Part 1:

1. What do economists assume when they are constructing a model of demand? Why are these assumptions necessary?

2. What conditions of utility theory are fulfilled at all points on an individual's demand curve?

Part 2:

3. Alpha Lumber Company has the following short run total costs:

Total explicit cost =$40,000

Total implicit cost =$20,000

How profitable (economic profit, normal profit or economic loss is the company in each of the following cases):

a. Total Revenue = $65,000
b. Total Revenue = $60,000
c. Total Revenue = $ $55,000

4. What is price discrimination? What is meant by reverse price discrimination?

5. Should economists advise the government to intervene in each situation in which spillover exist? Why or why not?

6. How much clean air would you be willing to pay for (either through taxes or in other ways) in your community?

Part 3:

7. Explain how the equality of marginal cost and marginal revenue maximizes profits or minimizes losses.

8. The following figure represents a purely competitive firm in the short run with average total, average variable, and marginal costs as shown. Answer the following questions related to the firm's profitability:

a. If the firm takes a rice of $5 as given, what is the most profitable rate of output? Will the firm earn a profit?

b. If the firm takes a price of $6 as given, what is its most profitable rate of output? If there is a profit, what type is it, accounting profit or normal profit?

c. If the firm takes a price of $7 as given, what is its most profitable rate of output? If there is a profit, what type is it, accounting profit or normal profit?

d. If the firm takes a price of $10 as given, what is its most profitable rate of output? If there is a profit, what type is it, accounting profit or normal profit?

e. What point in the figure above represents the firm's breakeven point? Its shut down point?

Part 4:

9. Monopolies always earn economic profits because of their privileged market positions. "How would you evaluate this statement"?

10. The hypothetical figure that follows is that of a monopoly firm operating in the short run. Based on this figure, answer the questions below.

11. Under what conditions is it profitable for a monopolistic firm to practice to rice discrimination?