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Questions

1. Jane has been working all day, missing both her breakfast and lunch. Finally able to leave work, after being required to work a couple of hour’s overtime, she is starving. Jane has $20 in her pocket, so she stops at a local fast food restaurant and orders a grilled chicken sandwich (somewhat healthy) and fries (not so healthy). As she sits down to eat them, a University of Christian Academy University student approaches her and tells her that she is doing a research project for her microeconomics course, and would like to ask Jane a few quick questions. Jane agrees and the student asks what “score” (Marginal Utility) from 1 to 100 would she give as her satisfaction level with the 1st sandwich and the 1st fries? After eating that order, Jane is still hungry and orders a second chicken sandwich and another fries. Again, the student asks Jane to give her new scores. Since Jane has not eaten all day, she is hungry enough to order a third round of food and again gives “scores” to the inquisitive student.

Below is the University of Christian Academy student’s completed experiment tally sheet of Jane’s marginal utility “scores” and the calculation of her marginal utility per dollar, given that each sandwich costs $4.00 and each order of fries costs $2.00, along with her budget of $20. The student filled in the shaded cells based on Jane’s responses, then computed the values in the remaining cells. Using this information, answer the following questions:

a. Is Jane maximizing her utility? Explain your reasoning and show any calculations.

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b. If Jane is not maximizing her utility, remembering the Law of Diminishing Marginal Utility, would she be better off to buy one less chicken sandwich and one more fry? Explain your reasoning and show any calculations.

c. If Jane is not maximizing her utility with the original purchase combination, remembering the Law of Diminishing Marginal Utility, would she be better off buying just one more fry? Explain your reasoning and show any calculations.

d. If Jane is not maximizing her utility with the original purchase, remembering the Law of Diminishing Marginal Utility, would she be better off buying one less fries and one more chicken sandwich? Explain your reasoning and show any calculations.

2. Remembering the Learning Practice in Unit 3, in the year 107 WBCE (Way Before the Common Era) the Gondwanaland Chairman of Production reported that the gosum berry growers were able to meet an average demand of 700 barrels of gosum berries per month at an average a price of $70 per barrel.

In the year 108 WBCE the growers were plagued with a gosum berry bug infestation that reduced average output, causing production to fall to only 600 barrels per month, causing the price to rise to $84 per barrel. The following table shows the Chairman’s report:

Year (WBCE)

Monthly barrels of gosum berries demanded

Price per barrel

107 700 $70

108 600 $84

a. Using the midpoint method, calculate the price elasticity of demand for Gondwanaland gosum berries. Explain what this price elasticity of demand means?

b. What is the monthly average total revenue for year 107, and the monthly average total revenue for year 108? How do these numbers compare to each other?

Year (WBCE)

Monthly barrels of gosum berries

Price per barrel Monthly average total revenue

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demanded

107 700 $70

108 600 $84

Change in average total

monthly revenue

c. Using your answer to part a. above, how could you have predicted this change in total monthly revenue?

3. The Gondwanaland Chairman of Production reported that the new Altair chariots (most modern, horse drawn family chariot) had a PRICE elasticity of 3 and an INCOME elasticity of 2. The supply of these Altair chariots is elastic. Evaluate the following statements and explain why you think they are true, or false.

a. A 20% increase in the price of the Altair chariot will cause the quantity demanded to fall by an astounding 60%.

b. An increase in Gondwanaland consumers’ incomes will cause prices to rise, but the total quantity demanded will also increase.

4. The accompanying table shows the price and monthly demand for barrels of gosum berries in Gondwanaland.

Price of gosum berries

per barrel

Native Demand

for gosum berries

per month

$100 0$90 100$80 200$70 300$60 400$50 500$40 600

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$30 700$20 800$10 900$0 1000

a. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of barrel of gosum berries rises from $10 to $20. What does this estimate imply about the price elasticity of demand of gosum berries?

b. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of barrel of gosum berries rises from $70 to $80. What does this estimate imply about the price elasticity of demand of gosum berries?

c. Notice that the estimates from (a) and (b) above are different. Why do price elasticity of demand estimates change along the demand curve?

5. Matilda is downloading music and videos from an online site. She is currently buying three music downloads that cost $3 each and two video downloads that also cost $3 each. The table below indicates what she reports as the marginal utility of the last music download and of the last video download in this combination of purchases.

Quantity Price per Download

MU per download

Music downloads 3 $3 60

Video downloads 2 $3 45

As an assignment for her Microeconomics course, Matilda used the marginal utilities that she gave to her 3rd music download and her 2nd video download to complete the Experiment Tally Sheet below.

