Study Guide

[ECON 2010: Principles of Microeconomics (Sum `15)]

Instructions:
This part of the Study Guide 2 consists of the sample essays type question that will prepare you for the final exam.
It is divided in five sections: Chapter 11, 12, 13, 16, and 17, respectively.
The solutions wont be provided before the Final exam in order to encourage questions and team work.
Remember to show all your work.

Chapter 11:
1) Tony's Pizza's production function is shown in the table below. Tony currently operates Plant 1. He hires workers
at a wage rate of $50 a day and his total fixed cost is $100.
Output (pizzas per day)
Labor
(workers)
1
2
3
4
5
6
7
Ovens
a.
b.
c.
d.

Plant 1
8
18
26
31
34
35
33
1

Plant 2
11
22
30
36
40
42
40
2

Plant 3
13
24
33
40
45
48
47
3

Plant 4
14
25
35
43
50
54
54
4

Calculate Tony's Pizza's total variable cost and total cost for each output level.
Calculate Tony's marginal costs.
Calculate the average fixed costs, average variable costs, and average total costs.
Draw Tony's marginal, average variable, and average total cost curves in one figure. What is the
relationship between marginal cost and average cost?

2) The below table gives the total cost schedule for oil changes at the local Jiffy Lube.
Output
(oil changes per
hour)
0
1
2
3
4
a.
b.
c.
d.
e.

Total cost
(dollars per hour)

What is Jiffy Lube's total fixed cost?

What is the total variable cost of 2 oil changes?
What is the average variable cost of 4 oil changes?
What is the average fixed cost of 2 oil changes?
What is the marginal cost of the 3rd oil change?

10
20
35
50
80

Chapter 12:
3) Petunia's Farm produces and sells milk. The market for milk is perfectly competitive. The market price of milk is
$2.50 per gallon. The relationship between the farm's output and total costs is shown in the table below.
Quantity
Total cost
(gallons per day) (dollars per day)
0
400
100
703
200
880
300
1,008
400
1,160
500
1,410
600
1,840
a.
b.
c.
d.
e.

Draw Petunia's average variable, average total, and marginal cost curves.
Use your graphs to find Petunia's profit-maximizing output.
If Petunia maximizes her profit, how much profit does she make?
What is Petunia's shutdown point? What is her economic profit at the shut-down point?
Should Petunia shut down? Will farms with costs the same as Petunia's enter or exit the milk market?
Explain.

4) The below figure shows the cost curves of a profit-maximizing perfectly competitive firm. If the price equals $7,

a.
b.
c.
d.

how much will the firm produce?

how much is the firm's average total, average variable, and marginal costs?
how much is the firm's total, total variable, and total fixed costs?
how much is the firm's total revenue and economic profit?

e.

what will happen in this market in the long run?

Chapter 13:

5) Anastasia's Gold Mines, a single-price monopoly, faces the demand schedule and has the cost schedule shown in
the table below.
Price
(dollars per
ounce)
100
200
300
400
500
600

Quantity
demanded
(ounces per day)
100
80
60
40
20
0

Quantity
produced
(ounces per day)
9
20
40
60
80
100

Total cost
(dollars per
day)
6,000
7,200
8,800
10,800
13,200
16,000

a.

Calculate Anastasia's marginal revenue schedule. In a figure, draw the demand curve and the marginal
revenue curve.
b. Calculate Anastasia's marginal cost and average total cost schedules. In the same figure that you drew the
demand and marginal revenue curves, draw the marginal and the average total cost curves.
c. What are Anastasia's profit-maximizing output and price? What is Anastasia's economic profit? Explain
your answer.
d. Does Anastasia's Gold Mines use resources efficiently? Explain your answer.

6) West Coast Gas, Inc., is a natural gas supplier. The firm faces the demand schedule shown in the table above and
cannot price discriminate. The company's fixed cost is $1,000 per month and its marginal cost is constant at $10
per thousand of cubic feet.
Price
Quantity demanded
(dollars per thousand (thousands of cubic feet
cubic feet)
per day)
10
80
30
60
50
40
70
20
90
0
a.

Draw the demand curve faced by West Coast Gas and the marginal revenue curve. Draw the company's
marginal cost and average cost curves.
b. Is West Coast Gas a natural monopoly? Why or why not?
c. What are the firm's profit-maximizing output and price? What is the firm's economic profit per month?
d. If West Coast Gas maximizes its profit, does it also maximize total surplus? Why or why not? What is the
deadweight loss (if any) [showing it in the graph is enough]?

Chapter 16:
7) The table below shows costs and benefits arising from college education. There is no government involvement
and the schools are competitive.
Marginal social
Marginal private Marginal external
Enrollment
cost
benefit
benefit
(millions of
(thousands of
(thousands of
(thousands of
students per year) dollars per student dollars per student dollars per student
per year)
per year)
per year)
4
4
16
8
8
6
14
7
12
8
12
6
16
10
10
5
20
12
8
4
24
14
6
3
a.
b.
c.
d.
e.

Draw the marginal social cost, marginal private benefit, and marginal social benefit curves.
How many students are enrolled and what is the tuition?
What is the efficient level of enrollment?
What is the deadweight loss? Why does it arise?
If the government provides the efficient amount of education, of the tuition paid by a student what does
the government pay and what does a student pay?

Chapter 17:
8) A paper mill dumps waste into a lake used by a catfish farmer. The table below shows costs and benefits arising
from the production of paper.
Quantity of paper
produced
(tons per week)
10
20
30
40
50
60

Catfish farmers'
Paper mill's
Marginal social
marginal cost from
marginal cost
benefit of paper
pollution
(dollars per ton)
(dollars per ton)
(dollars per ton)
10
5
55
15
10
45
20
15
35
25
20
25
30
25
15
35
30
5

a.

Draw the paper mill's marginal private cost curve, the marginal social cost curve, and the marginal social
benefit of paper curve.
b. What is the efficient level of paper production? If no one owns the lake and there is no regulation of
pollution, what is the quantity of paper produced per week? Illustrate the deadweight loss in your figure.
c. If the government introduces a Pigovian tax, what is the tax per ton of paper produced that achieves an
efficient outcome?
d. If the catfish farmer owns the lake, how much paper is produced per week and what does the paper mill
pay the farmer per ton? Explain you answer.
9) The below figure shows the market for fertilizer. When fertilizer is applied to lawns, it runs off into neighboring
streams and ponds, killing fish and creating an external cost.

a.

What is the equilibrium price and quantity of fertilizer in an unregulated, competitive market?

b. What is the efficient quantity of fertilizer?

c. Suppose government imposes a tax equal to the marginal external cost. What is the equilibrium price
paid by consumers and the equilibrium quantity after implementation of the tax?
d. At the output level in part (c), how much is the tax?
e. How much tax revenue does government collect?
f. What is the deadweight loss borne by society if the externality is left uncorrected?
10) The figure above shows the market for steel, the production of which creates pollution.

a.

What point represents the equilibrium price and what point represents the equilibrium quantity in an
unregulated, competitive market?
b. What area represents the deadweight loss of the unregulated, competitive market outcome?
c. What point represents the efficient quantity?
d. If the output level in part (c) was achieved through the use of a government imposed tax, what price
would consumers pay? What price would the producers receive? What distance represents the amount of
the tax?
e. If government successfully uses marketable permits issued under a cap-and-trade policy to eliminate the
external cost, what point represents how much output would be produced?