Demand shifts have a smaller price impact when supply is more elastic.
b) True or False: The effect of shifts in demand on the market price is larger in the short run than in the long run.
c) True or False: When marginal revenue is greater than marginal cost, a monopolist should raise prices.
d) True or False: It is sometimes possible for taxes or subsidies to increase social welfare.
e) True or False: Marginal revenue will always be less than price for a monopolist because total revenue declines as additional units are sold.
f) True or False: Monopolists charge prices that maximize total surplus.
g) In monopolistic competition, the product of an industry is:
a. Sold primarily by one large firm, which is a monopoly.
b. Differentiated somewhat between producers.
c. Sold at a lower price than if the industry were perfectly competitive.
d. Homogeneous.
h) The reason economists would support government subsidizing vaccinations for infectious diseases is:
a. A person buys only one vaccination of each kind.
b. Profits from vaccinations allow drug companies to reduce the price of HIV
drugs in the developing world.
c. Vaccinations produce positive externalities.
d. Production of vaccines has increasing returns to scale.
i) Suppose that when 1,000 pizzas per week are produced and sold the marginal social benefit of another pizza is $13.00, and the marginal social cost of another pizza is $5. Then it must be true that
a. The pizza firms are maximizing profits.
b. The cost to the firm of producing another pizza is greater than $5.
c. From society's point of view, more pizzas should be produced.
d. The government could improve social welfare by putting a tax on pizzas of
$8 per pizza.
j) The elasticity of demand for socks is -2 and the elasticity of supply is 4. A spike in the price of cotton has raised the cost of manufacturing socks by $0.30 a pair. How much will the price of socks rise?
$0 $0.05 $0.10 $0.15 $0.20 $0.25 $0.30
As the quantity produced of a good increases, the social welfare generated by that good increases..
Long run supply is more ___ than short run supply because it is easier for sellers to ___ up and down in the long run.
Taxes are borne more by suppliers when supply is more inelastic than demand. This is because a larger ____ change is required to get suppliers to choose the same reduction in ____.
____ price discrimination can be achieved when there is a positive association between a customer's willingness to pay overall, and her willingness to pay for improvements in product quality.
If you are selling in multiple markets and have the same marginal cost of serving all markets, you want to set ____ in each market ____to each other.
In the season 4 finale of "The Office", Jim pays for fireworks at the goodbye party for their colleague Toby so that there are fireworks as he proposes to Pam. This purchase creates ______ for everyone in the office. Generally speaking, too few people buy fireworks shows because actions featuring ______ are taken less than is socially optimal.
In season 1, episode 8, of "The Wire", Stringer Bell is teaching workers about the difference in how you treat customers buying drugs on the street corner versus in a copying/print shop. He says "You know what we got here? We got an elastic product. You know that that mean? That mean when people can go elsewhere and get their printing and copying done, they gonna do it. You acting like we got an inelastic product and we don't." In this quote, Stringer Bell is telling his workers that there are ___ substitutes for printing and copying services, whereas buyers of drugs lack good ____.
Suppose only 15 oranges are for sale at the supermarket and they are sold in an auction to the highest bidder. Buyers will tend to overpay for the oranges.
Membership fee pricing is more profitable when customers are more homogenous.
When markets are more competitive, a smaller fraction of industry-wide cost increases are passed through to consumers in the form of higher prices.
Suppose farmers can freely use groundwater to irrigate crops. We should expect groundwater to be depleted over time.
It is always possible to increase profit via indirect price discrimination. Simply offer products of varying quality and charge more for higher quality products.
If policymakers desire to increase the use of low emission technologies to generate power, it is usually better to tax production methods with high emissions than subsidize production methods with low emissions.
When selling a product in multiple markets, demand in one market should never affect the firm's price in the other market.
When a CEO sets up a "Profit & Loss" statement for divisions of the firm she manages, she only gets an accurate picture of the performance of each division if she allocates fixed costs to each division in proportion to each division's contribution to revenue.