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a. A consumer maximizes utility when the last dollar spent on any good generates the same satisfaction as the last dollar spent on every other good. Is Matilda maximizing her utility? Explain your answer.

b. Should Matilda consume one more video download, to move her closer to her optimum utility? Explain your answer.

c. Should Matilda consume one less music download and one more video download, to move her closer to her optimum utility? Explain your answer.

d. Should Matilda consume one more music download, to move her closer to her optimum utility? Explain your answer.

6.. Brandon and his family often rent movies from the new internet movie streaming service, Xanadu.

The table below shows Brandon’s demand schedule for eight movie rentals that Brandon’s family is interested in watching.

Number of internet video rentals

Willingness to pay each rental

1st movie rental $72nd movie rental $63rd movie rental $54th movie rental $45th movie rental $36th movie rental $27th movie rental $18th movie rental $0

a. If the price of the price of each movie rental from Xanadu is $3, how many movie rentals will Brandon buy and how much consumer surplus does Brandon receive? Explain your answer.

b. If the price of the price of each movie rental from Xanadu is $5, how many movie rentals will Brandon buy and how much consumer surplus does Brandon receive? Explain your answer.

c. If the Xanadu online service offers as many movie rentals as the customer wants to download, all for on-time yearly subscription fee of $25.00, how many movie rentals will Brandon download and how much consumer surplus will Brandon receive? Explain your answer.

d. If the Xanadu online service offers as many movie rentals as the customer wants to download, all for on-time yearly subscription fee of $35.00, how many movie rentals will Brandon download and how much consumer surplus will Brandon receive? Explain your answer.

e. If the Xanadu’s market research showed that Brandon’s demand represented what most of Xanadu’s customers wanted, what would be the most that Xanadu could charge as a one-time annual fee for all the downloads that the customer wanted?

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7. Newspaper vending machines are designed so that once you have paid for one paper; you have access to all the papers in the machine and could take multiple papers at a time. However, other vending machines dispense only one item (the item you bought). You do not have access to all the goods (sodas, candy, snacks, etc.) at one time. Using the concept of marginal utility, explain why these vending machines differ?

8. Suppose that the Gondwanaland Chairman of Production who sets the governmental price floor for gosum berries, in an effort to assist the gosum berry producers to have a higher income, set the price floor at $70 per barrel. These berries are a food staple of the Gondwanalandians and contributes directly to their health and long life (average lifespan of 150+ active years). In that particular year the amount of gosum berries produced at the $70 price floor was 700 barrels per month. To support the price of gosum berries, the Chairman of Production’s Office had to purchase 400 barrels per month. The accompanying diagram shows supply and demand curves illustrating the market for Gondwanaland gosum berries.

a. In the absence of a price floor, the maximum price that a few of the consumers are willing to pay up to $100 per barrel of gosum berries. The market equilibrium (E) price is $50 per barrel. How much consumer surplus is created, when there is no price floor? Show your calculations.

b. How much producer surplus when there is no price floor? Show your calculations.

c. What is the total surplus when there is no price floor? Show your calculations.

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d. After the price floor is instituted, the legal minimum price that can be charged by suppliers is $70 per barrel. The maximum price that a few of the consumers are still willing to pay is $100 per barrel of gosum berries. With the price floor at $70 per barrel, consumers buy 300 barrels of gosum berries per month. How much consumer surplus is created with the price floor? Show your calculations.

e. How much producer surplus when there is no price floor? Show your calculations.

f. The Chairman of Production’s Office buys any barrels of gosum berries that the producers are not able to sell. With the price floor, the producers sell 300 barrels per month to consumers, but the producers, at this high price floor, produce 700 barrels per month. How much money does the Chairman of Production’s Office spend on buying up surplus cheese? Show your calculations.

g. The Emperor of Gondwanaland must collect taxes from the people to pay for the purchases of surplus gosum berries by the Chairman of Production’s Office. As a result, total surplus (producer plus consumer) is reduced by the amount the Chairman of Production’s Office spent on buying surplus gosum berries. Using your answers for parts d, e, and f, what is the total surplus when there is a price floor? Show your calculations.

h. How does this compare to the total surplus without a price floor from part c?

9. When Total Costs (TC) are known, explain how to calculate each of the following:

a. Fixed Costs (FC)

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b. Variable Costs (VC)

c. Average Variable Costs (AVC)

d. Average Total Costs (ATC)

e. Average Fixed Costs (AFC)

f. Marginal Costs (MC)

10. Table 1. shows the hourly production and Total Cost estimates for a new manufacturing firm wishing to enter the smart phone market. Fill in the blank cells in columns a., b., c., d., and e. on the table by computing the appropriate values.

