ECONOMICS
MBA 502

Assignments/Announcements

Assignment of the Week - Midterm Assignment

Using the concepts of  “scarcity” and “opportunity costs”, to the extent that you can, discuss and answer one of the following two questions.
(250-300 words)

1. When the job market is weak the demand for higher education (at both undergraduate and graduate levels) tends to increase. What is a
possible economic explanation for this phenomenon?

2. Who do you think should pay for the higher cost of security at airports, the Federal government, the state and local governments, or the
airliners?

Some online references:

Assignment of the Week
Midterm Assignment
Due Date: Monday November 11

Question 1
a) Explain how a production possibility curve is constructed for a hypothetical economy.
b) Describe the economic information contained in a production possibility curve.
c) Describe how a production possibility curve might change (shift).
d) Using your hypothetical production possibility curve, demonstrate the concept of opportunity cost.

Question 2
The recent (poor) performance of the stock market has affected the consumers’ demand for many big-ticket consumer items such as cars, home appliances, etc. Using the supply and demand model, try to show how the markets for these goods might have been affected and how the changes in these markets might have caused changes in the position of the economy relative to its production possibilities curve.

Question 3
By lowering its admission price from \$10 to \$8, the town (only) movie theater can increase its weekly total revenue from \$5000 to \$5200.
a) What is the price elasticity of demand for movies in this town?
b) Is the demand for movies within the above price range elastic or inelastic? Explain.
c) Assume the price elasticity of demand between \$8 and \$7 is the same as between \$10 and \$8. Should the owner of the theater consider lowering its price further? Explain.

Question 4
Your friend plans to open up a small bagel shop. She has her eyes on a shop in a shopping strip near the college. The shop can be rented for \$800 per month. She has estimated that the fixed part of her monthly utility bill would be \$200. In addition, she expects to pay another \$200 each month for insurance and maintenance costs. Each dozen of bagels takes \$1.75 worth of ingredients and \$.10 worth of electricity to produce. Each dozen of bagels also needs \$.15 worth of bags or other packaging materials. She can lease all the equipment that she needs for \$400 per month. She also needs \$10,000 for up-fitting the shop and a small amount of inventory. Her bank has agreed to give her a loan in that amount and let her pay only the interest, \$100 per month, for five years. At the end of the five years she would have the option of renewing the loan or paying it off. (Hint: Her cost of up-fitting and inventory is in fact her monthly payment to the bank, not the whole \$10,000.) Your friend plans to quit her present job and, with the help of a full-time employee, run her bagel shop herself. Her monthly salary form her present job is \$1,500. She expects to pay her full-time employee \$1000 per month.

a) Identify all the fixed and variable costs of the operation.
b) Assuming the market price of bagel is \$5 per dozen, how many dozens of bagels would she have to sell (per month) to break even?

c) How many dozens would she have to sell to have \$1,000 profit each month?
Suppose in the second year of her operation, the monthly lease for the shop is expected to go up to \$1,200. Assuming no other changes, how will that affect her break-even quantity and the profitability of her business?

Question 5
Use diagrams to explain why we say that compared to perfectly competitive markets, a monopolistically achieved equilibrium is not economically efficient. Be as specific as you can in your explanation.

Production/Cost Exercises
1. The following is a short-run production table for a firm with labor as its only variable input.
Wage  = \$100
Capital  = 45
Capital Price= \$15
Product Price= \$10

Labor---------Output
0----------------0
1---------------40
2---------------90
3--------------140
4--------------180
5.................210
6.................230
7.................240
8.................245
9.................240
10...............235

a. Determine the following measures at all levels of output:
MPPL, APL,  TFC,  TVC,  TC,  TR,  MRPL ,   AVC,   ATC,  AFC,  MC,  PROFIT
b. At what level of output is the output the profit maximized?
c. What kind of observations can you make about MC, the product price, MRPL , and wage?