Since July, worldwide oil inventories have been falling. Moreover, recent unemployment numbers suggest that the US and European economies will grow more slowly than expected. What direction are global oil prices likely to go?
ZX Inc. develops a new production method that reduces marginal cost. It has no production constraints. Should it should keep prices the same, raise them, or cut them?
Taxes are paid mostly by consumers, regardless of whether the consumer or the producer physically sends the check to the government.
Johnsville Steel sells metal products in several markets worldwide. It has price-setting power in each market, and marginal cost that is increasing in the quantity sold. If demand for its products rises in Singapore, should it raise prices in Dubai, cut them, or keep them the same?
The commons problem can be solved by eliminating private property
Norsdansk operates a fleet of 103 tankers that transport oil. Suppose Nordansk intends to keep its current fleet of ships for the foreseeable future. The CFO has just refinanced $1 billion in debt and cut the interest rate by two percentage points. Nordansk should pass some of those savings to customers by lowering prices.
Huricane has destroyed a large amount of the Hawaii Pineapple crop. Pineapple prices should increase significantly this year, but should mostly return to normal next year.
elasticity of demand for cars is -1/2 and the elasticity of supply is 4. A subsidy of $500 per car is implemented. What fraction of this subsidy will be received by car buyers in the form of lower prices? (circle one) 1/9 1/8 1/4 1/2 3/4 7/8 8/9
Suppose we observe prices and sales of Gucci bags over 48 months and find more are sold in months with higher prices. This is evidence that demand for luxury goods is upward sloping
A radical new technology allows ranchers to choose the sex of newborn calves. Before the technology is introduced, female calves sell for higher prices than male calves and half of newborn calves are males. After the technology is introduced:
a. The price of milk should decrease and the price of beef should decrease
b. The price of milk should decrease and the price of beef should increase
c. The price of milk should increase and the price of beef should decrease
d. The price of milk should increase and the price of beef should increase
When there are no transport costs, firms producing the same item at several plants should choose production at each plant so that marginal cost is the same at all plants.
Subsidies are always harmful.
The elasticity of demand for a firm's products is -3, marginal cost is $10 and the firm is charging $15. The firm is profit maximizing.
Pricing below average cost is never optimal unless a firm has multiple units/divisions selling in different countries.
A powerful new study shows that regularly eating corn can reduce cancer rates by 20%. We should expect that:
a. The price of corn and the quantity sold should increase over time to a permanently higher level.
b. Corn prices should rise quickly and then fall over time back toward the old price.
c. The quantity of corn sold should remain roughly constant but the price should increase over time to a permanently higher plateau
Marginal revenue is often higher than marginal cost if the firm is producing at a capacity constraint.
Taxes sometimes increase deadweight loss and sometimes decrease deadweight loss.
Holding demand constant, a monopolistic firm should set higher prices when marginal cost is higher.
Brainscan Inc. has decided to enter the Chinese market and has determined that the elasticity of demand for its scanners is -3. How much should it mark up its product?
Suppose a cap and trade system has been put in place for SOx pollution and the current permit price is $0. Suppose the government increases the number of permits. The permit price is likely to
Jonesville Steel sells metal products in several markets worldwide. It has price-setting power in each market, and marginal cost that is decreasing in the quantity sold. If demand for its products rises in Singapore, should it raise prices in Dubai, cut them, or keep them the same?
Demand can be easily estimated by performing a regression of historical prices on historical quantites bought and sold:
Jill's Creamery has an average cost per ice cream sold of $2 and charges a price of $1.50. Jill's should definitely raise prices
Jill's Creamery has an average cost per ice cream sold of $2 and charges a price of $1.50. In the long run, as fixed costs are recoverable, Jill's should shut down
You are a manager of an iron mining firm. Suppose that the short-run supply of iron is SSR(P) = 10,000xp and the long-run supply is SLR(P) = 20,000 x (p-2). Suppose the current price is $3. You should prepare for lower prices
Prices respond to supply shocks more in the short run than in the long run
The principles of externalities imply that too few skilled musicians will give free concerts.
