## What, in general, does elasticity measures?

Microeconomics 2302 questions for Exam 2

1.Elasticity

question 1

a.What, in general, does elasticity measures?

b.Who might care about the price elasticity of demand and why?

c.Who might care about the price elasticityof supply and why?

d.Who might care about the cross elasticity of demand and why?

e.Who might care about the income elasticity of demand and why?

f.The formula to calculate the coefficient of elasticity of demand is (percentage change in quantity demanded of product X) / (percentage change in the price of product X). If your boss tells you she is planning a price increase in product X and wants to know how many units will be purchased after the price change, does the formula give you enough info to answer the question? If yes, why? If no, why not?

i.Think about what the formula really says.

ii.Can you as the analyst actually collectall the information required to calculate the answer?

iii.To what degree does it give you information about what might happen in the future?g.List and explain allthe measures of elasticity that were coveredin the slides, including Elasticity of Demand, Supply, Income, and Cross Elasticity of Demand.

i.Please refer to the slides and audio to prepare this answer. Elasticity of demand and supply should both have 5 interpretations of Elasticity. Income Elasticity should have 2 interpretations, and Cross Elasticity of Demand should have 3.

2.Elasticity question 2

a.Total Revenue Testi.Explain the Total Revenue Test ii.Explain the Total Revenue Test,

iii.How might the info help the firm make better decisions?

b.List and explainin detail,the determinants of price elasticity of demandand give 2 examples for each one (do not use examples from the slides).

c.Relative to Elasticity of Supply, please explain the importance of time to the tomato farmer discussed in the slides and audio.How does time impact elasticity and the input utilization choicesavailable to the tomato farmer? Please review the slides and listen to the lecture before you answer this question.

d.Cross elasticity of demand

i.Explain what cross elasticity of demand actually tells us

ii.Explain why a PepsiCo Executive would benefit from understanding cross elasticity of demand and elasticity of demand when evaluating a recommendation tolower the price of Doritos.

iii.How does understanding cross elasticity of demand and elasticity of demand support better decision-making?

e.Explain why an Analyst working for the Anti-Trust Division of the Justice Dept. (what is the job of the Anti-Trust Division of the Justice Dept.?) would benefit from understanding cross elasticity of demand when evaluating the proposed merger of Coca Cola Company and Pepsi.

i.How does understanding cross elasticity support better decision-making by the analyst?

3.Cost of Production 1

a.Explicit and implicit costs.

i.Explain the difference between explicit costs and implicit costs.

ii.Explain who would care about them and why.

b.The production function.i.What does the production function tell us?

iii.What information would you needif you were asked to construct your company production function? iv.What departmentswould you call to get that infoand why? (look at the organization chart of a typical business to get some insight into this.)

.c.Short Run Production Relationships

i.List and explain each of the 3 Short Run Production Relationships

discussed in the slidesand audio,

ii.Explain who in a business would care about eachof them and explain how each might be used. 4.Cost of Production 2

a.Law of DiminishingReturns.

i.Explain the Law of Diminishing Returns, including the assumptions.

ii.Explain how understanding that law might help a business manager make better business decisions.

b.Short run production costs. There are 7 of these. Please review the slides and lecture to prepare your answer

.i.Explain each of the short run production costs

.ii.Explain how a business manager might use each of them.

c.Long Run ATC Please focus on the slides and audio to get the storyonthis.

i.What does the Long Run ATC tell us?

ii.Explain how the long run ATC curve is derived.

iii.Explainhow understanding that concept mighthelp a business manager make better decisions.

iv.Where along the LRATC would a firm want to operate and why?

d.Economies of Scale

i.Explain economies of scale, constant returns to scale, and dis-economies of scale.

ii.Explain howunderstanding eachof theseconcepts might help a business manager improve their decision-making.

5.For the Pure Competition Market Structure1

a.List and explaineach ofthe characteristics of pure competitionand why we study that market structure.

b.Listand explain the 3 decision process questions confronting the producer in pure competition.

i.Please refer to the slide that discusses the 3 decision process questions under the total revenue total cost approachand listen to the audio to prepare your answer.

