You should have been able to recognise that the business above is in a monopolistically competitive market - differentiated products, no barriers to entry.
(A) Draw a CLG showing Camden's demand curve, marginal revenue curve, marginal cost curve, and long-run average total cost curve. Label Camden's profit maximising output Qm & Pm.
(B) On your graph in part (a) label the output at which total revenue is maximised QR.
Max revenue is where MR = 0, at that quantity revenue is maximised.
(C) Do firms in this market experience economies of scale, diseconomies of scale, or neither in long-run equilibrium? Explain.
Notice that where MR=MC intersect and we find our price and quantity the LRATC curve is sloping downward. This is the section of the LRATC (long run average total cost curve) where resource prices are decreasing in the industry. It's a decreasing cost industry or an increasing returns industry or this industry is experiencing economies of scale.
(A) What is Martha’s marginal benefit of the fifth unit of good X?
At a
quantity of 0, we haven’t purchased any units so there is no marginal benefit.
As we
purchase from 0 quantity to the first unit of X, we gain a marginal benefit of
$16.
As we
purchase from the first to the second unit of X, we gain a marginal benefit of
$12.
As we
purchase from the second to the third unit of X, we gain a marginal benefit of
$8.
As we
purchase from the third to the fourth unit of X, we gain a marginal benefit of
$4.
As we
purchase from the fourth to the fifth
unit of X, we gain a marginal
benefit of $1.
Think of marginal
as meaning the next purchase. Obviously we can only purchase full units, so
when we have 4 units purchased our next marginal purchase is the 5th
one and we receive a marginal benefit of $1 from the additional/marginal
purchase of that 5th unit.
(B) Calculate the total consumer surplus if
Martha consumes 5 units of X. (show your work)
Remember,
that consumer surplus is the additional value gained from consumption of a good
subtracting what has been paid for that good.
Answer - Total Consumer Surplus = $12 + $8
+ $4 + $0 + $ -3 = $21 of Total Consumer Surplus
·Understand that the $4 Cost is also part of the
benefit. Confusing at first, but understand that if I give you $4 for unit X
then unit X is still worth $4, at least to me.
(C) Martha is currently consuming 4 units
of X and 2 units of Y. Use marginal analysis to explain why this combination is
not optimal.
This
combination of Units X and Units Y are not optimal as the marginal benefit
gained from purchasing units X and Y is not equal.
We are use
to seeing these problems as Utility problems and recognizing that the Marginal
Benefits and Marginal Utility formula’s are the same.
(D) What is Martha’s optimal
combination of X & Y?
1st
– using the formula set the two goods equal by using the formula above. Table
is helpful. (:
2nd
– Martha chooses her purchases according to the greatest benefit gained with
each purchase.
3rd
– Martha purchases until her income is all spent.
E) Indicate whether each of the following
will cause the optimal quantity of good Y to increase, decrease or stay the same.
(I) The price of good Y doubles.
If the
benefit per unit of Y decreases, then we would purchase less of the good.Martha’s first purchase would have been
X as the benefit is 4, which is greater than the benefit of 2.5 for a unit of
Y.
Answer - The optimal quantity purchased
will decrease.
(II) Martha’s income falls to $10 with no change in prices.
If Martha’s
income falls to $10, then she will not be able to purchase 4 units of good Y.
She will
purchase the first 3 units of good X & Y exactly the same way, but then she
has spent $8 and only has $2 left, so she will then only be able to purchase a
unit of Y.
So 1 unit of
X and 3 units of Y will be purchased, this will use all of her income. The
question above asks if the optimal quantity of good Y will decrease, increase,
or stay the same.
Originally
Martha, with $20 of income bought 4 units of good Y, so her purchase of good Y
has decreased.
Answer – Martha’s purchase of good Y has
decreased.
(III) Martha’s income doubles and the price of both goods double.
The answer
to this question should be intuitive in that if Martha’s income doubles and all
goods prices double then Martha is no better off with a doubling of her income
as the ratio of prices to incomes are the same.
3 units of X
at $8 each is $24 spent and 4 units of Y at 4 each is $16 and $24 + $16 = $40
Martha has
spent $40 (all) of her income and bought the same combination of goods X &
Y.
Answer - No
change in optimal combination of goods X & Y.
