essay
1. (4 points) Cherry Pie is the best of all possible deserts. Your friend Taylor has left school to open a bakery, which specializes in Cherry Pie and Sushi. She has done some market research and finds that your neighbors value slices of pie according to the following schedule:
Slices MU cherry pie slices
1 $40.00
2 $36.00
3 $32.40
4 $29.16
5 $26.24
6 $23.62
7 $21.26
8 $19.13
9 $17.22
10 $15.50
11 $13.95
12 $12.55
13 $11.30
14 $10.17
a. (2 points) Graph the demand curve for cherry pie. Does the demand curve have a positive or negative slope? Why?
b. (1 point) How many slices will Taylor sell at $26.24? How many at $19.13?
c. (1 point) What will happen to the demand curve if a new study comes out showing cherries are bad for you? What will happen to the demand curve if instead a study comes out showing sushi has major health benefits?
2. (4 points) Production. Taylor makes pie using equipment that she rents for $15 and real carrots and other ingredients that cost $6.90 a slice. She hires workers at $12 each and finds that they produce cakes according to the following schedule:
Slices Workers
1 0.20
2 0.44
3 0.73
4 1.07
5 1.49
6 1.99
7 2.58
8 3.30
9 4.16
10 5.19
11 6.43
12 7.92
13 9.70
14 11.84
a. (2 points) Calculate and graph the marginal cost of each slice. Show your calculations! Why does the MC curve have the slope (up, down, or flat) that it does?
b. (2 points) Calculate and graph the marginal cost of each slice if workers become more productive so each slice can be made with only 70% as much labor. Show your calculations! Calculate and graph marginal cost if workers get a raise to $30/hour, with the old productivity.
3. (4 points) Perfect competition and equilibrium.
a. (1 point) Put the demand and supply curves together (at the original productivity and wages). Taylor assumes that she is in a perfectly competitive market. How many slices will she sell? At what price?
b. (1 point) Draw the graph again and shade in the entire area of consumer surplus. Shade in the entire area of producer surplus.
c. (2 points) Calculate consumer surplus as the sum of the difference between the marginal utility and the price for each slice up to the last slice sold. Calculate producer surplus as the sum of the difference between price and marginal cost for each slice.
4. (6 points) Monopoly and equilibrium
a. (2 points) Taylor gets smart and realizes that she is the only pie shop/Japanese restaurant around. Calculate the marginal revenue she gets for each additional sale of cherry pie slices as the change in total revenue (price times sales). Graph this and give the new quantity of sales and the new price. Note that you will need to estimate the new price from the graph because there is not an exact match of integral number of slices.
b. (1 point) Shade in the entire area of consumer surplus on your monopoly graph. Shade in the entire area of producer surplus.
c. (2 points) Calculate total consumer and total producer surplus under the monopoly situation.
d. (1 point) Compare the sum of consumer and producer surplus for the monopoly with the results for perfect competition. Which is better for consumers? Which is better for producers? Which is better for society? Explain.
5. (2 points) Moving Equilibrium. Show the effect of each on the monopoly market equilibrium; you don’t need to have exact answers but explain the direction of change in the demand and/or marginal cost curves.
a. (0.5 points) Fish prices rise.
b. (0.5 points) There is blight, and the cherry crop fails, causing prices for cherries to increase.
c. (0.5 points) Taylor loses her good pastry chef. The new chef is hired at the same wage but the pie quality is off.
d. (0.5 points) A local restaurant reviewer praises the quality of her sushi.