer and producer surplus after its introduction. Who has benefited from the introduction of the price lining? Suppose the demand and supply curves for good W are as follows: Q = 100 – UP SQ ? -20 + UP (a) (b) (c) (d) (e) (f) where P is price per keg measured in dollars and Q is quantity measured in ‘kegs equilibrium price.

Explain why governments may introduce a price floor. Suppose a price floor of $30 were to be introduced. Calculate the consumer and producer floor? 5 ? -20 + UP (a) where P is price per keg measured in dollars and Q is quantity measured in ‘kegs Suppose the government levies a tax that increases the priced faced by consumers to $30. What is the price faced by producers? What is the change in consumer surplus? What is the change in producer surplus? Calculate the size of the Deadweight Loss (DEL) Calculate the size of the increase in revenue from levying the tax.

## Topic Four: Utility

Sully is a heavy smoker. He smokes between 25 to 30 cigarettes per day to get 50 to 60 utile of satisfaction (utility), respectively. In the future, however, Sully is likely to develop heart and lung disease. His utility in this stage will be -100. A. Calculate Sully marginal utility from smoking cigarettes. B. Sully has a low valuation of the future relative to the present. In fact one additional ITIL in the future is only worth 0. 5 utile today. In terms of utility today, what is Sully cost of smoking cigarettes?

Does this explain why he smokes so much? C. Sully doctor has a very serious conversation with his patient. What relationship between utility today and utility in the future is necessary for sully to stop smoking?

Barney loves to smoke cigarettes and drink whiskey. (Barney stinks! ). The price of one cigarette is $1. 00 and the price of whiskey is $2. 00 per glass. Barneys marginal utility of consumption can be summarized by the following table: Number of cigarettes 1 234 5 Marginal Utility of 1 cigarette 5030 15 5-2

Glasses of whiskey 1 234 5 Marginal Utility of glass 60 55 30 10 5 a) If Barney only has $9 where will utility be maximized? B) Calculate Barneys marginal rate of substitution at the optimal consumption bundle (the answer to part a). If Barney only has $4 where will utility be maximized? Barney has $10 and a new tax on cigarettes increases it’s unit price to $2. 00. What is the optimal bundle of cigarettes and whiskey that Barney will consume?

## Topic Five: Production and Costs

**** Explain the difference between explicit and implicit costs, giving examples. Bill own and runs a kebab shop.

The following data are about his financial matters in his first year of business: $ 190,000 Total revenue 65,000 Salary that Bill could have earned if he had worked for another firm 90,000 Loan from a bank 9,000 Interest paid to the bank 70,000 Purchase of durable assets with his own money 4,200 Dividend that he could have earned by investing his $70,000 in shares 14,000 Depreciation of the durable assets 30,000 Salary for an assistant 67,000 Raw materials purchased and used Using the relevant figures (some figure’s is/are irrelevant), calculate Bill’s accounting profit and economic profit for his first year of business.

Show your calculations. The equation below shows the total production of a firm as the quantity of labor employed increases, with all other factors of production remaining constant.

Calculate the marginal product (ML) and the average product of labor (PAL). Define the law of diminishing returns. Sketch the Q. Is the marginal product calculated in part (a) consistent with the law of diminishing returns? (PLEASE NOTE that in an exam situation you will not be expected to sketch this function, but should know what it looks like).

Use the figure below, representing a perfectly competitive firm, to complete the following statements. If price is $7, the firm should produce units. Since average total cost of this profit maximizing output is $ f $ total cost is $ . Therefore the firm makes a total profit . Price then falls to $3. The firm will produce approximately units. Since average total cost at this output is $ cost is $ . Total variable cost is $ covers all variable cost, leaving approximately $ , total revenue less total ; thus the firm’s total revenue to apply to fixed costs.

Determine the output level that would maximize the grower’s profits. What are profits at this output level? If, due to an influx of new competition, the price of tomatoes falls to $3 per kilogram, explain whether the grower should continue to produce in the short run and in the long run. *** Using a perfectly competitive firm operating in the short run as a basis for your diagram, show and explain the prices associated with the break even and shut down points, and explain the output ranges over which the firm produces to make a positive economic profit and to minimize economic losses. A perfectly competitive firm has the following cost function: 120 (a) (b) 8 2 For the output and cost figures given above, calculate the average total cost (TACT), average variable cost (PVC) and marginal cost (MAC). At what level of output will the firm begin producing? At what price will this happen? Draw this firm’s short run supply curve, indicating the relevant numerical values for price and output. Suppose this firm’s costs are the same as those of other firms in the perfectly competitive market.

