Midterm

Student Name _ ______ BUSN6120 Managerial Economics Midterm Exam Directions: Answer any combination of the problems listed below adding to a cumulative total of 100 pts.

10 pts 1) For each of the following changes, show the effect on the demand curve, and state what will happen to market equilibrium price and quantity in the short run. a. Consumers expect that the price of the good will be higher in the future. b. The price of a substitute good rises. c. Consumer incomes fall, and the good is normal. d. Consumer incomes fall, and the good is inferior. e. A medical report is published showing that this product is hazardous to your health. f. The price of the product rises. Answer: A.

The equilibrium price and quantity both increase. There is a rightward shift in the demand curve (from D1 to D2), and a rise in the equilibrium price and quantity (E1 to E2). B.

The equilibrium price and quantity both increase. There is a rightward shift in the demand curve (from D1 to D2), and a rise in the equilibrium price and quantity (E1 to E2). C.

The equilibrium price and quantity both decrease. There is a leftward shift in the demand curve (from D1 to D2), and a decrease in the equilibrium price and quantity (E1 to E2).

D.

The equilibrium price and quantity both increase. There is a rightward shift in the demand curve (from D1 to D2), and a rise in the equilibrium price and quantity (E1 to E2). E.

The equilibrium price and quantity both decrease. There is a leftward shift in the demand curve (from D1 to D2), and a decrease in the equilibrium price and quantity (E1 to E2). F.

The equilibrium price and quantity both decrease. There is a leftward shift in the demand curve (from D1 to D2), and a decrease in the equilibrium price and quantity (E1 to E2). 10 pts 2) For each of the following changes, show the effect on the supply curve, and state what will happen to market equilibrium price and quantity in the short run. a. The government requires pollution control filters that raise production costs. b. Wages of workers in this industry fall. c. There is an improvement in technology. d. The price of the product falls. e. Producers expect that the price of the product will fall in the future. Answer: A.

There is a leftward shift in the supply curve (from S1 to S2). The equilibrium price increases while the quantity decreases (E1 to E2).

B.

There is a rightward shift in the supply curve (from S1 to S2). The equilibrium price decreases while the quantity increases (E1 to E2). C.

There is a rightward shift in the supply curve (from S1 to S2). The equilibrium price decreases while the quantity increases (E1 to E2). D.

There is a rightward shift in the supply curve (from S1 to S2). The equilibrium price decreases while the quantity increases (E1 to E2). E.

There is a leftward shift in the supply curve (from S1 to S2). The equilibrium price increases while the quantity decreases (E1 to E2).

5 pts 3) Suppose that the demand for oranges increases. Carefully explain how the rationing function of price will restore market equilibrium. Answer: As the demand for oranges increase (rightward shift of the demand curve), the price of the oranges will follow along the curve and increase. At the increased prices, consumers are not as willing to purchase as many oranges, resulting in a surplus of the product (the quantity supplied exceeds the quantity demanded). Producers, having a surplus product, would need to lower their prices to remain competitive in the marketplace, and reduce their inventory of oranges. 5 pts 4) Suppose that the demand for oranges increase. Explain the long -run effects of the guiding function of price in this scenario. Answer: As the demand for oranges increase, prices will rise. Competitors in the marketplace will attempt to bring more oranges into the marketplace (by growing, or importing) to keep up with the demand. New firms may even enter the marketplace. 10 pts 6) For each of the following sets of supply and demand curves, calculate equilibrium price and quantity. a. QD = 2000 - 2P; QS = 2P b. QD = 500 - P; QS = 50 + P c. QD = 5000 - 10P; QS = -1000 + 5P Answer: A. QD = QS 2000 - 2P = 2P 2000 = 4P 2000/4 = P 500 = P QD = 2000 - 2 (500) QD = 2000 - 1000 QD = 1000 B. QD = QS 500 - P = 50 + P 450 = 2P 450/2 = P 225 = P QD = 500 - P QD = 500 - 225 QD = 275 C. QD = QS 5000 - 10P = -1000 + 5P

