Handout Chapter 1: Limits, Alternatives, and Choices

TEXTBOOK: QUESTIONS (1,5,7)

PROBLEM 1:
Below is a production possibilities table for consumer goods (automobiles) and capital
goods (Forklifts)

Type of
Production Alternatives
Production
A B C D E

Automobile
0 2 4 6 8
s

Forklifts 30 27 21 12 0

1. Show these data graphically. Upon what specific assumptions is this production
possibilities curve based?
The resources available are constant
The technology is constant
The economy is producing two goods

2. If the economy is at point C, what is the cost of two more automobiles? Of six more
forklifts? Explain how the production possibilities curve reflects the law of increasing
opportunity costs.

The cost of the first two Auto: 3 Fork

The cost of the second two Auto: 6 Fork
The cost of the third two Auto: 9 Fork
The cost of the fourth two Auto: 12 Fork

The cost of the first forklift:2/12

The cost of the thirteenth forklift: 2/9
The cost of the twenty second forklift: 2/6
The cost of the twenty eight forklift: 2/3

The law if increasing opportunity cost is shown by the increasing sacrifice in one good
in order to produce additional unit of the other good.
The cost of one additional Auto is greater than the cost of the previous one.

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3. If the economy characterized by this production possibilities table and curve were
producing 3 automobiles and 20 fork lifts, what could you conclude about its use of
available resources?
At this point, the economy has unused resources.
If the economy is producing 3 Auto, they can produce between 21 and 27 forklifts.
Given that they producing 20 Forklifts only, this means that they are not utilizing all
their resources available.

4. What would production at a point outside the production possibilities curve indicate?
What must occur before the economy can attain such a level of production?

Any point outside the PPF is unreachable with the available resources.

To reach previously unreachable points, the economy should grow. Growth is realized in
two ways:
- More resources
- Better technology

5. Suppose improvement occurs in the technology of producing forklifts but not in the
technology of producing automobiles. Draw the new production possibilities curve.
Now assume that a technological advance occurs in producing automobiles but not in
producing forklifts. Draw the new production possibilities curve. Now draw a
production possibilities curve that reflects technological improvement in the
production of both products.

6. Explain how (if at all) each of the following affects the location of a country’s
production possibilities curve:

a. The quality of education increases. PPF will shift to the right The capacity will
increase
b. The number of unemployed workers increases. PPF will not change. The capacity
remains as it is but the production decreases.
c. A devastating earthquake destroys numerous production facilities. PPF will shift to
the left and the capacity decreases

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PROBLEM 2:

The following data show the different combinations of coffee and cars that can be
produced by an economy, given a particular amount of resources, and a particular state
of technology. Draw the corresponding production possibility frontier to answer the
questions below:

Type of
Productio Production Alternatives
n
A B C D E F

Coffee 100 80 60 40 20 0
(tons)

Cars 0 8 12 15 17 18
(units)

1. Given the production possibility frontier above, can the economy produce the
combination of 50 tons of coffee and 5 units of cars? What does this combination
suggest about the use of the resources? Are they fully utilized?

2. Given the production possibility frontier above, can the economy produce the
combination of 80 tons of coffee and 12 units of cars, and why?

3. What is the opportunity cost of increasing coffee production from 40 to 60 tons per
year, assuming that resources are fully utilized?

4. What would be the cost of producing 3 additional units of cars if this economy were
currently producing 80 tons of coffee and 5 units of car? Explain.

5. What would happen to the production possibility frontier if a new production

technique allows cars production to double? On the same graph, draw the new
production possibility frontier.

6. What would happen to the production possibility frontier, if the resources available to
the economy were to increase? Explain.

PROBLEM 3:

You can either spend Spring Break working for $80 per day for five days or go to Italy
for the week. If you stay home and work, your expenses will total about $100. If you go
to Italy, the airfare, hotel, food, and miscellaneous expenses will be about $700. What’s
your opportunity cost of going to Italy?
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4
Handout Chapter 3: Demand, Supply, and Market Equilibrium
TEXTBOOK: QUESTIONS (1,2,3,4,5,7,8,11) PROBLEMS (3,4,7)
PROBLEM 1:
Consider the following information regarding the quantity of corn demanded and
supplied per month, at different alternative prices.

