Question

Q1 Ch1 (20%) a. Supply: Suppose the following information is known about a market: 1. Sellers will not sell at all below a price of $2. 2. At a price of $10, any given seller will sell 10 units. 3. There are 100 identical sellers in the market. Assuming a linear supply curve, use this information to derive the market supply curve. b. Demand: Suppose the demand for a particular product can be expressed as Q = 100/p. Calculate the total amount spent on this good when p = 10, 20, and 50. Can you make a generalization about the mathematical form of this demand curve and consumer behavior in this market? Q2 Ch 1 (10%) When a market is in disequilibrium consumers and producers change their behavior. As a result the market reaches equilibrium. Please answer ”True” or ”False” and explain why? 1 Q3 Ch 2 (20%) Suppose you are the manager of a California orange orchard. How would you expect the following events to affect the market equilibrium price you receive for a bottle of orange juice? Please state the shift (leftward or rightward) of demand or supply. a. The price of comparable Florida orange juice decreases. b. One hundred new fruit juice processing plants open in California. c. The price of a bottle increases significantly due to new government anti-shatter regulations. d. Researchers discover a new fruit juice processing technology that reduces production costs. e. The average age of consumers increases, and younger people drink less orange juice. Q4 Ch 2 (10%) Suppose there is a linear downward-sloping demand curve and a linear upwardsloping supply curve for a good. The price of a substitute good increases and the price of an input to production also increases. Graph the original demand and supply curves, and the curves after the substitute good and input prices increase. How will the equilibrium price change after the substitute and input prices increase? Q5 Ch 3 (15%) a. If the price of a slice of pizza rises from $2.50 to $3, and quantity demanded falls from 10,000 slices to 7,400 slices, using the formula for arc price elasticity what is the percentage change in price? b. If a consumer increases her quantity of ice cream consumed by 100% when her income rises by 25%, then her income elasticity of demand for ice cream is? c. The market demand for wheat is Q = 100 − 2p + 1pb + 2Y . If the price of wheat, p, is $2, and the price of barley, pb, is $3, and income, Y, is $1000. Then what is the income elasticity of wheat? 2 Q6 Ch 3 (10%) a. What is the meaning of the statement ”correlation does not mean causation”? b. What does t-statistic measure? Q7 Extra (15%) Bavarian Crystal Works designs and produces lead crystal wine decanters for export to international markets. The production manager of Bavarian Crystal Works estimates total and marginal production costs to be T C = 10, 000 + 40Q + 0.0025Q2 MC = 40 + 0.005Q where revenues are measured in U. S. dollars and Q is annual decanter production. a. What is the optimal level of production of wine decanters? What is the marginal revenue from the last wine decanter sold? b. What are the total revenue, total cost, and net benefit (profit) from selling the optimal number of wine decanters? c. Is the optimal profit in answer b good enough to keep Bavarian Crystal Works in the market? Please comment on it.

Answer 1

q.1.

a) p<2 , s(p)=0

p belongs [2,9]) s(p) >0

p= 10 ,s(p) = 1000 -(10*100)

b) Q = 100/p

p = 10 , 20 50

Q at p = 10 , q= 100/10 = 10 : total amount spent = price*quantity = 10*10 = 100

Q at p=20 , q = 100/20 = 5 . : total amount spent = price*quantity = 5*20 = 100

Q at p =50 , q = 100/50 = 2 .: total amount spent = price*quantity = 50*2 = 100

c) The total amount spent is same(amount) , given the demand curve.

AS price increases , qty demanded falls. Demand curve is mathematically downward sloping.Consumer behavior is consistent with law of demand.

q.2

When ,market is in disequilibrium , the disequilibrium can be eliminated by change in consumer or producer's behavior .Statement is TRUE..The market automatically adjusts by changing the price and quantity patterns , as a best response to market conditions.