(A) In the market for bananas, the equilibrium price is $1.00 per pound,
and the equilibrium quantity is 1,000 pounds per week. Suppose the government
imposes a price floor on bananas at $1.20 per pound, causing the quantity
supplied to increase to 1,500 pounds a week.
(I) Would the price floor
result in a shortage, a surplus, or neither? Explain.
The price floor causes the price to increase, which sends a
signal to producers (suppliers) to produce more but consumers will reduce their
purchases due to the higher price causing the quantity demand to decrease. So,
a surplus would occur.
(II) Calculate the price
elasticity of supply if the price increases from $1 to $1.20 per pound. Show
your work.
Use either the midpoint formula or the alternative formula as
the College Board accepts both.
Midpoint
FormulaAlternative
Formula
(III) Between $1 & $1.20, is
the supply elastic, unit elastic, or inelastic? Explain.
So, a PES of 2 or 2.5 is obviously greater than 1 and therefore is Elastic.
(B) Bananas are an
input for muffins.
(I) Draw a correctly
labeled graph (CLG) of the market for muffins indicating the equilibrium price
and quantity, labeled P0 & Q0, respectively.
(II) On the graph
drawn in part (B) (I), show the increase in the price of banana's on the muffin market, labelling P1 & Q1.
An increase in the price of bananas is considered an increase in input cost for muffins as bananas are an input (resource) cost for muffins. Therefore the price of muffins will increase and the quantity of muffins sold will decrease.
(III) On the same graph, completely shade the area that represents the change in the consumer surplus caused by the change in the price of bananas.
(C) In the market for coffee, the equilibrium price is $3.00 per cup and the equilibrium quantity is a 100 cups per week. The cross-price elasticity of coffee with respect to muffins is -2.
(I) Are coffee and muffins normal goods, inferior goods, complimentary goods or substitute goods?
(II) Assume the supply of coffee is perfectly elastic. Using the equilibrium price and quantity given above, draw a correctly labelled graph for the coffee market and show the impact of the increase in the price of muffins on the coffee market.
(III) Given the original quantity 100 cups of coffee per week, if the increase in the price of muffins is 10%, calculate the new equilibrium quantity in the coffee market. Show your work.
The cross-price elasticity is the responsiveness of the quantity demand to a change in price.
As the price of muffins goes up by 10% the demand for coffee will decrease as muffins and coffee are compliments. Recognise that the price of coffee does not increase as the supply is perfectly elastic.
The question is to calculate the new quantity sold in the coffee market.
1. You have 1 hour and 10 minutes for the multiple choice section,,, pencil only,, no calculators,, plenty of time.,, draw graphs in the margins to help you answer the questions,, do not get hung up on one question,,, do the easy ones first and come back and ponder (SAT people) the hard ones. You know all of this so breathe and be brilliant.
2. You have 1 hour for the FRQs, this includes a ten minute reading section. Plan well,read the questions and underline the important parts,, but you can start writing during the 10 minute reading period,,, you do not have to wait to start writing. ((((use a pen only))) no coloured markers,, highlighters or white out.... If you start and then figure out that you have done something wrong,,,, quickly put a big X through it and start again.... Remember,, you know much more than they will be asking,,, show them what you know. Underline the important parts of the question,,, reread the questions to make sure you know what they are asking.
EXPLAIN Underline anytime you see the word EXPLAIN and EXPLAIN = WHY,,, Do not state,,, EXPLAIN, Complete sentences,, arrows on graphs,, but arrows in explanations need to be written out. Don't make them look and hunt for the answers,,, clearly labeled and underlined and/or circled the answer.
3. Eyes on your own paper
4. During the break,, do not touch anything related to economics,, or electronics.
5. The night before,,, (((( do not study until late))) Go to bed after a good bit of studying ,, but sleep and a clear head is better than cramming the night before.
6. The morning of the exam,,, eat breakfast and, then some kind of light snack before... Snacks and water are technically not allowed but almost all proctors allow it.
7. Study a bit more the morning of the exam,, you should be doing things you know well (Graphs),,, do not try and learn anything new the might before or the morning of the exam,,, do what you know and show yourself all you know.
8. Be confident,,, enjoy being tested and knowing that you will do well.
Mr w
Helpful and Nice review from Mr. Clifford,, Good Work. Mr. Clifford