Price per bushel (cents) Quantity demanded Quantity supplied

40 39000 83000
35 48000 78000
30 58000 74000
25 67000 67000
20 75000 62000
15 81000 59000

1. Determine the equilibrium price and quantity?

2. Describe the situation when the price is 40 cents per bushel, and predict what will
happen.

3. Describe the situation when the price is 15 cents per bushel, and predict what will
happen.

4. Explain what would happen if a serious transportation strike reduced corn output (at
each price) by 30000 bushels. Determine the new equilibrium price and quantity.

PROBLEM 2:
Consider the following information regarding the quantity of pizza demanded and
supplied per month at different alternative prices.

Price ($ per pizza) Quantity demanded Quantity supplied

10 0 40
8 10 30
6 20 20
4 30 10
2 40 0
0 125 0

1. Determine the equilibrium price and the equilibrium quantity.

2. What would occur if the price were set at $4 per pizza?

3. What would occur if the price were set at $8 per pizza?

4. What would happen if the demand for pizzas tripled at each price? Determine the new
equilibrium price and quantity.

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PROBLEM 3:

Dough Crust Bread is a normal good produced by Dough Crust Bakery. Explain what
would happen to the supply or demand curve, and to equilibrium price and
quantity of Dough Crust Bread in each of the following situations:

1. Due to a recession, households, which buy Dough Crust Bread, experience a decrease
in income.

2. The cost of wheat used in Dough Crust Bread increases significantly.

3. Dough Crust buys improved ovens that reduce the costs of Dough Crust Bread.

4. Lovely Loaf, a rival, cuts the price of its bread.

5. Consumers become health conscious and switch to low-calorie bread.

6. A widespread advertising campaign promoting the health benefit of Dough Crust

consumption.

PROBLEM 4:

Explain what would happen to the demand or the supply curve for oil in each of the
following situations:

1. A fall in the price of oil.

2. A change in consumer preferences to natural gas consumption.

3. A strike by oil refiners' workers.

4. An improved technology of oil production.

5. A discovery of new oil fields in Texas.

6. An increase in national income.

7. The introduction of cars running on solar energy.

8. An OPEC oil embargo.

9. A record breaking cold winter, raising the consumption of heating oil.

10. An improvement in transportation, lowering the cost of imported oil.

6
PROBLEM 5:
What effect will each of the following have on the demand for small automobiles such as
the Mini Cooper and Smart car?

1. Small automobiles become more fashionable.

2. The price of large automobiles rises (with the price of small autos remaining the
same).

3. Income declines and small autos are an inferior good.

4. Consumers anticipate the price of small autos will greatly come down in the near
future.

5. The price of gasoline substantially drops.

PROBLEM 6:

What effect will each of the following have on the supply of automobile tires?

1. A technological advance in the methods of producing tires.

2. A decline in the number of firms in the tire industry.

3. An increase in the price of rubber used in the production of tires.

4. The expectation that the equilibrium price of auto tires will be lower in the future than
it is currently.

5. The levying of a per-unit tax in each auto tire sold.

6. The granting of a 50-cent-per-unit subsidy for each auto tire produced.

7
Handout Chapter 4: Elasticity
TEXTBOOK: CH 4: QUESTIONS (3,4,6,8,9,10) PROBLEMS (3,4,5)

Problem1: Consider the following demand and supply schedules for good X:

Price Quantity demanded Quantity Supplied

9 150 300
8 200 275
7 250 250
6 300 225
5 350 200
4 400 175
3 450 150
2 500 125
1 550 100

a. Determine the equilibrium price and the equilibrium quantity.

b. At a price = $5, will there be a shortage or a surplus? And how much it is?

c. Compute and describe the price elasticity of demand for the price change from $8 to $7, and
from $3 to $2.

d. What is the relationship between price and total revenues in this problem? Explain

Problem2: Draw a market demand and supply curve for the bread industry in Lebanon. (The
demand curve for bread is rather inelastic). Explain and illustrates graphically the effect of
these changes on equilibrium price and equilibrium quantity.

a. A sudden increase in population.

b. A rise in the price of flour used in bread production. Explain the effect on the total revenues
of the bakeries.

c. Suppose that consumer’ income increases, and at the same time, more bakeries are selling
bread. What would be the effect of these two changes on the demand curve and the supply
curve of bread, and on equilibrium price and quantity?

