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Principles of Microeconomics 100

Review II

1. Consider the market for Cell Phones.a. Suppose that the supply increases in the market for Cell Phones resulting in a new

market price and quantity. The original market equilibrium was at P = $160 and Q = 30

(million), and the new market equilibrium is at P = $140 and Q = 34 (million). What is

the price elasticity of demand for cell phones?

i. Given this type of Ed, what happened to total revenue for firms after this shockto the market? Why?

b. Given the nature of cell phones, would you predict the income elasticity of demand tobe positive or negative? Why?

2. In The Economic Organisationof a P.O.W. Camp R.A. Radford (1945) discusses the marketsthat developed in the Prisoner of War camps that he was in during World War II. Discuss how

each of the following examples in his article is related to theory in Microeconomics.

a. Radford explains that cigarettes developed as the official currency of the camp, and thatprices for all goods were known in cigarettes. After parcels of essentials were

diminished in August of 1944, Radford reports that there were several cases of

malnourishment of those who were heavy smokers in the camp. What does this

suggest about the elasticity of demand for cigarettes relative to the elasticity of demand

for food by this group of heavy smokers?

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3. Use table 6.2. Assume that Max and Alec are the only consumers, and that Cindy and Logan andthe only producers in this market, and the market price is $160.

a. What is the quantity demanded in the market?

b. What is the market Consumer Surplus?

c. What is the quantity supplied?

4. Fill in table 6.7:Q TC MC

0 1000

1 1140

2 1260

3 1590

4 2080

a. Draw Maid of the Mist Tours Supply, be clear about what price and quantity pointsmake up the firm supply curve.

Table 6.2

Quantity MB (Max) MB (Alec) MC (Cindy) MC (Logan)

1 220 260 100 90

2 170 190 80 150

3 140 160 140 190

4 97 115 196 250

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5. Suppose that Jane is deciding on her optimal combination of rolls of film and muffins. Her totalbudget (income) for these goods is $24 and the price of film is $6 and the price of muffins is $2.

At point A, she is consuming 3 rolls of film and 3 muffins, her MU(film) = 140 and MU(muffins) =

80.

a. Is she utility maximizing at point A? If not, which good should she consume more of?

b. Suppose the price of film decreases to $4. Describe the Income Effect and theSubstitution Effect of the decrease in the price of film

6. The market for beer has an equilibrium price of $6 and quantity of 8000 units. Jane Tylers barin this market has total cost for beer: TC = 4 + 2q + 0.05q

2and her marginal cost is MC = 2 + 4q.

a. What is Jane Tylers bars profit maximizing quantity and price?

b. How much profitcan Jane Tylers bar earn if they produce at the short run profitmaximizing quantity?

c. Graph the market and firm outcomes below be sure to clearly label all outcomes andrelevant curves.

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7. Consider the market for clinical psychology services in Niagara Falls, NY, described by thefollowing equations: P = 150 0.04Q; P = 70 + 0.06Q. The original equilibrium Q is 800 and P is

$118

a. If the government implements a $2 tax in this market, the after tax supply curve is P =72 + 0.06Q, what is the new market quantity and price?

b. What is the consumer surplus (CS) after the tax?

c. Who benefits and who loses from this policy?

d. Graph the market: Be sure to label the demand and the original and new supply curvesas well as the original equilibrium and the new market equilibrium after the tax. Shade

and label the post policy areas of consumer surplus, producer surplus and tax revenue.

8. In economics, we assume that marginal utility diminishes as consumption increases. However,this sometimes appears to not be the case. For example, my niece goes down the slide for

hours, and will do so every day. How can we explain this using what we know about utility?

i. Explain another good or activity that seems, at first glance, to defy the law ofdiminishing marginal utility.