Economics 110
Midterm #2 Study-guide
Spring 2014
Instructor: William L. Koch
Midterm #2 Exam Study Questions: (A subset of these questions/concepts will be on the exam)
Chapter 5 - Elasticity
Define Price elasticity of demand. What does it mean to say demand is highly elastic? What kinds of goods have a very elastic demand? What kind of demand elasticity does a good have if, when the price for the good falls, total revenue goes up? Why is this? What are some of the determinants of the price elasticity of demand? Define the income elasticity of demand. What can you say about a good that has a positive income elasticity of demand?
Chapter 7 – Consumer/Producers and Market Efficiency
Define consumer and producer surplus. Starting at a market in equilibrium, explain how an increase in demand changes total surplus. Assume no changes in supply. Use a graph in your answer. Using the concept of Total Surplus, explain how market equilibrium is efficient. Define Market failure and give some examples of market failure. What is one remedy for market failure?
Chapter 13 - Costs
For an economist, what are a firm’s complete costs of production? How do they differ from accounting production costs? Define diminishing marginal product. What are a couple of reasons for this result? What is the usual shape of the Average Total Cost curve and why is it that shape? What’s the relationship between Marginal Cost and Average Total Cost? What’s the difference between costs in the short-run and long-run? How do short-run cost curves differ from long-run cost curves? Define Economies of Scale (EOS). Using a graph of a typical Average Total Cost Curve, show where a firm exhibits EOS.
Chapter 14 – Firms in a Competitive Market
Explain what it means to say that in a competitive market, all market participants are price-takers. For a firm in a competitive market, what variables are all equal to the market price? How does a competitive firm decide how much to produce?
Economics 110
Midterm #2 Study-guide
Spring 2014
Instructor: William L. Koch
For a firm in a competitive market, what is its Short-run supply curve? What is its Longrun supply curve? What is the Zero-profit condition for a competitive firm? How are economic profits different from accounting profits? In a competitive market in the Long-run, what will induce new firms to enter the market? When will this process new-firm market entry stop?
Chapter 15 - Monopoly
How does a monopolist differ from a firm in a competitive market? How do monopolies develop?
Sample quantitative/graphics questions
Assume that the world Supply and Demand for oil is very inelastic. A) Using a graph, indicate why a relatively small decrease in supply could result in a large increase in revenues for oil companies. B) Using a different graph, indicate how a small decrease in demand could result in a large decrease in revenues for oil firms.
Calculate the price elasticity for widgets using the midpoint method using the following diagram. Given your answer, what can you say about the demand for widgets?
P Demand for Widgets
100 63
360
600
Q
Economics 110
Midterm #2 Study-guide
Spring 2014
Instructor: William L. Koch
In the following diagram, calculate Total Surplus for the Limoncello Market in Ventura assuming the initial market equilibrium at intersection of Supply and Demand curves S1 and D1. If supply shifted to S2, how much would Consumer Surplus change? S1
P 10 8
S2
5 4
D1
.5 100
Q
175
Using the following information, fill in the rest of the table and construct a graph showing the ATC, MC, AVC, and AFC curves. What is the profit-maximizing level of output for the firm?
Conrad's Coffee Shop Q (Cup per hr) 0 1 2 3 4 5 6 7 8 9 10
TC
FC 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00
VC 0.00 0.30 0.80 1.50 2.40 3.50 4.80 6.30 8.00 9.90 12.00
AFC -
AVC -
ATC -
MC -
Economics 110
Midterm #2 Study-guide
Spring 2014
Instructor: William L. Koch
The following diagram indicates a firm in a competitive market and its corresponding costs curves (Average Total Cost, Average Variable Cost, and Marginal Cost). If P1 represents the current market price, what are the firm’s profits? What can we say about this firm’s plans for production in the long-run? If, in the next month, the market price rises to P2, what are the firm’s profits? Assuming the price remains at P2, now what can we say about the firm’s long-run production plans?
P ATC
MC 14 10
AVC
P2 P1
8
10 12
35
38
Q
Economics 110
Midterm #2 Study-guide
Spring 2014
Instructor: William L. Koch
The exam will consist of four parts: Part A will consist of multiple choice questions. Part B will consist of short answer/definitions/graphs and will be taken from the above listed study questions Part C will consist of quantitative/graphical questions. Part D will consist of a question about an article discussed at the beginning of lecture