8
Handout Chapter 9: Consumer Behavior
TEXTBOOK: QUESTIONS (1,2) PROBLEMS (1,2,3,4,5)

PROBLEM 1:

The table below represents the total utility schedule of two goods X and Y at different
quantities:

Quantity TUx MUx MUx/Px MUx/P'x TUy MUy MUy/Py

1 36 22
2 68 42
3 96 60
4 120 76
5 140 90
6 156 102
7 168 112
8 176 120
9 181 125
10 184 128

1. If Price of X=$2, Price of Y=$1, Consumer’s income=$20, what is the optimal

combination of good X and good Y that will maximize consumer’s utility?

2. What is the total utility of this optimal combination?

3. If Price of X= $1, Price of Y=$1, Consumer’s income=$20,

a. What is the new optimal quantity of good X and good Y?

b. What has happened to the quantity of good X and to the quantity of good Y? What
can you conclude about the relationship between good X and good Y (substitutes
or complements)? Explain.

c. Calculate the cross-price elasticity of the two goods.

9
PROBLEM 2: The table below represents the total utility schedule of two goods X and Y
at different quantities:

Quantity Tux MUx MUx/Px TUy MUy MUy/Py

1 80 100
2 150 180
3 210 240
4 260 280
5 300 310
6 330 330
7 350 340

1. If Px= $10, and Py= $20, and consumer's income = $120, find the optimal
combination of good X and good Y that will maximize the consumer’s utility.

2. What is the total utility of that combination?

3. If consumer’s income increases to $150, and prices of goods X and Y are

unchanged:
a. Find the new optimal quantity of good X and good Y that will maximize consumer’s
utility.
b. Calculate the income elasticity of demand for good X, and for good Y, for an
income increase from $120 to $150. What can you conclude?

PROBLEM 3:
You are choosing between two goods, X and Y, and your marginal utility from each is as
shown below.

Units of X MUx MUx/Px Units of Y MUy MUy/Py

1 10 1 8
2 8 2 7
3 6 3 6
4 4 4 5
5 3 5 4
6 2 6 3

1. If your income is $9 and the price of X and Y is $2 and $1, respectively, what
quantities of each will you purchase to maximize utility?

2. What total utility will you realize?

3. Assume that, other things remaining unchanged, the price of X falls to $1. What
quantities of X and Y will you now purchase?

4. Using the two prices and quantities for X, derive a demand schedule (price-quantity-
demanded table) for X.

10
Handout Chapter 10: Businesses and the Costs of Production
TEXTBOOK: QUESTIONS (1,2,3,4,7,9)
PROBLEM 1: Based on the information provided in the table below, calculate the
missing values to answer the following questions:

Output TFC TVC TC MC AFC AVC ATC

0 100
1 50
2 95
3 46.67
4 300
5 270

1. When output Q = 0, Total fixed cost is equal to:

a. 0 b. 50 c. 100 d. 200

2. When output Q = 1, Total variable cost is equal to:

a. 50 b. 100 c. 150 d.250

3. When output Q = 2, Marginal cost is equal to:

a. 40 b. 45 c. 72.5 d. 122.5

4. When output Q = 3, Total variable cost is equal to:

a. 26.67 b. 140 c. 175 d. 225

5. When output Q = 5, Total cost is equal to:

a. 320 b. 360 c.370 d. 400

6. After which level of output do diminishing returns set in?

a. Q = 1 b. Q = 2 c. Q = 3 d. Q = 4

PROBLEM 2:
Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual
rent of $5,000 for his shop, and spends $20,000 per year on materials. He has $40,000
of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could
earn him $4,000 per year if alternatively invested. He has been offered $15,000 per
year to work as a potter for a competitor. He estimates his entrepreneurial talents are
worth $3,000 per year. Total annual revenue from pottery sales is $72,000.

Calculate accounting profits and economic profits for Gomez’s pottery.

11
PROBLEM 3:

Indicate how each of the following would shift the (a) marginal-cost curve, (b) average-
variable cost curve, (c) average-fixed-cost curve, and (d) average-total-cost curve of a
manufacturing firm. In each case specify the direction of the shift.