6000 = 15P 6000/15 = P 400 = P QD = 5000 - 10 (400) QD = 5000 - 4000 QD = 1000 10 pts 7) Industry supply and demand are given by: QD = 1000 - 2P and QS = 3P a. What is the equilibrium price and quantity? b. At a price of $100, will there be a shortage or a surplus, and how large will it be? c. At a price of $300, will there be a shortage or a surplus, and how large will it be? Answer: A. QD = QS 1000 - 2P = 3P 1000 = 5P 1000/5 = P 200 = P QD = 1000 - 2 (200) QD = 1000 - 400 QD = 600 B. The lower price level of 100, there will be a shortage of the good. QD = 1000 - 2 (100) QD = 1000 - 200 QD = 800 QS = 3 (100) QS = 300 S = 800 - 300 S = 500 C. The higher price level of 300, there will be a surplus of the good. QD = 1000 - 2 (300) QD = 1000 - 600 QD = 400 QS = 3 (300) QS = 900 S = 900 - 400 S = 500 10 pts 8) A product's Demand Curve is: Qd = 50 - 2P, and its Supply Curve is: Qs = 40 + P. a. When P = $10, what is the difference, if any, between Qd and Qs? b. When P = $2, what is the difference, if any, between Qd and Qs? c. What are the equilibrium values of P and Q? Answer:

A. The difference between Qd and Qs would be: QD = 50 - 2 (10) QD = 50 - 20 QD = 30 QS = 40 + (10) QS = 50 QD - QS 30 - 50 -20. B. The difference between Qd and Qs would be: QD = 50 - 2 (2) QD = 50 - 4 QD = 46 QS = 40 + (2) QS = 42 QD - QS 46 - 42 4 C.

Qd = Qs 50 - 2P = 40 + P 10 = 3P 10/3 = P 3.333 = P QD = 50 - 2 (3.333) QD = 50 - 6.666 QD = 43.333

10 pts 9) A product's Demand Curve is: Qd = 25 - P, and its Supply Curve is: Qs = 10 + 2P. a. When P = $20, what is the difference, if any, between Qd and Qs? b. When P = $3, what is the difference, if any, between Qd and Qs? c. What are the equilibrium values of P and Q? Answer: A. The difference between Qd and Qs would be: QD = 25 - (20) QD = 5 QS = 10 + 2 (20) QS = 10 + 40 QS = 50 QD - QS 5 - 50 -45

B. The difference between Qd and Qs would be QD = 25 - (3) QD = 22 QS = 10 + 2 (3) QS = 10 + 6 QS = 16 QD - QS 22 - 16 6 C. QD = QS 25 - P = 10 + 2P 15 = 3P 15/3 = P 5=P QD = 25 - P QD = 25 - 5 QD = 20 10 pts 23) The demand curve is: QD = 500 - 1/2 P. a. Calculate the (point) price elasticity of demand when price is $100. Is demand elastic or inelastic? b. Calculate the (point) price elasticity of demand when price is $700. Is demand elastic or inelastic? c. Find the point at which point elasticity is equal to -1. Answer: Price Elasticity of demand =

A.

(ΔQ / ΔP) = .5

(%ΔQ / %ΔP)

Q = 500 - 1/2 (100) Q = 450 .5(100/450) = .11111 The demand is inelastic B

Q = 500 - 1/2(700) Q = 150 .5(700/150) = 2.333 The demand is elastic.

C.

Q = 500 - .5 (500) Q = 500 - 250 Q = 250 .5 (500/250) = 1. The demand is unitary elastic at $500.

Number Of Workers 0 1 2 3 4 5 6 7 8 9 10

Output 0 50 110 300 450 590 665 700 725 710 705

10pts 16) The table above shows the weekly relationship between output and number of workers for a factory with a fixed size of plant. a. Calculate the marginal product of labor. b. At what point does diminishing returns set in? c. Calculate the average product of labor. d. Find the three stages of production. Answer: A. Number Of Workers 0 1 2 3 4 5 6 7 8 9 10

Output

MPL

APL

0 50 110 300 450 590 665 700 725 710 705

0 50 60 190 150 140 75 35 25 -15 -5

0 50 55 100 112.5 118 110.833 100 90.625 78.888 70.5

B. The diminishing returns sets in at 4 workers. C. APL = Q/L D. The three stages of production: Stage 1; up to the point where the APL reaches a maximum: 0-5 Workers Stage 2; where the APL is declining and the MPL is positive. 5-8 Workers Stage 3; where the MPL is negative. 9 and 10 workers.

10pts 17) Based on the table above, if the wage rate is $500 and the price of output is $5, how many workers should the firm hire? Answer:

Number Of Workers 0 1 2 3 4 5 6 7 8 9 10

Output

Wage Rate

Output $

0 50 110 300 450 590 665 700 725 710 705

0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000

0 250 550 1500 2250 2950 3325 3500 3625 3550 3525

The firm should hire 5 workers, as the greatest profit returns are between 4 and 7.

0 -250 -450 0 250 450 325 0 -375 -950 -1475