Question details

ECON 213 Problem Set 3 A++ 2
$ 15.00

Data for the market for graham crackers is shown below.

Calculate the elasticity of

demand between the following

prices.

Price of

crackers

Quantity Demanded (per month)

$3

80

$2.5

120

$2

160

$1.5

200

$1

240

$1.00

-

$1.50: ___________________________________

$1.50

-

$2.00: ___________________________________

$2.00

-

$2.50: ___________________________________

$

2.50

-

$3.00: ___________________________________

If the price of graham crackers is $2.50 should firms raise or lower their prices if they

want to increase revenue?

Explain this in terms of elasticity.

 

ECON 213

Page

2

of

3

2.

Assume the competitive market shown below faces a

short run price of $10.

Using

the graph below, identify the following:

Profit maximizing output:

_______________________

Approximate mark up over cost

_______________________

In the long run, the price falls to $7.50.

Why does this happen?

What is th

e new profit maximizing output?

_______________________

10

20

30

40

50

60

70

80

90

100

110

120

130

$0.00

$2.50

$5.00

$7.50

$10.00

$12.50

Quantity

P=MR

MC

ATC

P

r

i

c

e

,

C

o

s

t

 

ECON 213

Page

3

of

3

3.

A local hardware store is trying to decide whether to stay open.

They have found that

their industry is extremely competitive and profits have shrunk considerably.

Knowing that you have take

n an economics course the owners have asked for your

opinion.

Draw a completely labeled graph to help you explain the

shutdown

decision.

You should show two graphs in your answer, one for the market as a whole, and one

for this store in particular.

Assume

that the store is losing money; however, explain

why they may want to stay open for a little while longer.

(NOTE: Your answer should

be a written explanation of your graph.)

4.

What combination of the two goods below allows you to maximize your utility with

a

budget constraint of $14?

Show how you arrived at your conclusion in the space

provided below.

Place your final answers on the lines at the bottom of this page.

PRICE = $0.50 per

bottle

Bottles of glue

Total Utility (Utils)

1

15

2

23

3

30

4

35

5

3

8

6

40.5

PRICE = $2.00 per

bale

Bales of hay

Total Utility (Utils)

1

10

2

22

3

36

4

52

5

70

6

90

Bottles of glue: _________________________

Bales of hay: ___________________________

Available solutions