1. A reduction in business property taxes.

2. An increase in the nominal wages of production workers.

3. A decrease in the price of electricity.

4. An increase in insurance rates on plant and equipment.

5. An increase in transportation costs.

PROBLEM 4:

Use the following figure, which shows cost information for “Lenny’s Lobsters, Inc”, to
answer the questions below:

1. What is the total variable cost of producing 50,000 lobsters?

2. What is the total cost of producing 70,000 lobsters?

3. What is the total fixed cost for “Lenny’s Lobsters, Inc”?

4. What is the average fixed cost at an output level of 60,000 lobsters?

5. At what level of output does “Lenny’s Lobsters, Inc” production begins to experience
diminishing returns?
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Handout Chapters 11 and 12: Pure Competition
TEXTBOOK: CH 11: QUESTIONS (1,3,4) PROBLEMS (1,2,3,4)
CH 12: QUESTIONS (1,5)
PROBLEM 1: Assume the following cost data are for a purely competitive producer:

Average Fixed Average Variable Average Total

Quantity Marginal Cost
Cost Cost Cost
1 $60 $45 $105 $45
2 30 42.50 72.50 40
3 20 40 60 35
4 15 37.50 52.50 30
5 12 37 49 35
6 10 37.50 47.50 40
7 8.57 38.57 47.14 45
8 7.50 40.63 48.13 55
9 6.67 43.33 50 65
10 6 46.50 52.50 75

1. At a product price of $56,

a. Will this firm produce in the short run? Why or why not?

b. If it is preferable to produce, what will be the profit-maximizing or loss-minimizing

output?

c. What economic profit or loss will the firm realize?

2. At a product price of $41,

a. Will this firm produce in the short run? Why or why not?

b. If it is preferable to produce, what will be the profit-maximizing or loss-minimizing

output?

c. What economic profit or loss will the firm realize?

3. At a product price of $32,

a. Will this firm produce in the short run? Why or why not?

b. If it is preferable to produce, what will be the profit-maximizing or loss-minimizing

output?

c. What economic profit or loss will the firm realize?

13
In the table below, complete the short-run supply schedule for the firm (columns 1 and
2) and indicate the profit or loss incurred at each output (column 3).

(2) (4)
(1) (3)
Quantity supplied Quantity supplied
Price Profit(+) or loss(-)
single firm 1500 firms
$26 $
32
38
41
46
56
66

4. Explain: “That segment of a competitive firm’s marginal-cost curve which lies above
its average-variable-cost curve constitutes the short-run supply curve for the firm.”
Illustrate graphically.

5. Now assume there are 1500 identical firms in this competitive industry; that is, there
are 1500 firms, each of which has the same cost data as shown here. Calculate the
industry supply schedule (column 4).

6. Suppose the market demand data for the product are as follows:

Price $26 32 38 41 46 56 66
Total Qd 17,000 15,000 13,500 12,000 10,500 9,500 8,000

a. What will be the equilibrium price?

b. What will be the equilibrium output for the industry?

c. What will be the output of each firm?

d. What will profit or loss be per firm?

e. Will this industry expand or contract in the long run?

14
PROBLEM 2:

A purely competitive firm has the following schedule of costs.

Average total Average

Output Total cost Marginal cost
cost variable cost
Q TC MC
ATC AVC
0 300 -- -- --
1 400 100 400 100
2 450 50 225 75
3 510 60 170 70
4 590 80 148 73
5 700 110 140 80
6 840 140 140 90
7 1020 180 146 103
8 1250 230 156 119

1. If the market price were equal to $60:

a. Indicate the quantity of output produced by this firm.

b. Calculate the level of profit earned by this firm.

c. Should the firm stay in business? Explain.

2. If the market price were equal to $110:

d. Indicate the quantity of output produced by this firm.

e. Calculate the level of profit earned by this firm.

f. Should the firm stay in business? Explain.

3. If the market price were equal to $140:

g. Indicate the quantity of output produced by this firm.

h. Calculate the level of profit earned by this firm.

i. Illustrate your answer graphically.

4. If the market price were equal to $180:

j. Indicate the quantity of output produced by this firm.

k. Calculate the level of profit earned by this firm.

l. Illustrate your answer graphically.

