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The first principle of economics discussed in Chapter 1 of Mankiw's book is that people face trade-offs. Use a production possibilities frontier to illustrate society's trade off between two "goods"-a clean environment and the quantity of industrial output. What do you suppose determines the shape and position of the frontier? Show what happens to the frontier if engineers develop a new way of producing electricity that emits fewer pollutants.
Suppose the cross-price elasticity of demand between goods X and Y is -5. How much would the price of good have to change in order to change the consumption of good by 50 percent?
Explain the water-diamond paradox using
the basic principles of Economics.
A locomotive producer’s demand function is P1 = 18 – 0.6Q for price increases and
P2 = 20 - 0.8Q for price decreases. The marginal cost is constant and equal to 5.
a. What price is the firm now charging and how much output is being produced?
b. If marginal cost increase to 6, how much would the firm produce?
c. If marginal cost decreases to 3, how much would the firm produce?
EnviroWest can produce recycle paper at a constant marginal cost of $1.5 per pound. Currently, the firm is selling 500,000 pounds each year at $2.00 per pound. This is the price charged by all other firms in the industry. Managers of EnviroWest are considering increasing the price to $2.5 per pound. Demand elasticity is constant and equals –0.6 if the price increase is matched by competitors and –4.0 if it is not matched. Management believes there is a 60 percent chance that other firms will follow EnviroWest's lead and increase their prices.
a/ If managers are risk neutral, should the proposed price change be implemented? Explain
b/ Write equation for the expected profit as a function of the probability that the price increase will be matched by the other firms.
Unique Motor Inc. manufactures motorcycles that are sold in a monopolistically competitive market. The firm’s demand curve is
P = 5,000 – 2Q
Where P is price and Q is quantity and the average cost (AC) function is
AC = 6,000 – 4Q + 0.001Q2
All firms in the industry have the same demand and average cost functions. If the entry or exit of firms in the industry results in the demand curve shifting in a parallel manner, what is the long-run equilibrium price and quantity produced for Unique( and, of course, for each of the other firms in the industry)?
The market demand and supply functions for an electronic typewriter are
QD = 20,000 – 10P
QS = 10,000 + 20P
Western Electronics Inc. is one of many firms in this perfectly competitive industry. Its marginal and average cost functions are
MC = 10 + 2Q
AC = (1,000/Q) + 10 + Q
a/ What is the profit-maximizing output rate for Western?
b/ How much economic profit will be earned at that rate of output?
Midland Power and Light is the only seller of electricity in the area. The demand function facing the firm is Q = 250 – 0.5P
Where Q is quantity demanded and P is price. The firm total cost function is
TC = 100 – 10Q + 0.5Q, and the marginal cost is MC = -10 + Q
a/ Determine the profit-maximizing price and output rate for Midland.
b/ Determine the cost per unit, profit per unit, and total profit.
Alpha Pharmaceuticals has a patent on a new medication used to treat high blood pressure, so it is the monopoly seller of this new drug product. The marginal cost of producing one dose of the drug is R10, and the elasticity of demand for the product is -3. What is the profit maximising monopoly price for this patented drug product
Bridge Coal Company is the only employer in a remote and mountainous region of the country, so the firm is the monopsony buyer of labor in the market. If the price of coal increases, then the firm's
