ECO 2302 Brookhaven College Microeconomics Problems

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Economics

ECO 2302

Brookhaven College

ECO

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2302 Unit 2 Problem set

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  1. You are running for President of the United States. One of your promises to the American people is cheaper gas if you are elected. You win. To keep your promise to make gas cheaper you impose a price ceiling that is one full dollar less than the market’s equilibrium price.
    1. What would be the reaction of the sellers of gasoline and of the public to the price ceiling law? Thoroughly explain and define any terms.
    2. Draw a graph showing the price ceiling. Label the consumer surplus and the producer surplus
    3. Would you expect to be reelected in the long run? Explain
  2. Is it possible for a firm to experience both economies of scale and diminishing marginal product at the same time? Explain and define any terms used.
  3. The accompanying table outlines the explicit and implicit costs incurred by a small graphic design company in France that takes in annual revenues equal to $250,000.
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Explicit Costs


Office Rent

$2,000/month

Utilities

$200/month

Computers

$1,000/month

Labor

$5,000/month

Implicit Costs

Forgone Wages

$55,000/year

Forgone Interest on Initial Investment

$5,000/year

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a. What would this company’s accounting profits equal for a year? Explain

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b. What would this company’s economic profits equal for a year? Explain

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c. What would we expect to happen in the long run for this market? Why? Explain

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  1. In the short run, Cat World Treats is selling cat treats in a purely competitive market. Its output is 800 treats, which it sells for $10 a treat. At the 800-treat level of output, the marginal cost is $10, the average total cost is $9.00, and the average variable cost is $8.00.
    1. Is the firm producing at its optimal level of output? Why or Why not? Explain
    2. Should Cat World Treats continue to produce in the short run or should they shut down? How do you know? Explain and be sure to include a graph in your answer.

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Explanation & Answer

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Running Head: UNIT 2 PROBLEM SET

1

Unit 2 Problem Set
Institutional Affiliation
Date

UNIT 2 PROBLEM SET

2
Unit 2 Problem Set

1. You are running for President of the United States. One of your promises to the
American people is cheaper gas if you are elected. You win. To keep your promise to
make gas cheaper you impose a price ceiling that is one full dollar less than the
market’s equilibrium price.
a. What would be the reaction of the sellers of gasoline and of the public to the
price ceiling law? Thoroughly explain and define any terms.
The gasoline sellers will supply little gasoline amount in the market and some traders will
be unable to continue with the business and shut down because of low prices. In turn, this will
result in gas shortage in the US market due to inadequate supply of gas. The US public will be
happy and enjoy the low gas prices at first when the supply is still sufficient, but in the long run,
they will suffer from the consequences of the law since they wound be able to get the gas in the
market even when the prices are low due to inadequate supply.
Definition of terms
Price ceiling: This is the enforcement of the price under the equilibrium price and its impacts
result in to decrease in the level of supply as the demand level escalates.
Shortage: It refers to the situation where the supply levels are low and...


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