15
PROBLEM 3:

Refer to the figure below, which depicts the short run cost and revenue conditions of a
perfectly competitive firm, to answer the following questions:

1. The short run market price is:

a. P1 b. P2 c. P3 d. P4

2. The short run profit maximizing output is:

a. Q1 b. Q2 c. Q3

3. In the short run economic profits are:

a. Positive b. Negative c. Zero

4. In the long run, the number of firms in the industry will:

a. Increase b. Decrease c. Remain the same

5. In the long run, the market supply curve will:

a. Shift rightward b. Shift leftward c. Remain the same

6. In the long run, the market price will:

a. Increase b. Decrease c. Remain the same

7. In the long run, economic profits (or losses) will:

a. Increase b. Decrease c. Remain the same

16
Handout Chapter 13: Pure Monopoly
TEXTBOOK: QUESTIONS (2,3,4,6,7,8) PROBLEMS (1)

PROBLEM 1:

Refer to the table below, which represents the demand schedule and the total cost
schedule of a monopolist, to answer the following questions:

Total Marginal Total Marginal

Quantity Price
revenue revenue Cost cost
0 $20 $15
1 18 21
2 16 27
3 14 33
4 12 39
5 10 45

1. What is the profit-maximizing output of the monopolist?

2. What price would the monopolist charge at the profit-maximizing output?

3. What is marginal revenue at the profit-maximizing output?

4. What is marginal cost at the profit -maximizing output?

5. What is the monopolist's level of profit at this output?

6. What is the monopolist's fixed cost?

17
PROBLEM 2:
Refer to the figure below, which depicts the short run cost and revenue conditions of a
pure monopoly, to answer the following questions:

1. What is the profit-maximizing output of the monopoly?

2. What price would the monopoly charge at the profit-maximizing output?

3. What is marginal revenue at the profit-maximizing output?

4. What is the monopolist’s level of profit at this output?

5. What will happen to monopoly profit in the long run?

6. If this monopoly were divided into many small firms producing identical products,
how much output would these perfectly competitive firm produce in total, and what
price would prevail in the long run?

18
PROBLEM 3:

Use the figure below to answer the following questions:

1. Assume that the market indicated in this figure is perfectly competitive:

a. What is the equilibrium quantity?

b. What is the equilibrium price?

c. Which area represents the consumer surplus at this price?

2. Assume that the market indicated in this figure is a monopoly:

a. What is the monopoly output?

b. What is the monopoly price?

c. Which area represents the consumer surplus at this price?

d. Which area represents the monopoly profit at this price?

3. Compared to pricing under perfect competition, which area represents the loss in
consumer surplus due to monopoly pricing?

4. Compared to pricing under perfect competition, which area represents the

deadweight loss due to monopoly pricing?
19
Handout Chapter 14: Monopolistic Competition and Oligopoly
TEXTBOOK: QUESTIONS (1,5,8,9,10)
PROBLEM 1:
Assume that the short-run cost and demand data given in the following table confront a
monopolistic competitor selling a given product and engaged in a given amount of production
promotion.

Total Marginal Marginal

Quantity Price Total cost
revenue revenue cost
Q P TC
TR MR MC
0 $70 - $50 -
1 68 70
2 66 80
3 64 85
4 62 90
5 60 100
6 58 115
7 56 136
8 54 164
9 52 200
10 50 245

1. Compute total revenue, marginal revenue, and marginal cost at each unit of output
for this firm.

2. In the short run,

a. What is the profit-maximizing output of this firm?

b. What price will this firm charge at the profit-maximizing output?

c. What is the level of profit that this firm earns at this output?

3. In the long run, the demand for this firm’s product will ____________, until the price
of the product equals ________________, and total economic profits of the firm are
____________.

20
PROBLEM 2:
An oligopoly producing a homogeneous product is composed of three firms. Assume that
these three firms have identical costs schedules. Assume also that if any of these firms
sets a price for the product, the other two firms charge the same price. As long as the
firms all charge the same price, they will share the market equally, and the quantity
demanded of each would be the same.

Following is the total cost schedule of one of these firms and the demand schedule that
confronts it when the other firms charge the same price as the firm.

