1. Draw a market supply and demand diagram for minivans. Give an example of something that would shift the supply of minivans. Which direction will it move the supply? On the same diagram or a new one, illustrate the new equilibrium. Which direction did price move? Quantity? Does this follow the law of supply or the law of demand?
2. Robert has $12 to spend. He has resolved to spend his $20 on either beer or pizza.
Number of objects Price of a slice of pizza Total utility pizza Marginal utility of slices Price of beer Total utility of beer Marginal utility of beer
1 $3 8 8 $2 5 5
2 $3 13 $2 8
3 $3 17 $2 11
4 $3 18 $2 12
5 $3 18 $2 13
6 $3 18 X $2 13 X
Fill out the rest of the table. How many slices of pizza and bottles of beer will Robert buy?
Would Robert buy more or fewer beers if they only cost $3?
Part 2: Long Answers
1. Consider a market in a perfectly competitive long run equilibrium. Draw the cost diagram for an average firm, including average fixed cost, average variable cost, average total cost, and marginal cost. Suppose advances in production technology make each product easier to make than it was before. Draw a new cost diagram including all of the same curves as before. Does this firm now make negative, zero, or positive economic profit in the short run? Based on that, should the number of firms in the market go up, down or stay the same? Draw an overall market supply and demand diagram to illustrate what happens in the market in response to this technological advancement. After the dust has settled, what profit will the firm make in the long run?