Suppose that an unexpected fire destroys a large mine producing platinum. We should expect the price of platinum to:
i. Rise quickly, then fall over time.
ii. Fall quickly, then rise over time.
iii. Rise slowly over time.
iv. Fall slowly over time
Long-run demand is more elastic than short-run demand because:
i. There is less opportunity to substitute in the short run.
ii. People are less psychologically wedded to their choices in the short run.
iii. Production is easier to scale up and down in the long run.
Iceland currently maintains a cap-and-trade system for fishing permits in which permits are given away. It has decided to auction them off next year instead of giving them away. Josephine is a trader in the permit market. She should expect ___ prices to
____.
h. Continuing with (g), Josephine should expect ___ prices to ____.
Let the elasticity of demand for Papaya be -2 and let the elasticity of supply be 1. If the government imposes a tax of $1.50 on papayas, the price that consumers pay will rise by:
The US Government has announced a tariff on imported steel. Which direction should Yan argue that steel prices in the US are likely to go?
The US Government has announced a tariff on imported steel. Which direction should Yan argue that steel prices outside the US are likely to go?
The current price (that sellers receive) of grade A beef is $15 per pound. Yan has calculated that demand for beef is three times as elastic as supply. The state has just announced it will remove a $4 tax on beef, effective immediately. How much should Yan argue that the price that sellers receive is likely to rise?
A drought has damaged crops throughout the Midwest, and the latest report
from the USDA states that the problem is much larger than previously believed. Which
direction should Yan argue that crop prices are likely to go? HIGHER
Congress has been debating whether to impose either (1) a carbon tax of $10/ton, or (2) a cap-and-trade system in which the price of carbon is likely to be $10/ton. In the cap-and-trade system, permits would be given to industry for free. In a midnight vote, congress chose the carbon tax. Should Yan argue that industrial stocks are likely to be higher in the morning, or lower?
Since August, automobile inventories have been rising. Moreover, recent unemployment numbers suggest that European economies will grow more slowly than expected. What direction are auto prices likely to go?
The elasticity of demand for fast food meals is -1, and the elasticity of supply is 3. Suppose a new minimum wage law increases costs by $1 per meal. What is the likely effect on meal prices?
Suppose a cap and trade system has been put in place for SOx pollution and the current permit price is $0. Suppose the government increases the number of permits. The permit price is likely to:
It is never possible for taxes and subsidies to increase total surplus
Managers in industries with highly inelastic demand don't need to worry much about policies that have industry-wide effects on costs.
Managers in industries with highly inelastic supply don't need to worry much their own costs.
The US Government has announced a new "industrial pollutant impact fee" of $1 per pound of copper produced. The fee will apply to all US firms and imports. The elasticity of supply of copper is 0.2 and the elasticity of demand is -0.8. How much will the
consumer price of copper increase? (circle one) 0.20
The long run supply elasticity of copper is 1, and the long run elasticity of demand for copper is -1. In the long run, how much will the consumer price of copper increase? (circle one) $0.50
The government has announced an increase in the mandatory quantity of ethanol contained in gasoline. The price of oil is likely to go:
The government has announced an increase in the mandatory quantity of ethanol contained in gasoline. The price of pork is likely to go:
A severe increase in piracy has made shipping to and from Hawaii very expensive. The US navy will respond eventually, but it may be a year before the problem is under control. The price of pineapples in Hawaii2 is likely to go: LOWER
The US Energy Information Administration has announced that gasoline inventories unexpectedly dropped last week. The price of gasoline futures is likely to go HIGHER
Government surplus = -q*subsidy
Government surplus = 40000 (q) * (Ps-4) => Here Ps-4 is from the surplus
TC and QC Factory Capacity is given
Dp and Tc is given. Factory Capacity is given.
a) Find price and quantity
b) Dp of ANOTHER country is given. Now, use Tc from a). Therefore, we need to set marginal profit equal in the two countries. Since marginal cost is the same in both, this is equivalent to setting MR equal in the two countries.
c) .....
