In producer theory, how are costs of production derived? What are the three assumptions of producer theory? How are they related to scarcity? What role does the consumer play?

In a market economy, what do firms do? What are residual claimants? Differentiate between the three types of firms discussed in class.

Differentiate between the explicit, implicit costs that firms face. What are total costs? What sunk costs?

What is economic profit? How might it differ from accounting profit? Explain why firms that are making zero economic profit are likely to continue in business.

Which of the following statements do you think reflect sound economic thinking? Explain your answer.
a. "Because we own rather than rent, and the house is paid for, housing doesn't cost us anything."
b. "I own 100 shares of stock that I can't afford to sell until the price goes up enough for me to get back at least my original investment."
c. Private education is costly to produce, whereas public schooling is free."

What is the principal-agent problem? When will the principal-agent problem be most severe? Why might there be a principal-agent problem between the stockholders and the managers of a large corporation?

Here is a fascinating interesting story in yesterday's New York Times on gas shortages and price ceilings in Venezuela. (Zero-priced registration required.)

Motorists in the United States smarting from rising gasoline prices, take note: Mr. Taurisano pays the equivalent of $1.50 to fill his Hummer’s tank. Thanks to a decades-old subsidy that has proven devilishly complex to undo, gasoline in Venezuela costs about 7 cents a gallon compared with an average $2.86 a gallon in the United States.

It turns out that this popular subsidy mostly benefits the wealthy and has been in place there since the 1940s.

Assume that Joe's Bakery sells 130 pies at a price of $9, 110 pies at a price of $10, and 95 pies at a price of $11.
a. Calculate the absolute value of the arc elasticity of demand if Joe raised the price of pies from $9 to $10. Is demand in this range elastic or inelastic?
b. Assume that Joe lowers his price from $11 to $9. What is the arc elasticity of demand?

Assume that real incomes fell during the 1990-1991 recession by 10 percent, and that the demand for Yugos increased by 15 percent. Can you determine an income elasticity measure?

Your book notes that the measure of the income elasticity for food is 0.51. Why do you suppose that the measure is inelastic for this good? Would you expect it to increase if looking at specific categories of food? Why or why not?

What are the major determinants of a product's price elasticity of demand? Studies indicate that the demand for Florida oranges, Bayer aspirin, watermelons, and airfares to Europe are elastic. Why?

Detroit mayor Kwame Kilpatrick proposed last year a 2 percent fast food tax in Detroit, with the stated purpose of trying to alter the incentive to eat fast food (as opposed to the purpose of raising revenue). Is his proposal, if passed, likely to be successful? Will it raise much revenue? Answer in terms of elasticity of demand.

(Note: the tax proposal was rejected by Detroit voters, so Kilpatrick then proposed a state law that would impose the tax. It is worded in such a way that would only apply to Detroit. Read more here.) Define: income elasticity, cross elasticity, and elasticity of supply. What signs would you expect for these measures? Why?

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If the quantity demanded of a product rose from 900 to 1,200 when the price of the product fell from $11 to $9, the arc price elasticity of demand coefficient is equal to
a. -0.20.
b. -0.70.
c. -1.0.
d. -1.42.

The price of a product falls from $15 to $10, and as a result the quantity demanded increases from 240 to 300 units. We can conclude that over this range the price elasticity of demand for the product is
a. elastic.
b. inelastic.
c. of unitary elasticity.
d. equal to -0.4.