Economics Answers

Question2:

Widgets are provided by a competitive constant-cost industry where each firm has fixed costs of $30. The following chart shows the industry-wide demand curve and the marginal cost curve of a typical firm:

Industry-Wide Demand// Firm’s Marginal Cost Curve
Price- Quantity / Quantity- Marginal Cost
$5 - 1500 / 1 - $5
10 - 1200 / 2 - 10
15 - 900 / 3 - 15
20 - 600 / 4 - 20
25 - 300 / 5 - 25
30 - 200 / 6 - 30
35 - 140/ 7 - 35
40 - 50 / 8 - 40

a.What is the price of a widget?

b. How many firms are in the industry?
For the remaining four parts of this question, assume that the government imposes an excise tax of $15 per widget.
c. In the short run, what is the new price of widgets?
d. In the short run, how many firms leave the industry?
e. In the long run, what is the new price of widgets?
f. In the long run, how many firms leave the industry?

Question3:
a. Consider public policy aimed at smoking;
i. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs $2 and the government wants to reduce smoking by 20 percent, by how much should it increase the price?

ii. Studies also find that teenagers have higher price elasticity than do adults. Why Might this be true?

b. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:

*Price Quantity Demanded: $200 -$250-$300.
* Quantity demanded (business travelers): 2,000 tickets - 1,900 tickets - 1,800 tickets.
* Quantity demanded (vacationers): 800 tickets - 600 tickets - 400 tickets.

As the price of tickets rises from $200 and $250, what is the price elasticity of demand for;
(i) Business travellers and (ii) vacationers? (Use the midpoint method in your calculations)

ii. Why might vacationers have a different elasticity from business travellers?

A firm in a purely competitive industry is currently producing 1,000 units per day at a total cost of $450. If the firm produced 800 units per day, its total cost would be $300, and if it produced 500 units per day, its total cost would be $275.
a What are the firm’s ATC per unit at each of these three levels of production?
b If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium?
c From what you know about these firms cost structures, what is the highest possible price per unit that could exist as the market price in long-run equilibrium?
d If that price ends up being the market price and if the normal rate of profit is 10 percent, then what will each firm’s

a. General Mills and Kellogg are two of the biggest players in the market for breakfast cereals. At their current level of operation, each makes $6 million per year in profit. Both are considering costly new advertising campaigns to gain market share. If one moves forward with the advertising campaign but the other does not, the one that moves forward expands market share and increases profit to $8 million while the other loses market share and profit falls to $2 million. If both adopt a new costly advertising campaign, then both companies’ profits fall to $4 million. Set up a payoff matrix to describe this decision-making situation.

b. Why is the drug cartel more effective than the oil cartel?

a. Explain the production possibilities frontier (PPF).
b. Analyse what it means for the PPF to be bowed out from the origin (curved), and what it means for the PPF to be a straight line.
c. State the Law of Increasing Opportunity Cost and explain why it holds.

Two traditional economies are trying to industrialize. The leaders of the first favor a command economic system. The leaders of the second want to try more free market-based policies. Which of the following actions would likely occur in one but not the other industrializing economy?

1. Conversion of farmland from agriculture to industry
2. Export of surplus goods not consumed locally
3. Investment in loans to support independent start-ups
4. Payment of workforce based on units of production