ECN 211 Study Guide - Economic Equilibrium, Price Ceiling, Broccoli

PLEASE HELP WITH ONLY THE BOLDED QUESTION THANK YOU

Consider the market for new, single-family homes in New Orleans. The general demand function for new housing in New Orleans is estimated to be Qd =15-2P+0.05M+0.10R where Qd is the monthly quantity demanded, P is the price per square foot, M is average monthly income in New Orleans, and R is the average monthly rent for a three-bedroom apartment in New Orleans. Qd is measured in units of 1,000 square feet per month. 1. New housing in New Orleans is a(n) __________________ (normal, inferior) good. How can you tell from the general demand function? 2. New housing and three-bedroom apartments are _________________ (substitutes, comple- ments) in New Orleans. How can you tell from the general demand function? 3. If average monthly income is $1,500 and the monthly rental rate for three-bedroom apart- ments is $700, then the demand function for new housing in New Orleans is Qd = _____________________________________. 4. Graph the demand curve for new housing in New Orleans on the axes provided below. Label the demand curve D0. 5. What happens to demand when the following changes occur? a. b. c. d. e. The price of the commodity rises. Income decreases and the commodity is normal. Income decreases and the commodity is inferior. The price of a complement good increases. The price of a substitute good decreases. The general supply function for new housing in New Orleans is estimated to be Qs =96+2P-10PL -4PK where P is the price per square foot of new housing in New Orleans, PL is the average hourly wage rate for construction workers, and PK is the price of capital (as measured by the average rate of interest paid on loans to home builders). Qs is measured in units of 1,000 square feet per month. 6. Does it make sense for PL and PK to have negative coefficients in the general supply func- tion? Explain why or why not. 7. If the average hourly wage rate for construction workers is $10 per hour and the average rate of interest on loans to builders is 9 percent (i.e., PK = 9), then the supply function for new housing is Qs = ______________________. 8. Graph the supply curve for new housing in the graph below. Label supply S0. 9. Other things remaining the same, what would happen to the supply of a particular commodity if the following changes occur? a. The price of the commodity increases. b. Government regulators outlaw the use of a technology that enables the good to be produced at a significantly lower cost. c. The prices of inputs used to produce the commodity decrease. d. The price of a commodity that is a substitute in production increases. e. Managers expect the price of the good to fall in the near future. f. As the cost of capital rises, firms in the industry stop purchasing plant and equip- ment, which allows depreciation to diminish the productive capacity in the indus- try. 10. Solve mathematically for equilibrium price and quantity. Show your work: PE = $__________ per square foot. QE = __________ square feet per month (in 1,000s). 11. Do your supply and demand curves intersect at PE and QE found in question 8 above? Should they? 12. In equilibrium found in question 8, compute total consumer, producer, and social surpluses: CS = $____________ PS = $____________ SS = $____________ 13. Suppose New Orleans suffers a serious recession that causes average monthly income to fall from $1,500 to $1,100 per month. If other things remain the same, the demand for new hous- ing in New Orleans is now: Qd = _______________________. Plot this new demand curve in the figure below. Label it D'. 14. Suppose that because of the recession in New Orleans, the wage rate for construction workers falls to $8 per hour. If other things remain the same, the supply of new housing in New Orle- ans is now: Qs = _______________________. Plot this new supply curve in the figure. Label the new supply curve S'. 15. After income falls to $1,100 and wages fall to $8, new equilibrium price and quantity are PE = $__________ per square foot QE = __________ square feet per month (in 1,000s) 16. Determine the effect upon equilibrium price and quantity sold if the following events occur in a particular market: a. The price of a substitute good (in consumption) decreases. b. Consumers’ income increases and the good is inferior. c. Government regulators decide to outlaw a cost-reducing technological process in order to protect the environment. d. The price of a complement good (in production) increases. e. The price of inputs used to produce the good decrease. f. Consumers expect that the price of the good will fall in the near future. g. It is widely publicized that consumption of the good is helpful in prevent- ing cancer. h. The price of a substitute good (in production) decreases. 17. Suppose that a pair of events from problem 15 occur simultaneously. For each of the pairs of events indicated below, perform a qualitative analysis to predict the direction of change in either the equilibrium price or the equilibrium quantity. Explain why the change in one of these two variables is indeterminate. a. Both a and h in problem 15 occur simultaneously. b. Both b and e in problem 15 occur simultaneously. c. Both d and g in problem 15 occur simultaneously. d. Both f and c in problem 15 occur simultaneously.

1. The Houston Chronicle reported that in Houston, the average price of new homes has decreased, while at the same time, the number of new homes sold has increased. This situation could be explained by which one of the following: (draw curves before answering)

1. An Increase in demand
2. An Increase in supply
3. A Decrease in demand
4. A Decrease in supply

2. In another market, the average price of new homes fell, while at the same time, the number of new homes sold decreased. The situation would best be explained by (Draw the curves before answering)

1. An Increase in Demand
2. An Increase in Supply
3. A Decrease in demand
4. A Decrease in supply

3. A consumer is said to have achieved maximum total utility when:

1. Purchases of Good A give the same satisfaction as purchases of Good B.
2. Purchases of the last dollar spent on Good A give the same satisfaction as purchases of the last dollar spent on Good B.
3. The average purchases per dollar of Good A give the same satisfaction as the average purchases per dollar of Good B.
4. The total utility derived from Good A is the same as the marginal utility derived from Good B.

