Chapter 1

Q1 Assume an individual is considering opening a new car dealership in a medium-sized metropolitan area (population = 200,000). Provide a list of economic variables you would recommend that the person consider in making his decision whether to open the business, and explain your rationale for including each variable.

Q2 List and describe the sources of spending in the economy by focusing on the four major sectors of the economy.

Q3 Explain the basic distinction between microeconomic analysis and macroeconomic analysis. Describe the types of issues that each branch of analysis focuses on.

Chapter 2

Q1. Assume the demand function for good X can be written as

Qd = 80 - 3Px + 2Py - 10I

wherePx = the price of X,

Py = the price of good Y, and

I = Consumer income.

a. What is the relationship between X and Y? Briefly explain.

b. Is good X a normal good? Explain. 

c. Assume that Py= 3, and  I = 5, draw the depand curve for the above demand function

Q2. Assume there is an increase in the price of electricity (which is the result of a decrease in the supply of electricity), and electricity and natural gas are substitutes. How would this affect the demand for natural gas, and what would happen to the equilibrium price and quantity of natural gas?

Q3. The demand and supply functions for sweatshirts (the basic grey kind) are as follows:

                 Demand                                    Supply

                 Quantity                                    Quantity

               Demanded                                  Supplied

Price      (per period)                Price       (per period)

$10           15,000                      $10             22,000

    9            15,500                          9             19,000

    8            16,000                          8             16,000

    7            16,500                          7             13,000

    6            17,000                          6             10,000

    5            17,500                          5               7,000

    4            18,000                          4               4,000

    3            18,500                          3               1,000

    2            19,000                          2                      0

a. Graph the demand and supply functions for sweatshirts and find the equilibrium price and quantity.

b. What effect will an increase in the price of gym shoes (a complement) have on the equilibrium price and quantity of sweatshirts, all else constant? Illustrate the effect using your graph.

c. What effect will a wage increase for workers in the sweatshirt industry have on the equilibrium price and quantity of sweatshirts, all else constant? Illustrate the effect using your graph.

Chapter 3

Q 1. Assume that, for a particular demand curve, when price rises from $50 to $60, total revenue falls from $8,750 to $7800.

a. Based on this information, what is the quantity demanded at each price.

b. Without calculating the coefficient of elasticity, is demand over this range elastic or inelastic? How do you know?

Q2. Provide a simple definition of the price elasticity of demand and explain why knowing the price elasticity for her product is useful to the firm's manager.

Q3. A car dealer wants to get rid of the stock of last year's model. Assume that the dealer knows from past experience that the price elasticity of demand for cars is unitary (= 1). If the price of the cars is currently $20,000 and the dealer wants to increase the quantity demanded from 30 units to 50 units, what must the new price be if the dealer is to sell the 20 additional cars? Explain and Show your calculations.

Q4. Assume an analyst has been hired to estimate the price elasticity of demand for hamburger (which sells for about $2.30 per pound) and filet mignon (which sells for about $20 per pound), respectively. Considering the different determinants of the price elasticity of demand, which item on the menu would you expect to have larger price elasticity of demand? Explain.

Chapter 4

Q1. Use the following information on a hypothetical short-run production function to answer questions a-c.

Units of Labor/Day          5          6          7          8          9

Units of Output/Day       120     140     155     165     168

The price of labor is $20 per day. Ten units of capital are used each day, regardless of output level. The price of capital is $50 per unit.

a. Calculate the marginal and average variable product of each unit of labor input.

b. Calculate total, average total, average variable, and marginal costs.

c. Can you tell where diminishing marginal returns sets in?

Q2. Explain the difference between the short run and the long run as it relates to the firm's production function. Why is this distinction important to a firm's manager?

Q3. From the manager's perspective it is important to treat implicit costs as explicit in order to make sound strategic decisions. Explain why giving some examples.