# 3 PROBLEMS SETS in microeconomics

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3 PROBLEMS SETS in microeconomics

NAME: _________________________________  PROBLEM SET 2

1.  A new plan before Congress to combat obesity has recommended instituting a national tax on fast food.  The demand for such food is thought to be elastic (but not perfectly elastic)

a.  Show the market for fast food before any such tax is put in place.  Identify the producer and consumer surpluses as well as the equilibrium price and quantity (you do not need to calculate these, just show them in your graph).

b.  Show a new graph indicating how this tax would change the market.  Identify which curve shifts, what happens to the price the buyer pays and the price the seller receives.  Additionally, what happens to consumer and producer surpluses, do they go up, down, or stay the same? (see below)

c.  Who would bear the larger portion of the burden of the tax?  Why?

d.  If the original market price prior to the tax was \$2 and the quantity was 500 and after the tax the price the buyer pays is \$2.50, the price the seller receives is \$1.50, and the quantity is 400, what is the size of the dead weight loss?

a.

PART b.

Which curve shifts: _________________________________

Price Buyer Pays (up, down, same):  ____________________

Price Seller Receives (up, down, same):  ____________________

Consumer Surplus (up, down, same):  ____________________

Producer Surplus (up, down, same):  ____________________

c. __________________________________________________________________________

d._________________________________

2.  Pollution is considered by most a negative externality.  Some economists would like to see the costs of these burdens incorporated into the price of goods that we buy.  For instance, since coal fire power plants increase emissions that could potentially lead to climate change, these economists believe that the price we pay for electricity is not adequately high enough.  Draw a completely labeled graph and illustrate on the graph how much higher electricity prices would be if the full costs of electricity production were taken into account.  You do not need to provide actual numbers, rather show on the price axis where the price would be before the externality is considered and the price after the externality is included.  What problems might exist in determining this new, externality based, price?

3.  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) Quantity Supplied (per month) \$3 80 120 \$2.5 120 140 \$2 160 160 \$1.5 200 180 \$1 240 200

\$1.00 - \$1.50: ___________________________________

\$1.50 - \$2.00: ___________________________________

\$2.00 - \$2.50: ___________________________________

\$2.50 - \$3.00: ___________________________________

If the price of graham crackers is \$2.50 should firms raise or lower their prices if they want to increase revenue?  Explain this in terms of elasticity.

4.  The following table presents data for wages in the market for internet security professionals.

 Wage Quantity Demanded Quantity Supplied \$50,000 20,000 14,000 \$60,000 18,000 18,000 \$70,000 16,000 22,000 \$80,000 14,000 26,000 \$90,000 12,000 30,000

What is the equilibrium wage? ___________________________________

Due to an increase in the internet security threats, the government wants to apply a price control in this market to encourage more people to become internet security professionals.  Assume that a wage control is set at \$75,000.  Will this increase the number of people entering this labor market?  Why or why not?  If you answered no, at what wage would you set the price control?  What is the consequence of doing this?

5.  In the old days lighthouses were built along the coast to prevent ships from running aground on rocks in unfamiliar ports.  By shining a beam of light over a port and guiding ships away from rocks, these vital buildings reduced the risk for ship captains and were generally considered to be extremely valuable resources.  Curiously, lighthouses were almost always run and maintained by local governments.

Based on what you have learned this week explain in economic terms why private firms would not run a lighthouse?

NAME: _________________________________________________  PROBLEM SET 3

1.  What is diminishing marginal productivity?  Why does it exist?  Provide a real world example of this and a live link to an internet source.  (In other words, don’t use an example from the text, find an example of your own.)

2.  Complete the following table.  What output is the profit maximizing level of output.  Using proper economic terminology why is this the case?

 Output Price Total Revenue MR TVC AVC TFC AFC TotalCost ATC MC 0 10 0 \$0 \$100 1 10 10 \$100 160 2 10 20 100 \$100 3 10 30 125 \$100 4 10 40 140 \$100 5 10 50 250 6 10 60 170 \$100 7 10 70 200 \$100 8 10 80 340

MR = Marginal Revenue

TVC = Total Variable Cost

AVC = Average Variable Cost

TFC = Total Fixed Cost

AFC = Average Fixed Cost

ATC = Average Total Cost

MC = Marginal Cost

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 a completely labeled graph to help you explain the shut down decision.  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 be a written explanation of your graph.)

4.  Monopolies can sometimes find themselves in difficult financial situations that lead to losses.  Suppose Mr. Burns’ power company has a monopoly for providing electricity in Springfield.  His costs of upkeep are so high that he is persistently losing money.  Show this outcome in a completely labeled graph.  Clearly identify all parts of your graph including the best price and output for the firm as well as the losses.

1. What happens to the market when Mr. Burns raises the price he charges?
2. Will this stop his losses?  Why or why not?

5.  Movies are distributed in a variety of forms, not just first run theatrical presentations.  What other ways are movies distributed? (HINT:  Distribution has nothing to do with how old a movie patron is.)  What are the different price points?  Using this information, draw a fully labeled graph of the market for movies in which the distributor of the film price discriminates.  (NOTE:  This should not be perfect price discrimination.)

NAME  : _________________________________  PROBLEM SET 4

1.  What combination of the two goods below allows you to maximize your utility with a budget constraint of \$14?  Show how you arrived at your conclusion in the space provided below.  Place your final answers on the lines at the bottom of this page.

PRICE = \$0.50 per pint

 Pints of Butter Beer Total Utility (Utils) 1 15 2 23 3 30 4 35 5 38 6 40.5

PRICE = \$2.00 per box

 Boxes of Bertie Botts Every-flavor Beans Total Utility (Utils) 1 10 2 22 3 36 4 52 5 70 6 90

Pints of Butter Beer: _________________________

Boxes of Beans: ____________________________

2.  Assume the following game is played one time only.  Based on the information in the payoff matrix, PNC Bank and Citizens Bank are considering an implicit collusive agreement on interest rates.  Payoffs to the two firms are represented in terms of profits in thousands of dollars:

 Citizens Bank Collude: Raise Rates Defect: Keep Rates where they are PNC Collude: Raise Rates (900, 600) (700, 800) Defect: Keep Rates where they are (1100, 300) (800,400)

a.  Does PNC have a dominant strategy?  What is it?  Does Citizens have a dominant strategy?  What is it?

b.  Solve for the Nash equilibrium.

c.  Does the result of your answer change if the game is played an infinite number of times?  Why or why not.  Properly use game theoretic terminology in your answer.

3.  Suppose that the national four-firm concentration ratio in NAICS code 7131102 is 71.8. What is NAICS code 7131102, and should authorities be concerned about the exercise of monopoly power based on that 71.8 figure? Explain your answer.  (You will need to find the NAICS title for industry code 7131102 to answer this question.  Yes, you can find it on the internet.)

4. Illustrate in a fully labeled graph the market for information security specialists.  Show the market equilibrium wage and quantity (you may just note this in your graph with a “w” and “q” or you may make up a price and amount).  Due to a recent increase in the number of cyber attacks from unfriendly nations firms and the U.S. government are trying to hire more people to help protect their information.  Assuming it takes a few years to adequately train someone to protect this information, what would you expect to see happen to price and quantity in this market?  Show this change in your graph.

PROBLEM SET 1 micro s2014.doc

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