Principles of Micro Midterm

1. Suppose that a recent study has shown that drinking a glass of orange juice a day significantly reduces a person's risk of stomach cancer. Draw a supply and demand diagram illustrating the effect you would expect this news to have on the market. Does the price increase or decrease? What about the quantity? Draw another supply and demand diagram illustrating the effect that you would expect this news to have on the market for apple juice. How does the price and quantity of apple juice respond?

2. Suppose that, initially, Inno Systems sells a product at $12. When the price is $12, Inno sells 3,000 objects. After doing some market research, Inno decides to raise the price to $15 and sell only 2,700 goods. What is the price elasticity of demand for Inno's product? Name a product that you think would have that elasticity and explain why.

3. Decim Corporation produces 1,000,000 liters of tequila a year. To do so, it spent $10 million on facilities and machinery and another $15 million on labor and inputs. What is Decim's fixed cost, average fixed cost, variable cost, and average variable cost? If Decim scaled its production up to 2 million liters of tequila in a year, would you expect their average fixed cost to increase or decrease? What about their average variable cost?

4. Ossuary produces whole wheat bread which sells for $3 a loaf. In order to produce an additional loaf of bread, it would cost Ossuary $3, but the average loaf only costs them $2.50. Assuming that the market for bread is competitive, is Ossuary in short run equilibrium? Why or why not? Is Ossuary in long run equilibrium? If so, explain why. If not, explain what would happen in the market to bring it to equilibrium.

5. Two companies, Leffers and Riten dominate the market for toasters. They sell identical toasters but compete by setting prices. What kind of oligopoly competition is this? If they each produce 240,000 toasters and sell them for $40, What is Leffers' marginal cost of toaster production? How do you know?

6. Leviath is a monopolist in the market for fusion stellarators. Leviath is currently producing 7 stellarators and selling them for $600 million each. If Leviath produced an eighth stellarator, it would only be able to sell them for $580 million. How much revenue does Leviath make with 7 stellarators? With 8? What is their marginal revenue? If the eighth stellerator would cost $400 million to produce, is Leviath currently maximizing its profits? Explain.

7. How do firms in a Cournot duopoly behave differently from other kinds of competition? Why does this cause them to restrict output? Why doesn't it cause them to restrict output as much as a monopolist would?

8. A event recently occurred which affected the market for widgets. The price of widgets and the number of widgets sold both rose. Does this adjustment follow the law of supply or the law of demand? Given that, which curve moved, and in which direction? If the event was that the price of gadgets fell, are gadgets and widgets substitutes or complements? Given that, what is a reasonable estimate for the cross price elasticity of widgets and gadgets?