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Microeconomics 2302

Potential questions and study guide for

Exam 2

6 of these will be on your exam.

Potential questions are in Black Font. Study Guide stuff is in red font.

1. Elasticity question 1

a. What, in general, does elasticity measures?

b. Who might care about the price elasticity of demand and why?

c. Who might care about the price elasticity of supply and why?

d. Who might care about the cross elasticity of demand and why?

e. Who might care about the income elasticity of demand and why?

f. The formula to calculate the coefficient of elasticity of demand is (percentage change in quantity demanded of product X) / (percentage change in the price of

product X). If your boss tells you she is planning a price increase in product X

and wants to know how many units will be purchased after the price change, does

the formula give you enough info to answer the question? If yes, why? If no,

why not? i. Think about what the formula really says.

ii. Can you as the analyst actually collect all the information required to calculate the answer?

iii. To what degree does it give you information about what might happen in the future?

g. List and explain all the measures of elasticity that were covered in the slides,

including Elasticity of Demand, Supply, Income, and Cross Elasticity of Demand.

i. Please refer to the slides and audio to prepare this answer. Elasticity of demand and supply should both have 5 interpretations of Elasticity.

Income Elasticity should have 2 interpretations, and Cross Elasticity of

Demand should have 3.

2. Elasticity question 2

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a. How could a firm benefit from understanding the Total Revenue Test, and How might the info help the firm make better decisions?

b. List and explain in detail, the determinants of price elasticity of demand and give 2 examples for each one (do not use examples from the slides).

i. There are 4. Please refer to the slides and audio as you prepare your answer.

c. Relative to Elasticity of Supply, please explain the importance of time to the tomato farmer discussed in the slides and audio. How does time impact elasticity

and the input utilization choices available to the tomato farmer?

d. Explain why a PepsiCo Sales Executive would benefit from understanding cross elasticity of demand and elasticity of demand when evaluating a recommendation

to lower the price of Doritos.

i. How does understanding cross elasticity of demand and elasticity of demand support better decision-making?

e. Explain why an Analyst working for the Anti-Trust Division of the Justice Dept. would benefit from understanding cross elasticity of demand when evaluating the

proposed merger of Coca Cola Company and Pepsi.

i. How does understanding cross elasticity support better decision-making by the analyst?

3. Cost of Production 1 a. Explicit and implicit costs.

i. Explain the difference between explicit costs and implicit costs. ii. Explain who would care about them and why.

b. The production function. i. What is the production function?

ii. What 2 questions does it help a business answer? iii. What information would you need if you were asked to construct your

company production function?

iv. What departments would you call get that info and why?

c. Short Run Production Relationships i. List and explain the 3 Short Run Production Relationships discussed in the

slides and audio.

ii. Explain who in a business would care about them and how they might be used.

4. Cost of Production 2

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a. Explain the Law of Diminishing Returns and how understanding that law might help a business manager make better business decisions. State the assumptions

and state the definition of the Law of Diminishing Returns.

b. Explain each of the short run production costs, and explain how a business manager might use them.

i. There are 7 of these. Please refer to the slides and audio as you prepare your answer.

c. Explain how the long run ATC curve is derived and how understanding that concept might help a business manager make better decisions.

i. Please refer to the slides and audio to get the story on this.

d. Explain economies of scale, constant returns to scale, and dis-economies of scale and why understanding those concepts might help a business manager improve

their decision-making.

5. For the Pure Competition Market Structure 1 a. List and explain each of the characteristics of pure competition and why we study

that market structure.

b. List and explain the 3 decision process questions confronting the producer in pure competition.

i. Please refer to the slide that discusses the 3 decision process questions under the total revenue total cost approach and listen to the audio to

prepare your answer.

c. From the point of view of the business manager, explain the Total Revenue Total Cost approach to determining the profit maximizing level of output and price for

the purely competitive firm, and how that info can help a business manager.

i. Please refer to the Total Revenue Total Cost Approach slide and the audio to prepare your answer.

