problem set 3
Problem Set 3
Name: Lauren Hensley
Problem Set 3 is to be completed by 11:59 p.m. (ET) on Monday of Module/Week 6.
1. 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: -0.333
$1.50 - $2.00: -0.6
$2.00 - $2.50: -1
$2.50 - $3.00: -1.66
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.
The firm should lower the price as we see the elasticity increases
2. Assume the competitive market shown below faces a short run price of $10. Using the graph below, identify the following:
Profit maximizing output: MC=MR, Q=110
Approximate mark up over cost There is no mark up
In the long run, the price falls to $7.50. Why does this happen? Ther are no fixed costs and the firm operates at minimum ATC which is equal to marginal cost
What is the new profit maximizing output? Min ATC, Q=90
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 taken 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.)
The loss and revenue are identifies on the individual firm graph. Total cost is equal to the sum of the losses and revenue. The decision about whether this firm shuts down or remains in the market depends on the postion of the average variable cost.
4.
Name: Lauren Hensley
Problem Set 3 is to be completed by 11:59 p.m. (ET) on Monday of Module/Week 6.
1. 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: -0.333
$1.50 - $2.00: -0.6
$2.00 - $2.50: -1
$2.50 - $3.00: -1.66
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.
The firm should lower the price as we see the elasticity increases
2. Assume the competitive market shown below faces a short run price of $10. Using the graph below, identify the following:
Profit maximizing output: MC=MR, Q=110
Approximate mark up over cost There is no mark up
In the long run, the price falls to $7.50. Why does this happen? Ther are no fixed costs and the firm operates at minimum ATC which is equal to marginal cost
What is the new profit maximizing output? Min ATC, Q=90
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 taken 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.)
The loss and revenue are identifies on the individual firm graph. Total cost is equal to the sum of the losses and revenue. The decision about whether this firm shuts down or remains in the market depends on the postion of the average variable cost.
4.