Short Answer Questions
1. Explain the law of diminishing marginal utility. Why does it occur?
2. The value of cross price elasticity of demand between goods A and B is 0.75, while the cross price elasticity of demand between goods A and C is -1.38. Characterize A & B and A & C as substitutes or complements. Explain why this is the case.
3. Why are there so many more proprietorships than corporations, yet corporations account for so much more of the sales of business firms in the country?
4. Suppose a consumer is at an optimum, consuming 6 hamburgers a week at a price of $1.50 each and 10 donuts a week at 50 cents a donut. If the price of a hamburger increases to $2.00, what will the consumer do to arrive at a new equilibrium? Why?
Project and Analysis Questions
5. In a local market, the price of product X decreases from $20 to $12, and the total quantity of monthly accounts increases from 100,000 to 225,000.
A. Using the formulas provided in your text, what is the price elasticity of demand for product X?
B. Is demand for product X elastic, unit-elastic or inelastic?
6. The short-run production function for a manufacturer of flash memory drives is shown in the table below. Answer questions A - C.
Input of Labor Total Output of Flash
(Workers per week) Memory Drives
0 0
1 25
2 60
3 85
4 105
5 115
6 120
A. Calculate the average physical product at each quantity of labor.
B. Calculate the marginal physical product at each quantity of labor.
C. At what point does marginal product begin to diminish?
7. An individual leaves a college faculty, where she was earning $45,000 a year, to begin a new venture. She invests her savings of $10,000, which were earning 10 percent annually. She then spends $22,000 renting office equipment, hires two students at $30,000 a year each, rents office space for $14,000 and has other variable expenses of $38,000. At the end of the year, her revenues are $220,000.
A. What are her accounting profits for the year?
B. What are her economic profits for the year?
8. You expect to receive a payment of $104 one year from now.
A. Your discount rate is 4%. What is the present value of the payment to be received?
B. Suppose that your discount rate rises to 5%. What is the present value of the payment to be received?
9. You and your family have decided to go into the restaurant business selling chicken wings. The following table displays different quantities of variable input in hours of labor you could employ and the resulting total output of chicken wings produced monthly. Assume that the cost of the labor which is the variable input is $8.50/hour. Assume also that the restaurant incurs monthly fixed costs of $250 for rent, insurance, taxes, and other inputs. You are interested in knowing some production and cost information for your new business. Using the formulas provided in your text, complete the following Production and Cost table (which is already partially completed for you) by filling in the highlighted blanks for Marginal Physical Product (MPP), Total Cost (TC), Average Fixed Cost (AFC), Average Variable Cost (AVC), Average Total Cost (ATC) and Marginal Cost (MC). (Note: Because Marginal Physical Product and Marginal Cost are found as Changes, their blanks are placed on the in-between rows.)
|
Input
(Hours)
|
Output
(Wings)
|
MPP
|
TFC
|
TVC
|
TC
|
AFC
|
AVC
|
ATC
|
MC
|
|
25
|
118
|
|
250
|
212.50
|
462.50
|
2.1
|
1.8
|
3.9
|
|
|
|
|
6.7
|
|
|
|
|
|
|
1.3
|
|
35
|
185
|
|
250
|
297.50
|
547.50
|
1.4
|
1.6
|
3.0
|
|
|
|
|
5.7
|
|
|
|
|
|
|
1.5
|
|
45
|
242
|
|
250
|
382.50
|
______
|
______
|
______
|
______
|
|
|
|
|
______
|
|
|
|
|
|
|
______
|
|
55
|
293
|
|
250
|
467.50
|
______
|
______
|
______
|
______
|
|
|
|
|
______
|
|
|
|
|
|
|
______
|
|
65
|
331
|
|
250
|
552.50
|
______
|
______
|
______
|
______
|
|
|
|
|
______
|
|
|
|
|
|
|
______
|
|
75
|
360
|
|
250
|
637.50
|
887.50
|
.7
|
1.8
|
2.5
|
|
- Using the following link, read the article about how stocks are bought and sold on the New York Stock Exchange
- Write a brief summary explaining the process of buying or selling stocks on the NYSE.
- Why might people who buy and sell stocks appreciate the relatively faster speeds of trade execution that the NYSE has achieved in recent years?