Table 1.Smart

cell phones produced in an hour

Total Cost (TC)

Variable Costs (VC)

Average Variable

Costs (AVC)

Average Total Costs (ATC)

Average Fixed Cost (AFC)

Marginal Cost (MC)

    a. b. c. d. e.0 $3,200   n/a n/a n/a n/a15 $3,525          30 $3,875          45 $4,250          60 $4,650          75 $5,075          90 $5,525          105 $6,725          120 $8,210          135 $9,950          

11.Based on your calculations in completing the table in Question 2, what is this manufacturer’s minimum cost output level? Explain your answer.

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12. According to our textbook (page 341) when one additional unit is produced, two factors directly impact the change in average total costs, the Spreading effect and the Diminishing Returns effect. In the following two situations explain how the factors of the Spreading effect and the Diminishing Returns effect cause the average total cost to be different.

a. Production of the 10th Gizmo resulted in an average total cost (ATC) of $20, but production of the 11th Gizmo resulted in an average total cost of $22.

b. Production of the 10th Gizmo resulted in an average total cost (ATC) of $20, but production of the 11th Gizmo resulted in an average total cost of $18.

Table 2.a. shows an LED light bulb manufacturer’s total cost of producing LED light bulbs.

Table 2.a.

Cases of LED light bulbs

produced in an hour

Total Cost

0 $4,500 10 $4,90020 $5,10030 $5,30040 $5,40050 $5,70060 $6,70070 $7,90080 $9,70090 $11,800

13..What is this manufacturer’s fixed cost? Explain why.

14.Assuming that you only know the Total Costs (TC) (as is shown in the Table 2.a. above) explain how you would calculate each of the following:

a. Variable Cost (VC);

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b. Average Variable Cost (AVC);

c. Average Total Cost (ATC);

d. Average Fixed Cost (AFC); and,

e. Marginal Costs (of a single case).

15. In Table 3.a., for each level of output, insert into the table the values for:

a. the Variable Cost (VC); b. the Average Variable Cost (AVC); c. the Average Total Cost (ATC); and, d. the Average Fixed Cost (AFC).

Table 3.a.Cases of LED light

bulbs produced

in an hour

Total Cost

Variable Costs

Average Variable Costs

Average Total Costs

Average Fixed Cost

    a. b. c. d.0 $4,500   n/a n/a n/a10 $4,900        20 $5,100        30 $5,300        40 $5,400        50 $5,700        60 $6,700        70 $7,900        80 $9,700        90 $11,800        

e. Given the information you computed in Table 3.a., what is the minimum cost output Level? Explain why.

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16.Brenda Smith operates her own farm, raising chickens and producing eggs. She sells her eggs at the local farmers’ market, where there are several other egg producers’ also selling eggs by the dozen. (Brenda operates in a perfectly competitive market in which she is a “price taker.”) In order to make sure she does not lose money on selling eggs, she does an analysis of her costs for producing eggs as shown on Table 4.a.

Table 4.a.

Dozens of eggs

Fixed Cost

Total Cost

Variable Costs

Average Variable

Costs per dozen

Average Total

Costs per dozen

0 $3.35 $3.35 n/a n/a n/a10 $3.35 $10.50 $7.15 $0.72 $1.0520 $3.35 $16.40 $13.05 $0.65 $0.8230 $3.35 $23.10 $19.75 $0.66 $0.7740 $3.35 $30.00 $26.65 $0.67 $0.7550 $3.35 $36.50 $33.15 $0.66 $0.7360 $3.35 $48.00 $44.65 $0.74 $0.8070 $3.35 $64.40 $61.05 $0.87 $0.9280 $3.35 $80.00 $76.65 $0.96 $1.0090 $3.35 $135.00 $131.65 $1.46 $1.50

a. What is Brenda’s break-even price for a dozen of eggs? Explain how you found that answer.

b. What is Brenda’s shut-down price for a dozen of eggs? Explain how you found that answer.

c. If the market price of a dozen eggs at the local farmers’ market is $1.45 per dozen, will Brenda make an economic profit? Explain how you determined your answer.

