Liberty University ECON 213 Problem Set 3 solutions
answers right
1. Data for the market for graham
crackers is shown below. Calculate the elasticity of demand between the following
prices.
Price
of crackers
Quantity
Demanded (per month)
$1.00–$1.50:
___________________________________
$1.50–$2.00:
___________________________________
$2.00–$2.50:
___________________________________
$2.50–$3.00:
___________________________________
Now,
assume the price of graham crackers is $2.75. Should firms raise or lower their
prices if they want to increase revenue? Explain this in terms of elasticity.
2. Assume the competitive market shown
below faces a short run price of $10. Using the graph below, identify the
following:
Profit-maximizing
output: _______________________
In
the long run, the price falls to $7.50. Why does this happen?
What
is the new profit-maximizing output? _______________________
3. A local hardware store is trying to
decide whether to stay open. They have found that their industry is extremely
competitive and profits have shrunk considerably. Knowing that you have taken
an economics course, the owners have asked for your opinion. Draw 2 completely
labeled graphs to help you explain the shutdown decision. One graph must be for
the market as a whole, and the other must be for this store in particular.
Assume that the store is losing money; however, explain why they may want to
stay open for a little while longer. (Note: Your answer should include a written
explanation of your graph.)
4. Use the production function below to
answer the following questions:
Units
of Labor
Total
Output
MP
a.) Calculate marginal productivity (MP)
and put this in the table.
b.) At what level of employment does
diminishing marginal productivity begin?
c.) At what level of employment does
marginal productivity become negative?
d.) Why does marginal product become
negative?
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