Week 2 Problems
1) The equation for a demand curve is P=2/Q. what is elasticity of demand as price falls from 5 to 4? What is elasticity of demand
as price falls from 9 to 8? Would you expect the answer to be the same> why or why not? (Taylor and Greenlaw, 2014) p. 126
2) The equation for supply curve is 4P=Q. what is the elasticity of supply as price rises from 3 to 4? What is the elasticity of
supply as the price falls from 7 to 8? Would you expect the answer to be the same? Why or why not? (Taylor and Greenlaw) p. 127
3) Praxilla, who lived in ancient Greece, derives utility from reading poems and from eating cucumbers. Praxilla gets 30 units of
marginal utility from her first poem 27 units of marginal utility from her second poem, 24 units of marginal utility from her third
poem, and so on, with the marginal utility declining by three units for each additional poem. Praxilla gets six units of marginal
utility for each of her first three cucumbers consumed, four units of marginal utility for each of the following three cucumbers
consumed, and so on, with the marginal utility declining by one for every three cucumbers consumed. A poem costs three bronze coins but
a cucumber only cost one bronze coin. Praxilla has 18 bronze coins. Sketch the vertical axis and cucumbers on the horizontal axis.
Start off with the choice of one poem and 15 cucumbers. Using this step by step process based on marginal utility, create a table and
identify praxillas utility-maximizing choice. (Taylor and Greenlaw) p. 156
Week 3 PROBLEMS
1) (Figure 7.3 p. 161 Taylor and Greenlaw, 2014) Determine the marginal gain in output from increasing the number of barbers from
4 to 5 and from 5 to 6? Does it continue the pattern of diminishing marginal returns?
2) Compute the average total cost, average variable cost, and marginal cost of producing 60 to 72 haircuts. Draw the graph of the
three curves between 60 and 72 haircuts. The idea is to go from 40 to 60 haircuts and calculate the total cost, average variable cost,
and marginal cost, and then do the same thing to go from 60 to 72 haircuts. (Taylor and Greenlaw, 2014) p.177
3) The AAA aquarium Co. sells aquariums for $20 each. Fixed costs of production are $20. The total variable cost are $20 for one
aquarium, $25 for two units, $35 for three units, $50 for four units, and $80 for five units. In the form of a table, calculate total
revenue, marginal revenue, total cost, and marginal cost for each output level (one to five units). What is the profit-maximizing
quantity of output? (Taylor and Greenlaw) p. 203
4) A computer company produces affordable, easy to use home computer systems and has fixed cost of $250. The marginal cost of
producing computers is $700 for the first computer, $250 for the second, $300 for the third, $350 for the fourth, #400 for the fifth,
$450 for the sixth, and $500 for the seventh.
A. Create a table that shows the companys output, total cost, marginal cost, average cost, variable cost, and average variable
cost.
B. At what price is the zero profit point? At what price is the shutdown point?
C. If the company sells the computers for $300, is it making a profit or loss? How big is the profit or loss? Sketch a graph with
AC, MC, and AVC curves to illustrate your answer and show the profit or loss. (Taylor and Greenlaw) p. 204
D. If the firm sells the computers for $300, is it making a profit or a loss? Sketch a graph with AC, MC, and AVC curves to
illustrate your answer and show the profit or loss.
Week 4 PROBLEMS
1) Using figure 9.2 p. 207 and p.223 (Taylor and Greenlaw)Suppose P0 is $10 and P1 $11. Suppose a new firm with the same LRAC
curve as the incumbent tries to break into the market by selling 4,000 units of output.
A. Estimate from the graph what the new firms average cost of producing output would be.
B. If the incumbent continues to produce 6,000 units, how much output would be supplied by the market by two firms?
C. Estimate what would happen to the market price as a result of the supply of both the incumbent firm and the new entrant.
D. Approximately how much profit would each firm earn?
2) Usingfigure 9.6 p.217 (Taylor and Greenlaw) draw the demand curve, marginal revenue, and marginal cost curves. P. 223
A. Identify the quantity of output the monopoly wishes to supply and the price it will charge.
B. Suppose the demand curve for the monopoly’s product increases dramatically. Draw the new demand curve.
1. What happens to the marginal revenue as a result of the increase in demand?
2. What happens to the marginal cost curve?
3. Identify the new profit maximizing quantity and price.
Week 5 PROBLEMS
1) A $10,00 ten-year bond was issued at the interest rate of 6%. It is now year 9 and you are thinking about buying the bod from
its owner. Interest rates are now 9%. (Taylor and Greelaw) p.403.
A. Would you now expect to pay for the bond? Why?
B. Calculate what you would be willing to pay for the bond.
2) Consider the following stock ownership situation (Taylor and Greenlaw) p. 403
• Investor 1: 20,000 shares
• Investor 2: 18,000 shares
• Investor 3: 15,000 shares
• Investor 4: 10,000 shares
• Investor 5: 7,000 shares
• Investors 6-11 5,000 shares each
A. What is the minimum number of investors it would take to vote to change the top management of the company?
B. Which investors would this involve?
C. In a 1-2 paragraphs discuss if any one investor would be able to make corporate changes without the agreement of the other
investors.
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