Chapter 7 Consumer/Producers and Market Efficiency

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1 Midterm #2 Exam Study uestions: (A subset of these questions/concepts will be on the exam) Chapter 5 - Elasticity Define rice elasticity of demand. What does it mean to say demand is highly elastic? What kinds of goods have a very elastic demand? What kind of demand elasticity does a good have if, when the price for the good falls, total revenue goes up? Why is this? What are some of the determinants of the price elasticity of demand? Define the income elasticity of demand. What can you say about a good that has a positive income elasticity of demand? Chapter 7 Consumer/roducers and Market Efficiency Define consumer and producer surplus. Starting at a market in equilibrium, explain how an increase in demand changes total surplus. Assume no changes in supply. Use a graph in your answer. Using the concept of Total Surplus, explain how market equilibrium is efficient. Define Market failure and give some examples of market failure. What is one remedy for market failure? Chapter 13 - Costs For an economist, what are a firm s complete costs of production? How do they differ from accounting production costs? Define diminishing marginal product. What are a couple of reasons for this result? What is the usual shape of the Average Total Cost curve and why is it that shape? What s the relationship between Marginal Cost and Average Total Cost? What s the difference between costs in the short-run and long-run? How do short-run cost curves differ from long-run cost curves? Define Economies of Scale (EOS). Using a graph of a typical Average Total Cost Curve, show where a firm exhibits EOS. Chapter 14 Firms in a Competitive Market Explain what it means to say that in a competitive market, all market participants are price-takers. For a firm in a competitive market, what variables are all equal to the market price? How does a competitive firm decide how much to produce?

2 For a firm in a competitive market, what is its Short-run supply curve? What is its Longrun supply curve? What is the Zero-profit condition for a competitive firm? How are economic profits different from accounting profits? In a competitive market in the Long-run, what will induce new firms to enter the market? When will this process new-firm market entry stop? Chapter 15 - Monopoly How does a monopolist differ from a firm in a competitive market? How do monopolies develop? How does a monopoly make production and pricing decisions? What kind of firm exhibits over a broad range of outputs? What industries do economists think follow this dynamic? Define Dead Weight Loss in terms of a monopoly. Use a graph in your answer. Define erfect rice Discrimination. In erfect rice Discrimination why is there no Dead Weight Loss? Sample quantitative/graphics questions Assume that the world Supply and Demand for oil is very inelastic. A) Using a graph, indicate why a relatively small decrease in supply could result in a large increase in revenues for oil companies. B) Using a different graph, indicate how a small decrease in demand could result in a large decrease in revenues for oil firms. Calculate the price elasticity for widgets using the midpoint method using the following diagram. Given your answer, what can you say about the demand for widgets? Demand for Widgets

3 In the following diagram, calculate Total Surplus for the Limoncello Market in Ventura assuming the initial market equilibrium at intersection of Supply and Demand curves S 1 and D 1. If supply shifted to S 2, how much would Consumer Surplus change? S S D 1 Using the following information, fill in the rest of the table and construct a graph showing the ATC, MC, AVC, and AFC curves. What is the profit-maximizing level of output for the firm? Conrad's Coffee Shop (Cup per hr) TC FC VC AFC AVC ATC MC

4 The following diagram indicates a firm in a competitive market and its corresponding costs curves (Average Total Cost, Average Variable Cost, and Marginal Cost). If 1 represents the current market price, what are the firm s profits? What can we say about this firm s plans for production in the long-run? If, in the next month, the market price rises to 2, what are the firm s profits? Assuming the price remains at 2, now what can we say about the firm s long-run production plans? MC ATC AVC

5 The following diagram indicates a monopoly firm s marginal revenue curve, marginal cost curve, and the market demand curve. A) Indicate on the diagram where the firm s production would be if it were acting as a monopolist and as a firm in a competitive market. B) If the firm acts as a monopolist, what are its profits? If the firm started acting as a firm in a competitive market, how would consumer surplus change? MC 6 2 MR D The exam will consist of four parts: art A will consist of multiple choice questions. art B will consist of short answer/definitions/graphs and will be taken from the above listed study questions art C will consist of quantitative/graphical questions. art D will consist of a question about an article discussed at the beginning of lecture

Chapter 7 Consumer/Producers and Market Efficiency

Chapter 7 Consumer/Producers and Market Efficiency Midterm #2 Exam Study uestions: (A subset of these questions/concepts will be on the exam) Chapter 5 - Elasticity Define rice elasticity of demand. What does it mean to say demand is highly elastic? What

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