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d. If the market price of a dozen eggs at the local farmers’ market is $1.45 per dozen, should Brenda continue producing eggs in the short run? Explain how you determined your answer.

e. If the market price of a dozen eggs at the local farmers’ market is 72 cents per dozen, will Brenda make an economic profit? Explain how you determined your answer.

f. If the market price of a dozen eggs at the local farmers’ market is 72 cents per dozen, should Brenda continue producing eggs in the short run? Explain how you determined your answer.

g. If the market price of a dozen eggs at the local farmers’ market is 64 cents per dozen, will Brenda make an economic profit? Explain how you determined your answer.

h. If the market price of a dozen eggs at the local farmers’ market is 64 cents per dozen, should Brenda continue producing eggs in the short run? Explain how you determined your answer.

17. The Gulf Sea Turtle Conservation Group (GSTCG), a 501(c) (3) non–profit group of volunteers working to collect data on nesting sea turtles and to promote sea turtle conservation, is considering creating a video to educate people about sea turtle conservation. The cost of duplicating the video on a DVD and mailing the DVD is $6.58. In a GSTCG member meeting, the video plan was discussed. Table 1. shows the expected demand for the DVD at different suggested donation levels, and they can act as a single-price monopolist if they choose to. The receipts will be used to fund GSTCG supplies for their data collection and conservation work. At the end of each sea turtle nesting season, any excess funds are donated by the GSTCG to a local non-profit sea turtle research and rehabilitation facility.

Table 1.

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Suggested Donation per DVD Request

Anticipated Number of DVD

Requests

$19.00 0$15.00 2$9.50 4$7.75 10$3.00 15

$0.00 20

a. Complete Table 2. by computing the Total Revenue, Marginal Revenue, and Profit columns.

Table 2.

Suggested Donation per DVD Request

Anticipated Number of DVD

RequestsTotal

RevenueMarginal Revenue PROFIT

$19.00 0      $15.00 2      $9.50 4      $7.75 10      $3.00 15      

$0.00 20      

b. The President wants the GSTCG to provide videos to generate the most possible donations (Total Revenue). What price is the President of the GSTCG favoring and how many people will receive the DVD if this becomes the price of the suggested donation? Explain your answers.

c. The Education Outreach Committee wants the GSTCG to provide videos to the most possible number of people. What price is the Educational Outreach Committee favoring and how many people will receive the DVD if this becomes the price of the suggested donation? Explain your answers.

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d. The Treasurer of the GSTCG wants the DVD program to be as efficient as possible so that the marginal revenue equals marginal cost. What price is the Treasurer favoring and how many people will receive the DVD if this becomes the price of the suggested donation? Explain your answers.

e. The Fund Raising Committee wants the DVD program to generate as much profit in donations as possible. What price is the Fund Raising Committee favoring and how many people will receive the DVD if this becomes the price of the suggested donation? Explain your answers.

18. A business has been created to provide needed services to its market. As the only provider of this service, it functions as a monopoly, with the ability to set prices and having the entire market demand schedule as its demand curve. Because the monopoly is newly formed, there is no government intervention into the monopoly’s pricing actions. Examine Diagram 2. and answer each of the following questions with complete explanations:

a. What is quantity (a) and why is it important?

b. What is the value at point (b) and why is it important?

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c. What is the value at point (c) and why is it important?

d. What is the value at point (d) and why is it important?

e. What is the meaning of the green rectangle labeled (e)?

f. If there were no monopoly and this was a perfectly competitive market, what would quantity at point (f) be and why is it important?

g. If there were no monopoly and this was a perfectly competitive market, what would point (g) be and why is it important?

h. For the market in which the monopoly now operates, what does the red triangle labeled (h) mean, and why is it important?

19. A governmental regulating agency was created to oversee the monopoly in Question 2’s operations and pricing. Diagram 3. depicts a new price ceiling set by the regulators. Answer each of the following questions with complete explanations:

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a. What is quantity (a) and why is it important?

b. What is the value at point (b) and why is it important?

c. At what level was the price ceiling set?

d. What is the value at point (c) and why is it important?

e. At this price ceiling level, will the monopoly make any monopoly profits?

f. At this price ceiling level, will the monopoly cover its costs?

g. At this price ceiling level, will the monopoly continue in business in the long run?

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20. Diagram 4. depicts a different price ceiling set by the regulators for the monopoly in Question19. Answer each of the following questions with complete explanations:

a. What is quantity (a) and why is it important?

b. What is the value at point (b) and why is it important?

c. At what level was the price ceiling set?

d. At this price ceiling level, will the monopoly make any monopoly profits?

e. At this price ceiling level, will the monopoly cover its costs?

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f. At this price ceiling level, will the monopoly continue in business in the long run?

21. Explain your understanding of how price effect contributes to the fact that, for a monopoly, marginal revenue is always less than the price.

22. Explain your understanding of how quantity effect contributes to the fact that, for a monopoly, marginal revenue is always less than the price.