.c.From the point of view of the business manager, explain the Total Revenue Total Cost approach to determining the profit maximizing level of output for the purely competitive firm, and how that info can help a business manager

.i.Please refer to the Total Revenue Total Cost Approach slide and the audio to prepare your answer. 6.For the Pure Competition Market Structure2

a.List and explain the three characteristicsof the MR-MC approach

to determining the profit maximizing output and price for the purely competitive firm.

i.Please refer to the slide that discusses short run profit maximization Key Rule regarding the MC –MR approach and the audio to prepare the answer.

b.From the point of view of the business managerof a purely competitive firm in the short run, please explain the steps involved in using the MR MCapproach to determining the firm’s:i.optimal level of output,

ii.the corresponding price,

iii.if the firmhas achieved a maximum profit,

iv.if the firm has achieved a minimum loss, or

v.if the firm has achieved a shut-downcondition. Please include the roles of ATC and AVC.7.You are a business manager working for a firm in a purely competitive market and you just hired a summer intern who does not understand how to derive the firms’ short run supply curve from the firms’marginal cost curve.

a.Please explain to the intern how the short run supply curve is derivedfrom the firm’s marginal cost curve.Be specific

b.Please explain to the intern the characteristics of long run equilibrium of a purely competitive firmand how operating in a purely competitive market might impactthe decision-making of the firmin the long run. Please include the implications of long-run equilibrium for productive and allocative efficiency

i.Please refer to the slides and audio to prepare the answer. Please include the 3 assumptions, as well as the implications for economic profit, productive efficiency and allocative efficiency.

8.For the Pure Monopoly Market Structure1a.List and explain the characteristics of pure monopoly andhow theydiffer from the characteristics of thepure competition market structure.

b.List and explain how a monopolist would use each of the barriers to entry and include how using that barrier would actually accomplish the monopolists’ objective. Be specific.

c.You are a business manager and you are considering lowering the price of your product. How will knowing where your firm is currently operating on its demand curve help you make a sound business decision?

1.Please refer to the slides and audio to prepare your answer. The monopoly revenue and cost slide should help.9.For the Pure Monopoly Market Structure2

a.For the monopolist, using the MR MC approach, please explain in detail the steps required to determine

i.The firm’s optimal level of output.

ii.The firm’s product price that would correspond to that optimal level of output.iii.Ifthefirm has achieved maximum profitiv.If the firm has achieved minimum profit Be sure you explain the roles of ATC and AVC.

b.You are employed by a firm with monopoly power. The boss wants to increase profits.

i.Explain the power of price discrimination to your boss.

ii.Explainthe requirements and assumptions for successfully implementing this approach.

iii.Explain 2 things that would prevent this approach from being successful.

c.You work for the government in the department that is responsible for dealing with Monopoly issues(the Antitrust Division of the Justice Dept.). Please read through the slides, listen to the audio lectures, then:

i.Explain the dilemma of regulation.

ii.List and explain each of the 3 options covered in the lecture, along with the impact of each option the monopoly firm and the customers.iii.Pick one of the options and explain why you picked it.

10.For the Monopolistic Competition Market Structure

a.List and explain the characteristics of monopolistic competition

and compare them to the characteristics of pure competition and monopoly.

i.Please discuss monopolistic competition, list and explain the characteristics.

b.Product differentiation

i.List and explain the characteristics of product differentiation.

ii.Provide 3 examples of companies actually using these

product differentiation techniquesand how they are using them.

iii.Explain the impact that product differentiation technique had on the firms’ performance.

c.You are a business manager at a monopolisticallycompetitive firm. Please explain to one of your newly hired workers how to determine the following:

i.the optimal level of output?

ii.the price that corresponds to that optimal level of output?

iii.if the firm has achieved maximum profits?

iv.if the firm as achieved minimum losses? Please

include the roles of ATC and AVC.

11.For the Oligopoly Market Structurea.List and explain the characteristics of oligopoly

and compare them to the characteristics of the other 3 market structuresusing a grid.

b.Explain which oligopoly modelbest lends itself to the use of the MR MCapproachand why.

c.Explain in detail the steps required to determine the optimal level of outputfor the oligopoly market structure model that best lends itself to the use of the MR MCapproach.

d.Explain in detail the steps required to determine the product price that corresponds to that optimal level of output.

e.Explain in detail the steps required to determine if maximum profit or minimum losses have been achieved. Be sure you include the role of ATC and AVC.

f.You work for a firm that is a member of an oligopoly market. Explainin detailthe issues of collusion

and why collusion would be attractive to those firms.

g.You work for a firm that is a member of an oligopoly market. Explain game theory and how the firm might use this tool to achieve its business goals

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