Assignment
(I) Equilibrium
a) What 5 factors (that also affect demand) are held fixed when we draw the demand curve?
b) What 5 factors (that also affect supply) are held fixed when we draw the supply curve?
c) Suppose the market for natural gas is in equilibrium. Draw a generic set of supply and demand curves and label the equilibrium.
d) Now suppose a new extraction technique is developed, called fracking, that makes extraction of natural gas possible in many more parts of the world.
i) Which curve shifts and why?
ii) Draw a picture of the new equilibrium and label the new P and Q.
iii) What do you think about the price elasticity of demand for natural gas? How does your assessment of the price elasticity of demand affect the change in equilibrium in (ii), i.e. will it manifest itself more in prices or quantity. Draw another picture to show this.
e) Oil-based heat is a substitute for natural gas. How will the change in the natural gas market affect the heating oil market?
i) Which curve (or curves) shifts and why?
ii) Draw a picture of the old and new equilibrium and label the old and new P and Q.
(II) Elasticity
a) Use the following two points on the demand curve to calculate the price elasticity of demand. Point A: Price = $8 and Quantity=16
Point B: Price = $4 and Quantity=20
b) Is demand for this good elastic or inelastic? Explain how you know.
c) List two goods that could have this elasticity and explain why you chose them
III. Single Firm Production in the Short-Run
Suppose a brewery faces the following short-run production schedule, where L is the. number of workers the brewery hires, N is the number of cases of beer the brewery can produce per week, TC is the total cost, FC is the fixed cost, VC is the variable cost, and MC is the marginal cost. Assume also that the brewery sells cases of the beer for $10.
a) Fill in the missing information, i.e. the FC, VC, and MC columns. All information are weekly values.
|
L
|
N
|
TC
|
FC
|
VC
|
MC
|
|
0
|
0
|
$5,000
|
|
|
|
|
1
|
500
|
$6,000
|
|
|
|
|
2
|
1500
|
$7,000
|
|
|
|
|
3
|
3000
|
$8,000
|
|
|
|
|
4
|
5000
|
$9,000
|
|
|
|
|
5
|
6500
|
$10,000
|
|
|
|
|
6
|
7500
|
$11,000
|
|
|
|
|
7
|
8000
|
$12,000
|
|
|
|
|
8
|
8300
|
$13,000
|
|
|
|
|
9
|
8500
|
$14,000
|
|
|
|
|
10
|
8600
|
$15,000
|
|
|
|
b) What is the optimal level of output for the firm and how much profit will it earn?
c) What are the weekly wages of each worker?
d) Given this production schedule, at what level of labor inputs does the law of diminishing marginal returns begin to kick in? Please explain.
e) Suppose the price of beer drops to $1 per case. Will this firm stay in business in the short-run? Why or why not?
d) If the price remains at $1, will this firm remain in business in the long run? Why or why not?