1. The following is the market demand scheduled for music CDs in the New York City area.

 Pric Quantity 18 0 16 40 14 80 12 120 10 160 8 200 6 240 4 280 2 320

a.  Draw (plot) the demand curve.
b. Calculate the arc elasticity of this demand curve for each of the following price ranges:
14 and 16,  12 and 14,  10 and 12,  8 and 10,  6 and 8 ,  4 and 6

c.  Can you calculate the point price elasticities at the prices \$14 and \$6?

d.  Suppose the above schedule was constructed when the average monthly income of New York's consumers was \$3000. At this income level music
stores were charging \$10 for each CD. Now suppose that consumers' income has increased to \$3300. If the income elasticity of demand for CD is .5,
how many CDs will be sold at this higher income level?

e.  Can you show the effect of the above income increase on the demand curve?

f.   Can you calculate the price elasticity for the new demand curve at the price rage between 8 and 10? ( or the point price elasticity at the price 10?)

g.  Did the change in income affect the price elasticity? Explain.

h.  Again assuming the price music stores are charging for CDs is \$10 and consumers' income is \$3,300, suppose the average price of a movie ticket
in the New York City area has increased from \$10 to \$12. If the cross price elasticity of demand for CDs with respect to the price of movie tickets is
.625, what is the effect of this price increase on demand for CDs?

i.  Now with the higher income levels and higher movie ticket prices, if the music stores wish to increase their sales (revenues), should they lower or
raise their CD prices? Explain. ( Assume presently they are charging \$10 for each CD.)

2. The following is the utility table of a student with a \$38-dollar weekly food budget. There are only three food items in the student's food basket: meat, potatoes, and ice cream. The price of one pound of meat is \$5.00, potatoes are sold at \$2.00 per pound, and ice cream is \$4.00 a pound.
a. Determine the utility maximizing mix of these items for this student. Show your work.
b. What is the total (maximum) utility the student can derive from the consumption of the three goods?

 Quantity Meat Potatoes Ice Cream Total Utility Total Utility Total Utility 0 1 200 50 80 2 300 80 112 3 380 104 128 4 420 124 136 5 440 140 140 6 450 148 140

The talk of an American military action against Iraq for the purpose of removing Saddam Hohssein from power has lead to
speculations about the impact of a new war in the Middle East on the price of oil and its ensuing effects on the economy. What do
you think?

Note: Try to use as much as what you learned about supply and demand in your arguments.

Some refernces:
Best and Worst (CNN)
War and Jobs (CNN)

An elasticity exercise:
The following are prices and quantities of daily demand for gasoline for two service stations. For each station, plot the information on a two-dimensional space with price measured vertically and quantity measured horizontally. (Use the same space for both stations.)
Price                  QuntitiyDemanded                     QunatuityDemanded
Stattion A                                   Station B
Gallons                                        Gallons
\$1.00                             1400                                             2000
\$1.20                             1200                                             1800
\$1.40                             1000                                             1600
\$1.60                               800                                             1400
\$1.80                               600                                             1200
\$2.00                               400                                             1000
\$2.20                               200                                               800

a. What kind of observations can you make about these two service stations?
b. Calculate the price elasticity for each station's demand between  prices \$1.40 and \$1.60.
c. Calculate the price elasticity for each station's demand between  prices \$ 2.00 and \$2.20.
d. What can you conclude about the price elasticity of demand for each station.

In his State of the Union Address the president outlined the United States' success in the war
against terrorism in Afghanistan. The conflict, he said, has cost \$30 million a day. Yet the war against terrorism "is only beginning," he said.
The president is proposing significant increases in military spending to support his campaign against terrorism and, possibly, and attack on Iraq.

Using the "production possibilities curve" model, discuss the economic implications of the president's proposed military/security budget on the economy. How do yo think you personally might be economically affected.

