Econ Prob.

NOTES FROM INSTRUCTOR

Hints for Problem Set #3:

For question one, to calculate the elasticities of demand, use the midpoint method

([(Q1-Q2)/(Q1+Q2)] / [(P1-P2)/(P1+P2)])

 

 For question two, mark up over cost is the value above the average total cost (value over ATC).

For question three, note that if they shut down they would lose more money closing down and paying fixed costs than if they stayed open, lost money, but could pay all of their variable costs and part of their fixed costs out of store revenue. Review pages 445-446.

In the graph you need to show where the price is relative to average total cost (ATC) and relative to average variable costs (AVC).   

 

For question four, you have to find the quantities for which the MU/price of glue equals the MU/price of hay. Look for the place where MU/$ for glue = MU/$ for hay while staying within the $14 budget constraint. Review pages 402-403