Quiz 1
1.
Question: (TCO A) There is an increase in the cost of materials for producing bicycles.
(4 pts.) What happens to bicycle supply?
(6 pts.) What happens to bicycle demand?
Your What happens to bicycle supply? When prices of materials required for unit
Answer: 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 Since a change in costs to produce the product is a supply factor, an increase in costs
Explanation: would be expected to decrease bicycle 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.
2.
Points 10 of 10
Received:
Question: (TCO A) Digital cameras and memory cards are 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 What happens to the demand for memory cards? Since cameras and memory
Answer: 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 When the price of a complimentary good falls, the demand for the other good
Explanation: 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 DEMAND for digital cameras. Only the quantity demanded would change -rise in this case. Remember that a change in demand means that THE WHOLE
CURVE SHIFTS.
3.
Points 5 of 10
Received:
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 What happens to the supply of corn? The number of sellers in a given market
Answer: 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 The supply of corn would increase, or shift to the right. The number of suppliers is
Explanation: obviously a supply factor, so the more suppliers thare are, the larger 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.
4.
Points 10 of 10
Received:
Comments: Sound argument... but watch out for QD vs. D
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 What happens to P if there is an increase in supply? The new equilibrium price
Answer: 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 An increase in supply will create a surplus at the price of P*. Surpluses put pressure
Explanation: on prices to fall. Hence, the new market equilibrium will be at a price that is lower 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 higher P* price.
5.
Points 10 of 10
Received:
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 Is demand elastic in the $6 - $10 price range? 150-100/100 = 33%, 10 - 6/6 =
Answer: 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 Demand is inelastic because Ed is equal to 0.80 which is less than 1.0. Ed = [chg in Q
Explanation: / 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. Since we 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 10 of 10
6.
Received:
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
is inelastic, 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 When something is inelastic it means that price has very little impact on
Answer: 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 The unemployment impact would be greater in the case of elastic demand. Starting
Explanation: 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. Suppose the 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).
7.
Points 10 of 10
Received:
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
2
1100
108
350
3
1650
114
800
4
2200
119
1270
5
2750
123
1600
6
3300
125
1700
7
3850
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 What is the marginal product of the third worker? 114-108 = 6. The marginal
Answer: 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 (TCO C) You have been hired to manage a small manufacturing facility which has
Explanation: cost and production data given in the table below.
No. of workers
Total Labor Cost
Output
Total Revenue
1
$550
100
$170
2
1100
108
350
3
1650
114
800
4
2200
119
1270
5
2750
123
1600
6
3300
125
1700
7
3850
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.
8.
Points 4 of 10
Received:
Question: (TCO C) Answer the next question on the basis of the following cost data for a purely
competitive seller:
Total Product
TFC
TVC
0
$50
$0
1
50
70
2
50
120
3
50
150
4
50
220
5
50
300
6
50
390
Refer to the above data. If the product price is $85, at its optimal output will 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 I used an excel spreadsheet to calculate the total profit, marginal cost and
Answer: 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
TP TFC
TVC
MC
Instructor
0
$50
$0
Explanation:
1
2
3
4
5
50
50
50
50
50
70
120
150
220
300
70
50
30
70
80
6
50
390
90
When P = $85, then MR = $85, and we want to produce as long as the rising MC
is less than $85.
So we would produce 5 units, Total Revenue would be 5 x $85 = $425.
Total Costs = $50 + $300 = $350.
So there would be a profit of TR - TC = $425 - $350 = $75.
9.
Points 10 of 10
Received:
Question: (TCO C) Answer the next question on the basis of the following cost data for a purely
competitive seller:
Total Product TFC TVC
0
$50
$0
1
50
70
2
50
120
3
50
150
4
50
220
5
50
300
6
50
390
Refer to the above data. If the product price is $105, at its optimal output will 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 I used an excel spreadsheet to calculate the total profit, marginal cost and
Answer: 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. At the optimal output level of 3 units the firm is achieving the
highest MR of 75 with the lowest MC of 30 and at this point the firm will
realize a profit of $115. Without knowing what the opportunity cost of the next
best alternative it is difficult to know what the ture economic profit is but at the
optimal level of 3 units the firm is maximizing its MR and minimizing its MC.
Price Profit MR MC 0 0 -50 1 105 -15 35 70 2 210 40 55 50 3 315 115 75 30 4
420 150 35 70 5 525 175 25 80 6 630 190 15 90
Instructor Instructor Explanation :
Explanation:
TP
TFC
TVC
MC
0
$50
$0
1
50
70
70
2
50
120
50
3
50
150
30
4
50
220
70
5
50
300
80
6
50
390
90
When P = $105, then MR = $105, and we want to produce as long as the rising MC is less than
$105.
So we would produce 6 units, Total Revenue would be 6 x $105 = $630.
Total Costs = $50 + $390 = $440.
So there would be a profit of TR - TC = $630 - $440 = $190.
10.
Points 10 of 10
Received:
Question: (TCO C) A firm has Total Costs (TC) of $12,000 over the next three months (TOTAL
for the 3 months - not per month), of which $8,000 are fixed costs (TFC) for rent on its
lease that cannot be broken. If it stays in business over those months, then the firm
will collect only $6,000 in revenues (TR). So, considering only this information, should
they stay in business for those three months, or should they close down right now?
Provide your reasoning.
Your This firm should continue to stay in business for the three months. A firm’s
Answer: ultimate goal for being in business is to make money in the form of profits. In
the short run a firm should continue to operate if it can cover its variable costs
and expects to be able to cover its total costs in the long run. In this case the
firm is just able to cover its variable costs. Since fixed costs will remain
constant over time, or the long run, the firm should continue to produce aiming
to sell more units thus being able to cover both FC and VC and turn a profit
Instructor This firm should stay in business until its lease expires. If it closes down now, it loses
Explanation: $8,000 on the lease payments (fixed costs must still be paid, and no revenue would be
earned). If it stays in business, it collects $6,000 in revenues and incurs $4,000 in
variable costs, thus netting a positive difference of $2,000 that can be applied against
the fixed costs. True, the firm does end up losing $6,000 overall by staying in
business, but that is better than losing $8,000 on the only viable alternative.