Indicate, together with a brief explanation, the numerical value of the critical price level below which this firm will leave the market in the long run, and above which new firms will enter that market in the long run. In long-run equilibrium, P = AC = MAC. Of what significance for the allocation of resources is the equality of MAC and AC? Of what significance for the allocation of sources is the equality of P and MAC?

## Topic Seven: Monopoly

Discuss the major barriers to entry into a market. Explain how each barrier can foster monopoly.

Which barriers, if any, do you feel give rise to monopoly power that is socially Justifiable? A monopoly has the following demand and cost functions as shown below. 51 10 Demand: Cost: (a) (b) (c) (d) For the demand and total cost given above, calculate total revenue (TRY) and marginal revenue (MR.). Based on the equations above, determine the short run profit maximizing (loss minimizing) output, price and total profit or loss for this monopoly. Suppose the government were to impose a price ceiling at the allocation efficient price. What is the value of this price and resulting level of output?

Read what will happen if the government sets the price for potatoes at point B?

Would the monopolist remain in business in the long run if the price ceiling remained in place? 14 Tiger’s Mineral Springs, a monopoly, faces the following demand schedule for bottled mineral water: Q = 20- UP where P is the price per bottle measured in dollars, and Q is the quantity measured in ‘000 bottles Tiger’s marginal cost is $4 a bottle – ii, marginal cost is constant for this firm. Assume fixed costs of $4000. (a) (b) Sketch the emend, marginal revenue (MR.), average variable cost (PVC) and marginal cost (MAC) curves for the firm.

Based on your diagram, determine Tiger’s profit-maximizing output and price, and the associated level of profit or loss. A monopoly has the following monthly demand and cost data. (Q = output or quantity demanded, P = price, MAC = marginal cost): What is this monopoly profit maximizing output and price in the short run? Explain with the aid of your calculations. Suppose the total fixed cost of this monopoly was 500 per month. What would be the monthly profit or loss of this monopoly at the output determined at (a)?

Show your calculations. Suppose the government were to impose a price ceiling on this monopoly at the lucratively efficient price. Determine the value of this price and the associated level of output and profit (or loss) for the firm. With the aid of a diagram, explain how the misapplication of resources that results from monopoly can be eliminated by means of price regulation. WOWS a monopoly similar too price floor? 15 Topic Eight: Monopolistic Competition 1 . What is (are) the main difference(s) between unapologetically competitive market and a monopoly market? ****** Explain how the presence of product differentiation influences the way in which firms in a unapologetically competitive market set their prices, as compared to firms operating in a perfectly competitive market. Explain why firms in both perfectly competitive and unapologetically competitive markets earn zero economic profits in the long run. Contrast the long run adjustment process for the two market structures. Draw your diagrams carefully for both the short and long run. In particular, ensure your diagram depicts that = O in the long run V firms!

Firms in unapologetically competitive markets provide consumers with the benefit of product variety. Discuss. 16 Topic Nine: Oligopoly and game theory 1 . Suppose Penguin and Joker are the only two firms in the death ray market. Each firm is considering two possible pricing strategies – either P = $700 or P = $1 500 – for their goods. The following payoff matrix gives the profit outcomes (in $m). Joker P = $700 P = $700 Penguin P = $1 500 (a) 35 29 303539 $15002741 38 What price will each of the firms choose if they make their decisions independently, following a dominant strategy? Explain how you determined your answer.

What is meant by the term collusion? In general, what is the incentive for firms in an oligopoly market to collude? Explain. Based on the payoffs for Penguin and Joker (shown above) and your solution in (a), could these firms benefit by colluding? Explain. Suppose Alpha and Romeo are the only two firms in the automobile market. Each firm plans to put only one model onto the market. They are considering two possible choices – a standard model at P = $50,000 or a luxury model at P = $80,000. The following payoff matrix gives the profit outcomes (in $m). Romeo P = $50,000 P = $50,000 Alpha P = $80,000 (a) 35 40 40 35 45 P = $80,000 45 30 30