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    Econ Study Guide

    Uploaded by

    Zach Salisbury
    This document contains 6 practice questions about microeconomics concepts including: 1) A firm operating at a loss should contract output to maximize short-run profits. 2) When analyzing utility maximization, the marginal utility of additional consumption should be zero. 3) For a pizza shop operating at different market prices, profit maximizing output and profits can be determined by analyzing revenues and costs.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Econ Study Guide

    Uploaded by

    Zach Salisbury
    141 views2 pages
    This document contains 6 practice questions about microeconomics concepts including: 1) A firm operating at a loss should contract output to maximize short-run profits. 2) When analyzing utility maximization, the marginal utility of additional consumption should be zero. 3) For a pizza shop operating at different market prices, profit maximizing output and profits can be determined by analyzing revenues and costs.

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    Econ study guide

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    This document contains 6 practice questions about microeconomics concepts including: 1) A firm operating at a loss should contract output to maximize short-run profits. 2) When analyzing utility maximization, the marginal utility of additional consumption should be zero. 3) For a pizza shop operating at different market prices, profit maximizing output and profits can be determined by analyzing revenues and costs.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    141 views2 pages

    Econ Study Guide

    Uploaded by

    Zach Salisbury
    This document contains 6 practice questions about microeconomics concepts including: 1) A firm operating at a loss should contract output to maximize short-run profits. 2) When analyzing utility maximization, the marginal utility of additional consumption should be zero. 3) For a pizza shop operating at different market prices, profit maximizing output and profits can be determined by analyzing revenues and costs.

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    © All Rights Reserved
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    Tutorials- Ch14

    1. In a perfectly competitive industry, the market price is $10. An individual firm is producing the output at which
    MC = ATC = $15. AVC at that output is $9. What should the firm do to maximize its short-run profits?
    a. Expand output.
    b. Leave output unchanged.
    c. Contract output.
    d. Shut down.
    e. Insufficient information to answer.

    2. You go out to the best restaurant in town and order a lobster dinner for $40. After eating half of the lobster, you
    realize that you are quite full. Your date wants you to finish your dinner, because you can’t take it home and because
    “you’ve already paid for it.” What should you do? Relate your answer to the material in this chapter.

    3. Luigi’s Pizza is a price taker. It has fixed costs of $20 per day and its variable costs are given below:

    Output Total
    (pizza per Variable
    day) Cost
    1 38
    2 48
    3 62
    4 80
    5 102
    6 128

    a. What is Luigi’s break-even price? What is Luigi’s shut-down price? Show your work.

    b. Suppose that the market price of pizzas is $25. What is Luigi’s profit maximizing output? What is his
    profit?

    c. Suppose that the market price of pizzas is $21. What is Luigi’s profit maximizing output? What is his
    profit?

    d. Suppose that the market price of pizzas is $18. What is Luigi’s profit maximizing output? What is his
    profit?

    e. Draw a diagram of Luigi’s AVC, ATC and MC functions and show the output level at the above prices on
    your diagram (you can draw the standard cost curves, use the above information to depict the min points of
    AVC and ATC curves).

    4. Bob’s lawn-mowing service is a profit-maximizing, competitive firm. Bob mows lawns for $27 each. His total
    cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day. What can you say about Bob’s
    short-run decision regarding shutdown and his long-run decision regarding exit?

    5. In 2003, a single case in Alberta of bovine spongiform encephalopathy, also known as mad cow disease,
    temporarily shut down export markets for Canadian beef.

    a. Using firm and industry diagrams, show the short-run effect of declining demand for Canadian beef due to
    the shutdown of its export markets. Label the diagram carefully and write out in words all of the changes
    that you can identify.

    b. Although export markets eventually began to open up later that same year, the demand for Canadian beef
    remained low. On a new diagram, show the long-run effect of the declining demand. Explain in words.
    6. Suppose there are 1000 hot-pretzel stands operating in Toronto. Each stand has the usual U-shaped average-
    total-cost curve. The market demand curve for pretzels slopes downward, and the market for pretzels is in long-run
    competitive equilibrium.

    a. Draw the current equilibrium, using graphs for the entire market and for an individual pretzel stand.

    b. Now the city decides to restrict the number of pretzel-stand licenses, reducing the number of stands to only 800.
    What effect will this action have on the market and on an individual stand that is still operating? Use graphs to
    illustrate your answer.

    c. Suppose that the city decides to charge a license fee for the 800 licenses. How will this affect the number of
    pretzels sold by an individual stand, and the stand’s profit? The city wants to raise as much revenue as possible and
    also wants to ensure that 800 pretzel stands remain in the city. By how much should the city increase the license
    fee? Show the answer on your graph.

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