EC 515  —  Managerial Economics

Exam One  Problem Set

Complete the following.  I would prefer that you paste this into WordPerfect or Word, add plenty of space for your answers, print the document and complete with pencil or pen.

1.  (A) Define each and explain what is the difference between economic profit and accounting profit?
(B) Consider the following Wall Street Journal quote, “Natural Gas Prices Surge, and Producers aren’t Happy at All.”  Illustrate and explain under what circumstances that natural gas producers might be unhappy about a large increase in the price of their product?

2.  Consider the following demand and supply equations:

Qd = 1,300 - 20P, and
Qs = 100 + 10P,
where Q equals quantity and P equals price.
Draw and label a graph showing the market’s equilibrium price and quantity.  Don’t worry about your figures exactly matching the equations (Just get the general shapes correct.  There is no need to plot points).

What will happen in the market if the government sets a price floor equal to \$30?

3.  Recently pollution has been a problem in the Volga River, where much of the world’s caviar originates.  The sturgeon that live in these waters are laying more eggs than before.  Show graphically and explain the effects on the market for caviar.

4.  Suppose a new production technique is developed which significantly lowers the cost of producing tires and the price of public transportation rises at approximately the same time, what will the effect be on equilibrium price and quantity in the market for passenger cars.  Illustrate your answer.

5.  A straight line downward sloping demand curve (one with constant slope) will have the same price elasticity everywhere along the curve.  True or False?  Explain using a figure.

6.  (A) If the supply of turkeys turned out to be unusually small this November, do you think a turkey shortage would result?  Explain with a graph.

(B)Suppose the price of IBM personal computers falls from \$1700 to \$1250 (ceteris paribus) and, as a result, the number of personal computers purchased increased.  Explain what happened in the market for personal computers.

7.  Suppose that as a result of a 5 percent price increase, quantity demanded declined from 2080 to 1920.  Calculate the price elasticity of demand along this portion of the demand curve.

8. For each of the following pairs of goods or services, identify the one for which the price elasticity of demand is greater and explain why:

1 - Coffee; Starbucks Coffee

2 - Tuition at a public university; tuition at a private university

3 - Emergency room medical service; annual physical exam

4 - Movies during afternoons; movies at night

5 - Prescription medicine; over-the-counter medicine

9. Evaluate this statement: “You are a natural athlete, an attractive person who learns easily and communicates well. Clearly, you can do everything better than your friends and acquaintances. As a result, the term specialization has no meaning for you. Specialization would cost you rather than benefit you.”

10.  Gomer can make either 200 bushels of corn (C) or 200 bushels of strawberries (S) every six months. Goober can make only 100 bushels of corn (C) or 50 bushels of strawberries (S) every six months.

A. Draw their corresponding production possibilities curves.

B. What is Gomer’s opportunity cost of making one bushel of corn?

C. What is Gomer’s opportunity cost of making one bushel of strawberries?

D. What is Goober’s opportunity cost of making one bushel of corn?

E. What is Goober’s opportunity cost of making one bushel of strawberries?

F. Who has a comparative advantage in making corn?

G. Who has a comparative advantage in making strawberries?

H. Provide terms of trade between corn and strawberries that would be mutually beneficial to both Gomer and Goober if each specialized and exchanged the product of his comparative advantage.