Microeconomics

Always show your work and/or explain your answers!

1. (6 points) What is economics and why is the concept of scarcity so central to the field?

2.(20 points) Suppose the people of Latium always have either corn flakes or bran flakes for breakfast. They like both cereals about the same and generally choose whichever is cheaper.In either case, they always put milk in their cereal. Land used to produce corn (used to make corn flakes) can also be used to produce wheat (used to make bran flakes).

1. What is likely to happen to the price and quantity of corn flakes when the price of bran flakes decreases?
2. What is likely to happen to the price and quantity of corn flakes when the price of milk increases.
3. If the price of fertilizer falls (used in the production of both corn and wheat), what is likely to happen to the price and quantity of corn flakes?
4. Recently Latium has begun trading with Minoa. The Minoans enjoy eating cereal but don't have enough land to produce much corn or wheat. What is likely to happen to the price and quantity of corn flakes in Latium as a result of this new trade?

3.(20 points) Suppose that when the price of corn flakes increases by 10% the quantity demanded of corn flakes decreases by 8%.

1. What is the price elasticity of demand for corn flakes? Is demand elastic or inelastic?
2. If the price of corn flakes increases by 10%, what will happen to the total revenue of corn flake producers?
3. Suppose that when the price of bran flakes increases by 5%, the quantity demanded of corn flakes rises by 7%. What is the cross-price elasticity of corn flakes with respect to bran flakes? What does your answer suggest about the relationship between corn flakes and bran flakes?
4. Suppose that when income rises by 8%, the quantity demanded of corn flakes increases by 6%. What is the income elasticity of demand for corn flakes? What does your answer suggest about how consumers view corn flakes, i.e. what type of good are corn flakes?

4.(20 points) Suppose Linus has $15 to spend and wants to buy some pizza and soda pop.The price of a slice of pizza isand the price of a soda pop is. Suppose the table below represents Linus's utility from consuming pizza and soda pop.

Pizza	Soda Pop
0	0	----	----	0	0	----	----
1	42			1	24
2	78			2	46
3	108			3	66
4	132			4	84
5	150			5	100

1. What is the marginal utility associated with the 3^rdslice of pizza?
2. What is the marginal utility associated with the 4^thsoda pop?
3. Given Linus's income of $15 and the prices given above, what is his utility maximizing combination of pizza and soda pop?
4. Briefly describe how we can use this utility maximization problem to derive Linus's demand curve for pizza.

5.(12 points) Daisy sells basil by the pound. The table below represents her production cost.

Q	Total Cost (TC)	Variable Cost (VC)	Fixed Cost (FC)	Marginal Cost (MC)	Average Total Cost (ATC)	Average Variable Cost (AVC)	Average Fixed Cost (AFC)
0	10			----	----	----	----
1		6
2				5
3					9
4						6
5	42
6		41
7				10

1. Fill table .
2. What is Daisy's fixed cost?
3. What is the variable cost of producing 2 pounds of basil?
4. What is the marginal cost of producing 3 pounds of basil?
5. What is the average total cost of producing 4 pounds of basil?

6.(20 points) Suppose that Daisy operates in a perfectly competitive market. Use the cost data in question 5 to answer the following questions.

1. If the market price of basil is $10 per pound, then what is Daisy's profit maximizing quantity and what is her profit at that quantity?
2. Assuming Daisy is a typical producer in this market, does the market appear to be allocatively efficient?
3. Is the market in long-run equilibrium?
4. Would you predict that the price will rise, fall or stay the same in the near future for this market?

6.(24 points) Suppose that a flood wipes out all basil producers in this market except Daisy so that she is now a single-price monopolist. Suppose that the demand schedule for basil is given below.

P	Q	TR	MR
17	0		----
16	1
15	2
14	3
13	4
12	5
11	6
10	7

1. What is Daisy's total revenue from selling three pounds of basil?
2. What is Daisy's marginal revenue from selling four pounds of basil?
3. Complete the table.
4. Using the cost data from question 5, what is Daisy's profit maximizing output level and what is her profit at that level of output?
5. Is Daisy allocatively efficient?
6. Is Daisy in long-run equilibrium?

7.(12 points) Suppose that Daisy remains a monopolist and she figures out a way to be a perfect price discriminator. Use the cost data from question 5 and the demand schedule from question 7 to answer the following.

1. What is Daisy's profit maximizing quantity and total profit as a perfect price discriminator?
2. Is Daisy allocatively efficient?

8.(10 points)

a. Suppose that Raoul operates a restaurant in a monopolistically competitive market. His restaurant often has empty seats - can he be in long-run equilibrium? Does the presence of empty seats mean that his profit is negative?

b. Monopolistically competitive markets are both productively and allocatively inefficient, which is a bad thing. What is good about monopolistically competitive markets? What benefit do consumers derive from them?