1. This question deals with demand and supply and refers you to the table below:
a. Given the table, respond to the questions below. It may be helpful to graph the data as you respond to the questions.
Price Quantity Demanded/Month Quantity Supplied/Month
5 6,000 10,000
$4 8,000 8,000
$3 10,000 6,000
$2 12,000 4,000
$1 14,000 2,000
b. What is the equilibrium price and equilibrium quantity?
c. Suppose the price is currently at $5. What problem would exist in the economy? What would you expect to happen to price?
d. Suppose the price is currently $2. What problem exists in the economy? What would you expect to happen to price?
2. You own a small town movie theatre. You currently charge $5 per ticket for everyone who comes to your movies. Your friend who took an economics course in college tells you that there may be a way to increase your total revenue.
Given the demand curves shown, answer the following questions.
a. What is your current total revenue for both groups?
b. The elasticity of demand is more elastic in which market?
c. Which market has the more inelastic demand?
d. What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is this elastic or inelastic?
e. What is the elasticity of demand between $5 and $3 in the children’s market? Is this elastic or inelastic?
f. Given the graphs and what your friend knows about economics, he recommends you increase the price of adult tickets to $8 each and lower the price of a child’s ticket to $3. How much could you increase total revenue if you take his advice?
3. Describe the difference between average revenue and marginal revenue. Why are both of these revenue measures important to a profit-maximizing firm?
4. Explain how a firm in a competitive market identifies the profit-maximizing level of production. When should the firm raise production, and when should the firm lower production?
5. In many countries, the government chooses to "internalize" the monopoly by owning monopoly providers of goods and services. (In some cases these firms are "nationalized" and the government actually buys or confiscates firms that operate in monopoly markets). What would be the advantages and disadvantages of such an approach to ensuring the "best interest of society" is promoted in these markets? Carefully explain your answer.
6. In many college towns, private independent bookstores typically locate on the periphery of the college campus. However, in some college towns, the University has used political power to restrict private bookstores near campus through community zoning laws. Use your knowledge of markets to predict the price and quality of service difference in the market for college textbooks under these two different market regimes.
7. Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade patterns, absolute advantage or comparative advantage? Why?
8. How does an import quota differ from an equivalent tariff?
9. Describe the difference between a diminishing marginal product of labor and a negative marginal product of labor. Why would a profit-maximizing firm always choose to operate where the marginal product of labor is decreasing (but not negative)?
10. The National Collegiate Athletic Association (NCAA) has long argued that nationally-prominent college athletes are compensated with an investment in human capital that far exceeds the monetary reward of playing professional sports. Examine this argument in light of your knowledge of human capital theory and the economic theory of labor markets.
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