Home » REWORD THE FOLLOWING PLEASE PUT EACH CHAPTER IN SEPERATE WORD DOCS.  Chapter 3: 6, 8 ,9, 11  6. a. The production of auto tires would increase. Increasing the supply and lowering thecost of th

REWORD THE FOLLOWING PLEASE PUT EACH CHAPTER IN SEPERATE WORD DOCS.  Chapter 3: 6, 8 ,9, 11  6. a. The production of auto tires would increase. Increasing the supply and lowering thecost of th


Chapter 3: 6, 8 ,9, 11

6.  a.    The production of auto tires would increase. Increasing the supply and lowering the

cost of the tires to the consumer.

     b.    A decline in the number of firms in the tire industry would cause prices to go up,

because there will be less competition in the market and would let the remaining firms control the price of the tires being sold.

     c.    An increase in the cost to produce tires, will make the cost go up to the consumer.

     d.    The supply of auto tires could potentially decrease, because the produces could

withhold stock. Forcing the price of tires to stay the same or possibly go up.

     e.    Firms may start producing more auto tires instead of large tires to help increase profits.

     f.     The cost of production of tires will result in the price going up for the consumer

     g.    Lowers production cost and increases supply

8. Supply of hides and leather goods decreased therefore the price of hides and leather goods

would increase.

9. In my perspective, these are two different demands situations. The second equilibrium

occurs after the demand has decreased.

11. Price ceiling occurs when the government feels the need to help lower income households

we cannot afford the increased prices in the market. By creating a price ceiling it renders the free market ineffective. Q(demanded)-Q(supplied)= persistent shortage amount of grain in Kansas City. Price flooring occurs when the cost of a product becomes so low that it starts to take money away from the producers. Q(supplied) at $4.60 can only be sold to buyers willing to pay for it. Q(demanded). This leaves out consumers that cannot afford that price, thereby creating a persistent surplus.

Chapter 4: # 4, 7, 9, 10

4. What is the formula for measuring price elasticity of demand? What does it mean (in terms of relative price and quantity changes) if the price-elasticity coefficient is less than 1? Equal to 1? Greater than 1? Price elasticity of demand is found by dividing the percentage change in quantity demanded by the percentage change in price. Over a range of prices, we use the midpoint formula:

Ed = [(change in Q)/ (sum of Q’s/2)] divided by [(change in P)/ (sum of P’s/2)]

A coefficient of 1 means that the percentage changes are equal – a 10 percent price decrease will cause a 10 percent increase in quantity demanded. A coefficient greater than one means that consumers are relatively responsive to price changes.

7. You are chairperson of a state tax commission responsible for establishing a program to raise new revenue through excise taxes. Why would elasticity of demand be important to you in determining the products on which the taxes should be levied?

Elasticity of demand would be very important to me. I would select goods for which the demand was price inelastic. When demand is price inelastic, the decrease in quantity demanded because of the price increase caused by the excise tax is proportionately less than the increase in price.

9. Because of a legal settlement over state health care claims, in 1999 the U.S. tobacco companies had to raise the average price of a pack of cigarettes from $1.95 to $2.45. The decline in cigarette sales was estimated at 8 percent. What does this imply for the elasticity of demand for cigarettes? Explain.

The price elasticity of demand for cigarettes was inelastic. The percentage change in price was 22.7 percent whereas the percentage change in quantity demanded was only 8 percent.

10. The income elasticities of demand for movies, dental services, and clothing have been estimated to be 13.4, 11, and 1.5, respectively. Interpret these coefficients. What does it mean if an income-elasticity coefficient is negative?

All are normal goods—income and quantity demanded move in the same direction. These coefficients reveal that a 1 percent increase in income will increase the quantity of movies demanded by 13.4 percent, of dental services by 11.0 percent, and of clothing by 1.5 percent.

Chapter 7: # 1, 3, 4, 6

1.      Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications does each of the following most accurately fit?

(a) a supermarket in your hometown;

(b) the steel industry;

(c) a Kansas wheat farm;

(d) the commercial bank in which you or your family has an account;

            (e) the automobile industry. In each case, justify your classification.

Pure competition: very large number of firms; standardized products; no control over price: price takers; no obstacles to entry; no non price competition. Pure monopoly: one firm; unique product: with no close substitutes; much control over price: price maker; entry is blocked; mostly public relations advertising.

Monopolistic competition: many firms; differentiated products; some control over price in a narrow range; relatively easy entry; much non price competition: advertising, trademarks, brand names.

Oligopoly: few firms; standardized or differentiated products; control over price circumscribed by mutual interdependence: much collusion; many obstacles to entry; much non price competition, particularly product differentiation.

(a)   Hometown supermarket: oligopoly. Supermarkets are few in any one area; their size makes new entry very difficult; there is much non-price competition.

(b)   Steel industry: oligopoly within the domestic production market. Firms are few; their products are standardized to some extent;

(c)   Kansas wheat farm: pure competition. There are a great number of similar farms; the product is standardized; there is no control over price; there is no non-price competition.  

(d)   Commercial bank: monopolistic competition. There are many similar banks; the services are differentiated as much as the bank can make them appear to be; there is control over price within a narrow range;

(e)    Automobile industry: oligopoly. There are the Big Three automakers, so they are few; their products are differentiated;

2.      “Even if a firm is losing money, it may be better to stay in business in the short run.” Is this statement ever true? Under what condition(s)?

Yes, a firm may want to stay in business even if it is losing money. For example, assume the firm has a fixed cost of $1,000 that it must pay even if it stops production. Now assume that average variable cost is $10 per unit and price of the product is $15 per unit. Finally, assume that output equals 100 units using the MR = MC rule. This implies total revenue equals $1,500, variable cost equals $1,000, and total cost equals $2,000.

3.      Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures? Explain why price can be substituted for marginal revenue in the MR 5 MC rule when an industry is purely competitive.

If the last unit produced adds more to costs than to revenue, its production must necessarily reduce profits. On the other hand, profits must increase so long as the last unit produced—the marginal unit—is adding more to revenue than to costs.

6. Explain: “The short-run rule for operating or shutting down is P>AVC, operate; P<AVC, shut down. The long- run rule for continuing in business or exiting the industry is P≥ATC, continue; P<ATC, exit.” In the short run, a firm pays its fixed costs whether it operates or not.

 If a firm can cover its variable costs and a portion of its fixed costs they lose less by operating than by shutting down. In the long run, all costs are variable; if a firm cannot cover all its costs it is better to exit the market.

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