Consumer Surplus: ½* q* (50-P) => (50-p) is from demand.
Producer Surplus: ½*q*(Supply Coefficient)
Profit: price*quantity - (total cost)
What is NPV? Price to be charged?
Units that can produce is XYZ | Expansion costs $X | Discount rate Y% | Investment time 0 and earning begin at time 1
Pi(orginal quantity) = (price - MC)*(original quantity) - units it can produce
Pi(profit quantity) = (80-MC) * (original quantity) - units it can produce
Delta price = answer of pi (answer of profit quantity - orginial quantity)
NPV = Delta price/Discount%
What is the maximum value of annual fixed costs such that L-Star is still earning a positive profit at the price you found?
Profit = PQ-TC
If the MC reduces or increases, then what happens. Should the facility be leased?
a) Take the orginal MC and then reduce/increase the value as given.
b) Calculate profit
c) Decide
Foreign reserve and DP and SP
a) Find p. Dp=Sp
b) If exports decline or increase by 80%, do the following:
a. Dp = 20%Sp
If import decline or increase by 80%, do the following:
a. Sp=20%Dp
c) How long the reserves come through? No of days
a. Excess demand = Sp-20%Dp (note the percentage is on Dp)
b. To calculate the days = Total reserves/excess demand
d) If change in the supply and demand is gradual, the exchange rate will be gradual.
If quota is placed on production, what happens to price? And PS? Quota is placed on production means limit to supply
a. Find out the quota price from the question. The limit will be in the question.
b. This limit will be what the customers pay.
c. Limit is XYZ, curve will be vertical from X axis
d. So you must equate Demand equation to this limit or quota
e. You will have the p
f. PS: ½*q*(intercept of supply-p)
Bad weather can be good or bad for farmers. When bad weather leads to low yields locally, farmers are hurt badly. When bad weather leads to bad yields over large areas or globally, farmers often do very well.
Globally bad weather reduces all farmers' yields, often increasing producer surplus significantly: each farmer sells less, but higher prices are more than enough to compensate.
Pollution and SOX problem
Dp and Sp is given.
Each ton of steel produces XYZ pounds of pollution
a) Use cap and trade. Cap is 24M pounds per month. What is price of permit?
a. Dp=Sp. You will get P and Q. Pollution = Price * Quantity
Cap is 24M. So, Price * Quantity = 24M, you will get new Q.
b. Plug Q to Dp. So Dp=Q. You will get P
c. Plug Q to Sp, So, Sp=Q. You will get P for supply
d. Profit = P for demand - P for supply.
e. Permit price = P for demand - P for supply/P (price that you get from Dp=Sp)
b) If government increases no. of permit. What is price and price permit.
a. If Pollution = Price * Quality is less than Government no. of permit. Then, do nothing.
b. If Pollution = Price * Quatity is greater than government no of permit. Then, find follow steps from (b) and continue
c) Label cap and MC
d) If X = 18M what is price permit to produce one NOx. What is permit price for 9M?
a. New cap is 18M. So, production is New cap/oldest price => 18M/30 = No of units.
b. Plug no of units to demand. You will get new price
c. Plug no of units to supply. You will get MC.
d. Marginal profit = new price - MC.
e. So, permit cost is Marginal profit/30
f. If cap is 9Mm then production is 9M/30 = new no of units
g. Plug no of units to demand. You will get new price.
h. Plug no of units to supply, you will get MC
i. Marginal profit = new price - MC
j. So, permit cost = Marginal profit/30
If 30,000,000 permits are issued, the price will be 0.
a. If NO permits are issued, q=0 => Marginal profit = intercept of Dp - intercept of Sp.
b. So, price per permit is Marginal Profit/No of permits.
c. Permit price is always a vertical line
When a monopolist sells in multiple markets it will choose lower prices in placeswhere people have a lower willingness to pay, so prices of monopolisticallyprovided imports should be lower. In competitive markets, p=mc and mc is thesame across countries when the goods are imported, so prices should be the sameacross countries.