6. For the Pure Competition Market Structure 2 a. List and explain the three characteristics of the MR-MC approach to determining

the profit maximizing output and price for the purely competitive firm.

i. Please refer to the slide that discusses short run profit maximization Key Rule regarding the MC – MR approach and the audio to prepare the

answer.

b. From the point of view of the business manager, thoroughly explain how the purely competitive firm in the short run would determine its optimal level of

output, and price, and how the firm determines if it has achieved a profit, a loss,

or shut down using the MR-MC approach, for the:

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i. Profit maximizing case ii. Loss minimizing case

iii. Shut down case 1. All three are documented in the slides and audio.

7. You are a business manager working for a firm in a purely competitive market and you just hired a summer intern who does not understand how to derive the firms’

short run supply curve from the firms’ marginal cost curve.

a. Please explain to the intern how the short run supply curve is derived from the firm’s marginal cost curve. Be specific.

b. Please explain to the intern the characteristics of long run equilibrium of a purely competitive firm and how operating in a purely competitive market might impact

the decision-making of the firm. Please include the implications of long-run

equilibrium for productive and allocative efficiency.

i. Please refer to the slides and audio to prepare the answer. Please include the 3 assumptions, as well as the implications for economic profit,

productive efficiency and allocative efficiency.

8. For the Pure Monopoly Market Structure 1 a. List and explain the characteristics of pure monopoly and how they differ from

the characteristics of the pure competition market structure.

i. Please include all 6

b. List and explain how a monopolist would use each of the barriers to entry and include how using that barrier would actually accomplish the monopolists’

objective. Be specific.

c. You are a business manager and you are considering lowering the price of your

product. How will knowing where your firm is currently operating on its demand

curve help you make a sound business decision?

1. Please refer to the slides and audio to prepare your answer. The monopoly revenue and cost slide should help.

9. For the Pure Monopoly Market Structure 2 a. Explain how the monopolist determines the profit maximizing level of output and

price, and how it can determine if it has achieved a profit, or a loss. Be specific.

i. Please use what you have learned about using the MR MC approach along with the use of the appropriate cost curves to create your answer.

b. You are employed by a firm with monopoly power. The boss wants to increase profits. Explain the power of price discrimination to your boss. Discuss the

requirements and assumptions for successfully implementing this approach, and

the likely outcomes.

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i. You should explain price discrimination and its 3 forms, the conditions for price discrimination, and the outcomes of price discrimination for the Pure

Monopolist.

c. You work for the government in the department that is responsible for dealing with Monopoly issues (the Antitrust Division of the Justice Dept.). Please explain

the dilemma of regulation. Please be thorough.

1. Using the information you have learned about monopoly and how it is viewed by government; please the nature of the dilemma, along with the 3 choices and

the implications of those choices.

10. For the Monopolistic Competition Market Structure a. List and explain the characteristics of monopolistic competition and compare

them to the characteristics of pure competition and monopoly.

i. Please discuss monopolistic competition, list and explain the characteristics.

b. List and explain the characteristics of product differentiation. Provide 3 examples of companies actually using this technique and the impact of that differentiation

had on the firms’ performance.

i. Product differentiation is a key concept of microeconomics. Please list and explain the characteristics.

c. You are a business manager at a monopolistically competitive firm. One of your newly hired workers wants to know the conditions under which the

monopolistically competitive firm in the short run will maximize economic profit

or minimize economic loss. Please explain these two things to your new

employee. Be thorough.

i. Please use the MR MC approach in your answer.

11. For the Oligopoly Market Structure a. List and explain the characteristics of oligopoly and compare them to the

characteristics of the other 3 market structures.

i. The oligopoly market structure is one of the most significant types in our economy. Please discuss the oligopoly market structure, and list and

explain the characteristics. Creating a grid with explanations might help

here.

b. List and explain the conditions under which the Oligopolistic firm achieves profit

maximization and loss minimization using the MR-MC approach. Be thorough.

i. Using the MR MC approach, discuss how to determine when the oligopolistic firm maximizes profit or minimizes loss in the kinked

demand curve model.

c. You work for a firm that is a member of an oligopoly market.

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i. Explain in detail the issues of collusion. 1. Here you should discuss the role collusion (in its various types)

and how the firm might deal with the issue.

ii. Explain game theory and how the firm might use this tool to achieve its business goals

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