1. Why is utility subjective? 2. What are inferior options? 3. Suppose the price of A is 1, the price of B is 2 and the price of C is 1.

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1 Study Questions for Chapters 7-11 Chapter 7 1. Why is utility subjective? 2. What are inferior options? 3. Suppose the price of A is 1, the price of B is 2 and the price of C is 1.50 a. Complete the following table: Units of A MUa MUa/Pa Units of B MUb MUb/Pb Units of C MUc Muc/Pc b. Suppose you have a budget of $ What would your optimal bundle of goods be? c. What if your budget increased to $ What would your optimal bundle be? 4. Suppose you have a budget of $18. The price of good A is $3, and the price of good B is $6. a. Draw the budget line on a graph. b. Suppose the price of good B drops to $3, draw a new budget line on the graph. c. Show how you would determine equlibrium quantities of each good on this graph. d. Demonstrate mathematically that MRS=Pb/Pa is equivalent to MUa/Pa = MUb/Pb

2 Chapter 8 1. Why does a firm s MC curve intersect the ATC curve and AVC curve at their minima 2. What are economies of scale? List 4 types. List 2 diseconomies of scale. Show graphically where economies of scale, constant returns to scale an diseconomies of scale exist on a long run ATC. 3. Suppose a firm has fixed costs of $60. Complete the table below. Is this short run or long run? Q TFC TVC TC AFC AVC ATC MC produced Explain how you could derive the long run ATC curve. Show this graphically.

3 Chapter 9 1. If P<MC is underallocation or overallocation present? 2. a. Complete the following chart: b. Graph the demand and marginal revenue curves. Do they coincide? Why or why not? Price Quantity Demanded Total Revenue Marginal Revenue 3. Suppose we have the following information for a competitive producer Q produced AVC ATC MC Profit a. Determine MC b. If price=$56, will this firm produce in the short run? How much would it produce? What would it s profits be? c. Suppose the price is $41. Will the firm produce in the short run? How much would it produce? What would be it s long run decision? d. If the price fell to $30, would the firm produce in the short run? 4. Using diagrams for both the industry and a representative firm, illustrate the competitive long run equilibrium. Assume constant costs, use diagrams to show how an increase in market demand will upset the equilibrium. Show graphically how the market adjusts to a new long run equilibrium.

4 Chapter What are the characteristics of a monopoly? 2. What sort of barriers to entry exists in a monopoly? 3. Explain why a monopoly is inefficient. 4. Suppose we have a monopolist that faces the following demand: Price Quantity TR MR MC ATC Profit Demanded a. Assume this monopolist charges the same price for all customers. Calculate TR, MR, MC and Profit. b. How much will this monopolist produce? What is the equilibrium price? c. Suppose now this monopolist can perfectly price discriminate. What is the new equilibrium price and quantity. d. Show, graphically, the difference in profit between a price discriminating monopolist and a single-price monopolist. What is different about equilibrium quantities of each case? e. Show graphically, where fair return price and socially optimal price are situated. 5. It has been proposed that natural monopolists should be allowed to determine their profit-maximizing outputs and prices and then governments should tax their profits away and distribute them to consumers in the proportion to their purchases from the monopoly. Is this proposal as socially desirable as requiring monopolists to equate price with marginal cost or average total cost?

5 Chapter Explain graphically what long run equilibrium looks like for a monopolistically competitive firm in the long run. Why are there no profits in the long run? 2. In the kinked demand curve oligopoly model, why is the demand curve kinked? Why is there a gap in the MR curve? 3. Given the following graph, answer the following multiple choice question: P Po MC1 MC2 D Q MR A shift in the MC curve from MC2 to MC1 would: a. increase the price of the good above Po b. leave price at Po, but reduce the firm s total profit c. make this firm s demand curve more elastic 4. Explain what is meant by the term Cartel. Show graphically where a cartel with 4 identical firms would set their price/quantity combination using a representative firm. 5. In the price leadership model, how frequent are price changes and why? 6. Why is there as much advertising in monopolistic competition and oligopoly? How does such advertising help consumers and promote efficiency? What are some negative effects of advertising? 7. Explain the meaning of the following payoff matrix for oligopolists C and D: a. Use the payoff matrix to explain the term mutual interdependence. b. Assuming no collusion, where would C and D produce? c. Explain how collusion would be profitable, but that the incentive to cheat is great. C s prices High Low $57 $59 High $60 $55 D s Prices Low $69 $50 $58 $55

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