Haircuts, restaurant food and other locally provided goods use mostly local labor.Wages are much lower in Mexico so marginal cost and demand are lower as well,implying lower prices whether the goods are monopolistically provided or not.
If a store offers a discount. Where customers can shop for 2x more or 3x. What will be the optimal price?
a. Calculate P for regular separately. Find MR and MC.
b. Calculate P for discount separately. Find MR and MC.
How much the card must be charged? Something else should be charged.
a. Find CS = ½ * Q (Intercept of Demand - Price)
If demand is MORE than SUPPLY, Price and Total cost is 0
If insurance on the kidney or some other cost. Demand is inelastic. Supply is upward slope. So, people are willing to pay more price. So donation will increase.
As the supply of kidneys becomes more elastic, the expense to insurers and the government decreases
After the new law is passed, the expense to insurers and the government from the organmarket increases
The effect is smaller when supply is more elastic.
The return on the government's advertising campaign is HIGHER after the law requiring motorcyclists to wear helmets is passed.
Revenue and Profit
MC=0, the goal is to maximize revenue.
If you don't know what to do. Just multiple quantity * cost = revenue.
Opportunity Cost
a. Know the accounting cost for product 1. This is the opportunity cost for product 1. The opportunity cost is revenue - other cost (labour cost, production cost and so on)
b. Economic profit = accounting profit - opportunity cost
Supply and Demand
Price of a product
a) Dp = Sp - find price and quantity
b) Subsidy: Ps=Pd+(subsidy cost)
c) Government surplus = quantity * subsidy price/tax price
d) Deadweight loss = ½ * subsidy price or tax price * (quantity after getting subsidy/tax - original quantity obtained)
Government gives up tax or subsidy but makes an alternative choice. Has a price floor of $ What happens then?
a) Use the first Dp and subtract $ from the intercept
b) Do the same for supply
If lowest price is what the product is sold and if operators cant operate. (OR) if there is a condition. How much will it be sold? Producer surplus?
a) Take the lowest price value from the above equation.
b) Take the supply curve.
c) Equate the lowest value to the supply curve. Lowest value = supply curve
d) Find the price
Long run equilibrium
How to find if market is in long run?
a) Dp = Sp
b) Find p
c) If p matches with the price of long run. Then market is in long run. Else substitute new price to Long run equation. Quantity must match. If they don't they are not in long run.
Time for market to get to long-run.
a) Make Dp = Sp (if long run or short run equation is given. Make them equal)
b) Find the price
c) Find quantity
d) See where is the price is falling and then make a choice
Oil and demand and supply
If supply/demand is inelastic and another equation is given - find the price and consumer surplus
a) Use the elastic/inelastic number and equate to demand or supply. Find the value of p and q
Demand or supply falls. New price the consumers are ready to pay. Quantity still same. Demand/supply is new equation is given. Producer surplus?
a) Quantity is same
b) Price increase/decrease
c) If price falls => PS falls
d) If price increases => PS increases
Elasticity
You are given elasticity of demand and supply.
You are given how much buyers make and suppliers make in quantity.
Price per quantity is given too.
a) First convert all demand and supply elasticity into %
b) Now, take elasticity of demand and multiple with buyer quantity. Since the value of demand is - hence subtract the value you get from multiplying from buyer quantity.
c) Do the same as in (b). But since it is + hence you add.
d) You can try with different numbers
Price of the product changes. It increases for example. Many people are willing to pay more per ounce. How much price of other product be?
When you are opening the market, you are combining two different supply and demand.