Some study questions:
( You do not have to turn these in !)
Make a case for studying economics.
What is an economic model?
Why do we need (economic) models in economics?
What do economists mean by "opportunity costs"?
What kind of information does a production possibilities curve contain?
Why is a production possibilities curve negatively sloped?
What does a straight-line production possibilities curve (as compared to a curved on) indicate?
What does the curvature of a production possibilities curve indicate?
What are are the underlying assumptions of a production possibilities curve?
What makes a production possibilities curve shift or change positions?
Give an example of two economic variables that are negatively related to each other. Can you demonstrate this relationship in a diagram?
Give an example of two economic variables that are positively related. Demonstrate this relationship in a diagram.
What is an exogenous variable in an economic model? Give an example.
What is an endogenous variable in an economic model? Give an example.
What is the difference between a curve (concave) and a straight line production possibilities frontier?
How is it decided where along a production possibilities curve an economy will be?
What are the main characteristics of a market economy?
How does the market system coordinates the allocation of resources?
What do economists mean by efficiency?
What is function of price in a market economy?
How is the price determined in a market economy?
Why is it said that price is a rationing instrument in a market economy?
What do economists mean by demand?
What do economist mean by supply?
What is demand curve?
What is the distinction between "demand" and "quantity demanded?"
What makes quantity demanded change?
What makes quantity supplied changed?
What makes the demand (curve) for movies increase?
What makes the supply (curve) of music CDs increase?
What makes quantity demanded of music CDs go down?
What is the effect of an crease in the price of gasoline on demand for tires?
What is the effect of an increase in the price of crude oil on the equilibrium price and equilibrium quantity of tires. (Crude oil is used in the production of both tires
and gasoline.)
What is(are) the effect(s) of an increase in the price of tomatoes on the market for pizza?
Suppose a 15 percent increase in government subsidies for college students ( in forms of subsidized loans and direct grants) is accompanied by a 10 percent
increase in the college tuition. The increased revenues from the tuition hike is used to raise instructors' salaries. Evaluate the effects of these changes on the
market for college education.
What is economics?
What do economists mean by scarcity?
How do we personally and societally deal with the scarcity problem?
What do economists mean by "opportunity costs"?
What is an economic model?
What is a "good" economic model?
Why is abstraction important in making an economic model?
What is a production possibilities curve?
What kind of information does a production possibilities curve reflect?
What are the factors that determine the position and shape of a production possibilities curve?
What makes a production possibilities curve shift?
What is the difference between a curve (concave) and a straight line production possibilities frontier?
How is it decided where along a production possibilities curve an economy will be?
What are the main characteristics of a market economy?
How does the market system coordinates the allocation of resources?
What do economists mean by efficiency?
What is function of price in a market economy?
How is the price determined in a market economy?
Why is it said that price is a rationing instrument in a market economy?
What do economists mean by demand?
What do economist mean by supply?
What is demand curve?
What is the distinction between "demand" and "quantity demanded?"
What makes quantity demanded change?
What makes quantity supplied changed?
What makes the demand (curve) for movies increase?
What makes supply (curve) of music CDs increase?
What makes quantity demanded of music CDs go down?
What is the effect of an crease in the price of gasoline on demand for tires?
What is the effect of an increase in the price of crude oil on the equilibrium price and equilibrium quantity of tires. (Crude oil is used in the production of both tires and gasoline.)
What is(are) the effect(s) of an increase in the price of tomatoes on the market for pizza?
Suppose a 15 percent increase in government subsidies for college students ( in forms of subsidized loans and direct grants) is accompanied by a 10 percent increase in the college tuition. The increased revenues from the tuition hike is
used to raise instructors' salaries. Evaluate the effects of these changes on the market for college education.