4. You are given the following information about a firm's present output position: MPP (Marginal Physical Product) of Land = 12; MPP of Labor = 16; Price of Land = $2; Price of Labor = $4. With no additional money to spend, this firm should:

5. A firm achieves the least cost in production by substituting factors until

1. their factor prices are equal
2. their marginal products are equal to the factor prices
3. their marginal products are each equal to zero
4. the ratios of their marginal product equal the ratio of their prices
5. none of the above

6.The economy is currently on its production possibilities frontier (PPF). A politician says that it is possible to get more of everything--more infrastructure, more schools, more national defense, more spending on social programs, and so on. The politician is

1. correct if he is assuming a rightward-shifting PPF.
2. incorrect if he is assuming a rightward-shifting PPF.
3. correct if he is assuming a PPF that does not change.
4. none of the above

7. Assume your swimsuit business is at its maximum profit position, and one new change occurs: consumer incomes decrease. If swimsuits are normal goods, the equilibrium price of swimsuits will __________, and the CONSUMER surplus will ________.

1. increase, increase
2. decrease, decrease
3. increase, decrease
4. decrease, increase

8. Firms that shuts-down in the short-run still must pay:

1. Marginal cost
2. Variable cost
3. Fixed cost
4. Total cost

9. The term externalities refer to:

1. Black-market economic activity.
2. The impact on markets of imported goods.
3. The costs and benefits of a market activity borne by a third party.
4. The inequitable distribution of income.

10. If full external costs are not internalized, firms will tend to allocate more of society's scarce resources to produce than is societally warranted, and if full external benefits are not internalized, firms will allocate less of society's resources to produce than is societally justified. True/False.

11. Joe was very careful about smoking in his home until he bought a fire insurance policy. After buying the policy, he became careless. His attitude is: "I'm insured. What do I care if this place burns down; I'll just collect the money". Joe's attitude is an example of ______________.

12. Megatrust Bank had historically scrutinized loans very carefully and extended them, only to persons whom they considered very creditworthy. They made relatively few loans. However, after the government provided guarantees to sub-prime loans, Megatrust relaxed its standards and increased its loan volume. (And its default rate as well.) This is an example of _______________.

13. In the short-run, if a perfectly competitive firm finds itself operating at a loss, it will

1. Reduce the size of its plant to lower fixed costs.
2. Raise the price of its product.
3. Shut down.
4. Continue to operate as long as it covers its variable cost.

14. If income today is more equally distributed than it was in 1960, a Lorenz Curve depicting today's distribution would be

1. More bowed and to the left of the 1960's curve.
2. More bowed and to the right of the 1960's curve.
3. Less bowed and to the left of the 1960' curve.
4. Less bowed and to the right of the 1960's curve.

15. Which of the following statements is true?

1. As output increases, the average fixed cost becomes smaller and smaller.
2. Average fixed cost does not change as output increases.
3. The marginal cost curve intersects the average fixed cost curve at its minimum point.
4. When marginal cost is greater than average fixed cost, average fixed cost increases.
5.  

16. A firm in any of the market structures we have studied will maximize its profit (or minimizes its loss) when its

1. Average costs are at a minimum
2. Marginal revenue and marginal cost are the same.
3. Marginal revenue is less than marginal cost.
4. Marginal revenue is zero.

17. If the demand for a good increase, when the price of other good increases, these goods are

1. Capital goods
2. Substitute goods
3. Complementary goods
4. Luxury goods

18. Which of the following pairs of products are complementary goods?

1. mobile phones and laptops
2. pens and pencils
3. sugar and artificial sweeteners
4. radios and television
5. toothbrushes and toothpaste

19. The amount of a good that is given up to produce another good is:

1. Scarcity
2. Specialization
3. Opportunity cost
4. Trade
5. Efficiency

20. The most important characteristic of the equilibrium price is that it:

1. Guarantees that producers earn a profit.
2. Increases the quantity demanded.
3. Clears the market.
4. Decreases the quantity supplied.

21. Rank the following market structures based on the number of participating firms: From the fewest number of firms to the most number of firms:

1. Oligopoly
2. Perfect Competition
3. Monopoly
4. Monopolistic Competition

22. If firms in a monopolistically competitive market are earning economic profits which of the following scenarios would best reflect the change facing incumbent firms as the market adjusts to its new equilibrium?

1. an increase in demand
2. a decrease in demand
3. a downward shift in their marginal cost curve
4. an upward shift in their marginal cost curve

23. If labor in Mexico is less productive than labor in the United States in all areas of production, 

1. neither nation can benefit from trade
2. Mexico can benefit from trade but the United States cannot
3. Mexico will not have a comparative advantage in any good
4. both nations can benefit from trade

24. Which of the following statements is false?

1. The typical monopolistically competitive firm could reduce its average total cost if it produced more output.
2. Monopolistically competitive firms advertise to increase the elasticity of the demand curve they face.
3. Expensive advertising might help consumers if it is a signal that the product is good.
4. Brand names acquired at great cost might help consumers by assuring quality.

25. Suppose the state of Wyoming passes a law that increases the tax on cigarettes. As a result, smokers who live in Wyoming start purchasing their cigs in surrounding states. Which of the following principles does this best illustrate:

1. people respond to incentives
2. rational people think at the margin
3. a trademark can make everyone better off
4. markets are usually a good way to organize economic activity

1 an imperfect market, individual firms