Marginal Quantity Marginal

Output Total cost Price
cost Demanded Revenue
0 $0 $140 0
1 30 130 1
2 50 120 2
3 80 110 3
4 120 100 4
5 170 90 5
6 230 80 6
7 300 70 7
8 380 60 8

1. Complete the marginal cost and the marginal revenue schedules facing the firm.

2. What price would this firm set if it wished to maximize its profits?

3. How much would

a. It sell at this price?

b. Its profits be at this price?

4. What would be the industry’s

a. Total output at this price?

b. Joint profits at this price?

5. If these three firms colluded in order to maximize their joint profit, what price would
they charge?

21
PROBLEM 3:

Refer to the figure below for an oligopoly firm, to answer the following questions:

1. If marginal costs were equal to MC1, what would be the profit-maximizing rate of
output of the oligopolist?

2. If marginal costs were equal to MC1, what would be the profit-maximizing price of
the oligopolist?

3. If marginal costs for this firm were to increase from MC1 to MC3, what would be
the new profit-maximizing output and price?

4. According to the kinked demand curve model, if this firm decides to increase its
price, what will happen to its market share?

5. According to the kinked demand curve model, if this firm decides to decrease its
price, what will happen to its market share?

6. If this oligopoly firm were to increase its advertising expenditures in an effort to

increase market share, what would be the most likely response of its rivals?

22
PROBLEM 4:

Two firms are serving a market. They face the following choices and profit payoffs (in
millions).

Bubbling Brook’s Choices

Charge $1.50 Charge $2.00

Pure Water’s Choices

$1,200 PW $4,200 PW
Charge $1.50
$1,200 BB $400 BB

$400 PW $2,500 PW
Charge $2.00
$4,200 BB $2,500 BB

1. Do these firms have a collusive strategy? What is it?

2. If yes, is the collusive strategy the equilibrium?

3. If not, what is the equilibrium?

PROBLEM 5:
Two firms are serving a market. They face the following: If each restricts advertising
their profits (each) will be $75,000 annually; if they both advertise, profits will be
$40,000. If only one advertises (the other doesn't), the advertiser has profits of
$100,000 and the non-advertiser loses $15,000 because it is a significant period of time
before the other can then advertise.

1. Do these firms have a collusive strategy? What is it?

2. If yes, is the collusive strategy the equilibrium?

3. If not, what is the equilibrium?

23
Handout Chapter 15: The Demand for Resources
TEXTBOOK: QUESTIONS (2,3,5,6) PROBLEMS (1,4)

PROBLEM 1: Complete the following labor demand table for a firm that is hiring labor
competitively and selling its product, pencils, in a purely competitive market.

Marginal
Marginal
Units of Labor Total Product Product Price Revenue
Product
Product
0 0 - $0.5 -
1 16 0.5
2 36 0.5
3 54 0.5
4 68 0.5
5 80 0.5
6 90 0.5
7 98 0.5
8 98 0.5

1. With which worker do diminishing returns set in?

2. If the wage rate per worker is $5, and the market price of pencils is $0.5/unit, what
is the optimal quantity of workers to be used in the production process?

3. If the wage rate per worker is $7, and the market price of pencils is $0.5/unit, what
is the optimal quantity of workers to be used in the production process?

4. Show in schedule form and graphically the labor demand curve of this firm.

5. If increased training for the firm’s workers doubles labor productivity, how many
workers would the firm hire, if the wage rate is $14 per hour?

24
PROBLEM 2: Suppose the productivity of labor and capital, are as shown in the
accompanying table. The output of these resources sells in a purely competitive market
for $1 per unit. Both capital and labor are hired under purely competitive conditions at
$3 and $1, respectively.

Units of MP of Units of MP of
MPc/Pc MRPc/P MPL/PL MRPL/PL
capital capital labor labor
c
1 24 1 11
2 21 2 9
3 18 3 8
4 15 4 7
5 9 5 6
6 6 6 4
7 3 7 1
8 1 8 1/2

1. What is the least-cost combination of labor and capital to employ in producing 80

units of output? Explain.

2. What is the profit-maximizing combination of labor and capital the firm should use?

3. What is the resulting level of output?

4. What is the economic profit?

25