Give a general description of the concept of elasticity.
2. Define the price elasticity of demand.
3. How is the price elasticity of demand calculated?
4. How is arc elasticity calculated?
5. Draw a hypothetical linear demand curve (say, for hair cuts or hair styling). Calculate the arc elasticity of this demand curve at two different price levels. Explain why elasticity changes along a linear demand curve.
6. Use your demand curve in the previous exercise to explain how total revenue (or total expenditure) changes as a result of a price change.
7. What are the factors that affect or determine price elasticity?
8. True of false: The elasticity of an inferior good with respect to income is negative. Explain.
9. True or false: The price elasticity of an inferior good is positive. Explain.
10. True of false: The price elasticity of an upward-sloping supply curve is positive. Explain.
11. How would you rank the following goods according to their price elasticities?
Milk, Snow mobiles, Tires, Gasoline
12. Why do we expect the price elasticity to change over time?
13. What is a production function?
14. Why do we expect the marginal physical product of an input to increase first and then at some point start to decline.
15. What do we mean by a short-run production function?
16. Examine and explain the relationship between the average physical product of an input and its marginal physical product.
17. What is marginal revenue product?
18. What is the effect of an increase in the price of a product on the marginal revenue product.
19. Carefully draw and compare total product, average physical product and marginal product.
20. What is the effect of an increase in the productivity of labor on marginal revenue product?
21. What do we mean by “the optimal” level of an input?
22. Explain the components of production costs in the short run.
23. What does a straight-line total cost function indicate?
24. What is (short-run) marginal cost?
25. Does an increase in wage affect the short-run marginal cost (assuming labor is our variable input)? Explain.
26. Does an increase in wage affect the short-run average total cost (assuming labor is our variable input)? Explain.
27. What is the optimization rule for a multiple-input production function?
28. With reference to the input optimization rule, explain the reaction of a profit-maximizing firm to changes in input prices.
29. How do we determine a firm’s revenue?
30. Can a firm always increase its by charging higher prices? Explain.
31. What do we mean by economic profit?
32. Should a profit maximizing firm shut down if its economic profit is 0? Explain.
33. Draw total cost and total revenue functions in a diagram and demonstrate how a firms profit is determined. (Do this exercise using both horizontal and downward-sloping demand curves)
34. Draw a diagram showing short-run marginal cost, average variable cost, and total cost. Use a hypothetical price to demonstrate the short-run equilibrium output. Also, show how the firm determines its profit on your diagram.
35. What is the short-run profit maximizing rule for a profit maximizing firm?
36. True or False: If a firm produces at a level where its marginal cost is greater than its marginal revenue the firm will show an economic loss. Explain.
37.  True or False: If a firm produces at a level where its marginal cost is less than its marginal revenue the firm will show an economic loss. Explain.
38. True or False: When a firms profit is maximized (in the short-run) its marginal cost is equal to its marginal revenue and at the same time its marginal revenue product  is greater then the price of its variable input. Explain.
39. Use a diagram to show how the long-run average total cost of a firm is derived.
40. True or False: An increase in the price of the fixed input does not effect a firms profit in the short-run. Explain.
41. What are the characteristics of a perfectly competitive market?
42. Explain why it is said that the long-run equilibrium profit of a competitive firm is 0.
43. What is the effect of an increase in demand on the profit of a firm under competitive conditions in the short run?
44. What do we mean by a short-run shutdown price?
45. What is the effect of new entries into a competitive market on individual firm’s profits?
46. True or False: An individual firm’s short-run supply curve is always upward sloping. Explain.
47. True or False: The short-run industry’s supply curve is always horizontal. Explain.
48.  Explain the impact of an increase in long-run average cost on the shape of  an industry’s long run supply curve.
49. Explain the conditions under which an industry’s long run supply curve would be horizontal.
50. Is it possible for the industry’s long run supply curve to be negatively sloped? Explain.
51. What is an isocost?
52. What is the optimizing rule that a profit maximizing firm must follow in the long run?
53. What does the slope of an isocost measure (reflect)?
54. What is the effect of an increase in an input price on the isocost?
55. True or False: In the long run, to maximize its profit, a firm must produce at the output level where its long-run average cost is minimized.
56. True or False: In the long run, to maximize its profit, a firm must produce at the output level where its total revenue is maximized.
57. True or False: In the long run, to maximize its profit, a firm must produce at the output level where its marginal revenue is equal to zero.