03 Jun Question 1. If the demand curve for wheat in the United States is P=12.4 – Q_D where is the P is the farm price of wheat (in dollars per bushel) and Q_D is t
Question
1. If the demand curve for wheat in the United States is P=12.4 – Q_D where is the P is the
farm price of wheat (in dollars per bushel) and Q_D is the quantity of wheat demanded
(in billions of bushels), and the supply curve for wheat in the United States is P= -2.6 +
2Q_S where Q_s is the quantity of wheat supplied (in billions of bushels), what is the
equilibrium price of wheat? What is the equilibrium quantity of wheat sold? Must the
actual price equal the equilibrium price? Why or why not?
2. The Haas Corporations executive vice president circulates a memo to the firms top
management in which he argues for a reduction in the price of the firms product. He
says such a price cut will increase the firms sales and profits.
a. The firms marketing manager responds with a memo pointing out that the price
elasticity of demand for the firms product is about -0.5. What is this fact
relevant?
b. The firms president concurs with the opinion of the executive vice president. Is
she correct?
3. In the following diagram, we show one of Janes indifference curves and her budget line.
a. If the price of good X is $100, what is her income?
b. What is the equation for her budget line?
c. What is the slope of her budget line?
d. What is the price of good Y?
e. What is Janes marginal rate of substation in equilibrium?
Good X
40
1
80
Good Y
4. According to the chief engineer at the Zodiac Company, Q=AL^aK^B, where Q is the
output rate, L is the rate of labor input, and K is the rate of capital input. Statistical
analysis indicates that a=0.8 and B=0.3. The firms owner claims the plant has increasing
returns to scale.
a. Is the owner correct?
b. If B were 0.2 rather than 0.3 would she be correct?
c. Does output per unit of labor depend only on a and B? Why or why not?
5. The Haverford Company is considering three types of plants to make a particular
electronic device. Plant A is much more highly automated than plant B, which in turn is
more highly automated than plant C. For each type of plant average variable cost so long
as output is less than capacity, which is the maximum output of the plant. The cost
structure for each type of plant is as follows:
Average Variable Costs
Plant A
Plant B
Plant C
Labor
$1.10
2.40
$3.70
Materials
0.90
1.20
1.80
Other
0.50
2.40
2.00
Total
$2.50
$6.00
$7.50
Total fixed costs
$300,000
$75,000
$25,000
Annual capacity
200,000
100,000
50,000
a. Derive the average costs of producing 100,000, 200,000, 300,000, and
400,000 devices per year with plant A. (For output exceeding the capacity of
a single plant, assume that more than one plant of this type is built.)
b. Derive the average costs of producing 100,000, 200,000, 300,000, and
400,000 devices per year with plant B.
c. Derive the average costs of producing 100,000, 200,000, 300,000 and 400,000
devices per year with plant C.
d. Using the results of parts (a) through (c), plot the points on the long-run
average cost curve for the production of these electronic devices for outputs of
100,000, 200,000, 300,000 and 400,000 devices per year.
6. In 2008, the box industry was perfectly competitive. The lowest point on the long-run
average cost curve of each of the identical box producers was $4, and this minimum point
occurred at an output of 1,000 boxes per month. The market demand curve for boxes was
Q_D=140,000 10,000P
Where P was the price of a box (in dollars per box) and Q_D was the quantity of boxes
demanded per month. The market supply curve for boxes was
Q_S=80,000 + 5,000P
Where Q_S was the quantity of boxes supplied per month.
a. What was the equilibrium price of a box? Is this the long-run equilibrium price?
b. How many firms are in this industry when it is in long-run equilibrium?
7. The Wilson Companys marketing manager has determined that the price elasticity of
demand for its product equals -2.2. According to studies she carried out, the relationship
between the amount spent by the firm on advertising and its sales is as follows:
Advertising Expenditure
Sales
$100,000
$1.0 million
$200,000
$1.3 million
$300,000
$1.5 million
$400,000
$1.6 million
a. If the Wilson Company spends $200,000 on advertising, what is the marginal revenue
from an extra dollar of advertising?
b. Is $200,000 the optimal amount for the firm to spend on advertising?
c. If $200,000 is not the optimal amount, would you recommend that the firm spends more
or less on advertising?
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