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0 1 2 3 4 5

O u

tp u

t o

f T

ru c k s

Output of Tanks

• A

•

PPC for Thompsonia

Point

Tanks

Produced

Trucks

Produced

Production Possibilities Table

Assignment #14 Final Study Guide

(20 Points)

Your final exam will be comprehensive. It may include any material covered in workbooks 13 and 14 as

well as the following topics from the other workbook sets. All problems on this study guide are from your

homework (exactly the same). If you completed your homework, all you have to do is copy correct answers

and update incorrect ones. Please use the mid-terms as study guides for multiple choice questions.

Workbook Part 1: 1. What are the three questions all economies must answer? I. _____________________________ II. _____________________________ III. ____________________________ 2. All factors of production can be placed into four categories. List the four categories and give a

brief description of each? I. ____________________________________________________________________________ II. ____________________________________________________________________________ III. ___________________________________________________________________________ IV. ___________________________________________________________________________ 3. Explain why sunk costs are not included in a decision.

Workbook Part 2: 1. Use the production possibilities curve below to answer the following questions. a. Complete a corresponding production possibilities table for Thompsonia

O u

tp u

t o f

W a tc

h e s

Output of Bananas

200

400

600

800

1000

1200

1400

1600

2 0

4 0

6 0

8 0

1 0

0 0

Switzerland’s PPC

Colombia’s PPC

•A

B•

•D

Combined PPC

b. Determine the opportunity cost for each decision. I. Increasing production of tanks from 2 to 3. ____________________________ II. Increasing production of tanks from 3 to 4. ____________________________ III. Increasing the production of tanks from 4 to 5. ________________________ IV. Increasing the production of trucks from 0 to 1. _______________________ V. Increasing the production of trucks from 1 to 2. ________________________ VI. Increasing the production of trucks from 1 to 5. _______________________ c. can this economy produce 4 trucks and 4 tanks at the same time? Explain your answer.

d. What would your analysis of this economy be if Thompsonia only produced 3 tanks and 2

trucks? ______________________________________________________________________________

______________________________________________________________________________ ______________________________________________________________________________

e. Does this economy exhibit the law of increasing marginal opportunity cost? How do you know

by looking at the graph? ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________

2. Use the combined production possibilities curve below to answer the following questions.

a. What is the maximum amount of watches Switzerland can produce? __________

b. What is the maximum amount of watches Colombia can produce if they also decide to produce

400 bananas? _______________________

Point

Watches

Produced

Bananas

Produced

Combined PPC

c. What is Switzerland’s opportunity cost of producing watches? _________________

d. What is Switzerland’s opportunity cost of producing bananas? _________________

e. What is Colombia’s opportunity cost of producing watches? _________________

f. What is Colombia’s opportunity cost of producing bananas? _________________

g. Who has the comparative advantage in producing watches? How do you know?

h. Who has the comparative advantage in producing bananas? How do you know?

i. Point D on the graph is clearly outside both countries production possibilities curve.

Explain how both countries can reach point D?

j. Complete the table below.

Workbook Part 3:

4a. How do businesses and households interact in the goods market?

________________________________________________________________________

________________________________________________

4b. How do businesses and households interact in the factor market?

________________________________________________________________________

________________________________________________

3. What are the three sectors of the U.S. Economy?

1. _________________________________________

2. _________________________________________

3. _________________________________________

12. Complete the circular flow diagram below by correctly labeling each part of the

economy. (Be sure to label all the arrows!)

Workbook Part 4:

5. What are the shift factors of demand?

________________________________

Quantity

Price

Demand

Supply

504010 25

6. What are the shift factors of supply?

________________________________

3. Use the graph below to answer the following questions.

a. What is the equilibrium price in the market above? ______________

b. What is the equilibrium quantity in the market above? _______________

c. Will there be a shortage or a surplus at a price of $8.00. By how much? ______________

d. Will there be a shortage or a surplus at a price of $2.00. By how much? ______________

4. For each of the following situations, identify what shift factor is being described. Then,

graphically illustrate the appropriate shirts in supply, demand, or both, and identify the effects

on price and quantity by creating graphs below

a. U.S incomes decrease by 10% due to the current recession. Market for gasoline

Shift Factor: ________________

b. Congress decides to decrease income taxes on all individuals.

Shift Factor: ________________

c. A new housing development is constructed in your neighborhood, bringing 1000 new residents.

Market for local grocery store products.

Market

Supply

Market

Demand

Labor Market

Market for Blackberry’s

(gallons)

$400

$450

$500

$350

$300

1 0

0 0

$550

$600

8 5

$480

$430

Supply

Demand

Supply + Tax

5. Use the graph below to graphically illustrate the imposition of a minimum wage. Identify any

shortages or surpluses associated with the minimum wage.

8. Suppose an excise tax is levied on Blackberry phones. Use the graph below to answer the

following questions.

a. What is the size of the tax imposed on Blackberry’s? _______________

b. Who physically pays the tax to the government? _______________

c. What is the price of Blackberry’s before and after the tax? ______________

d. How much do producer’s receive for each blackberry sold after the tax? ______________

e. What is the amount of the tax burden to consumers? ______________

f. What is the amount of the tax burden to producers? ______________

g. What is the deadweight loss associated with the tax? ______________

h. What is the tax revenue generated by the tax? ______________

Income

Marginal

Tax Rate

0 - $8,350 10%

$8,351 - $33,950 15%

$33,951 - $82,250 25%

$82,251 - $171,550 28%

$171,551 - $372,950 33%

$372,950 + 35%

Tax Structure A

Income

Marginal

Tax Rate

0 - $8,350 20%

$8,351 - $33,950 20%

$33,951 - $82,250 20%

$82,251 - $171,550 20%

$171,551 - $372,950 20%

$372,950 + 20%

Tax Structure B

Income

Marginal

Tax Rate

0 - $8,350 35%

$8,351 - $33,950 33%

$33,951 - $82,250 28%

$82,251 - $171,550 25%

$171,551 - $372,950 15%

$372,950 + 10%

Tax Structure C

Workbook Part 6:

3. Using the concept of tax burden, explain how a tax increase to the rich (business

owners/corporations) will affect everyone, not just the rich and businesses who are

paying the tax.

________________________________________________________________________

Use the tax tables below to answer the following questions:

2. Complete each sentence by filling in the blank with the appropriate term (progressive,

regressive, or flat).

a. Tax structure A is a __________________ tax rate.

b. Tax structure B is a __________________ tax rate.

c. Tax structure C is a __________________ tax rate.

3. Calculate how much income tax you would have to pay for the following amounts using

tax structure A.

a. Income tax on $400,000 is ________________________

b. Income tax on $35,000 is _________________________

6. Suppose the government imposes an excise tax on the production of cigarettes of $10.00

per carton. Calculate the tax burden to both consumers and producers given the

following elasticities.

a. Elasticity of demand = 1.5 Elasticity of supply = 0.5

Consumers tax burden = ____________ Producers tax burden = ____________

b. Elasticity of demand = 1.5 Elasticity of supply = 2.5

Consumers tax burden = ____________ Producers tax burden = ____________

Quantity

Slice of

Pizza

Double

Cheeseburger

Slice of

Pizza

Double

Cheeseburger

Slice of

Pizza

Double

Cheeseburger

0 0 0 - - - -

1 20 36

2 38 66

3 54 87

4 68 105

5 78 105

6 84 102

7 84 93

8 80 78

Total Utility Marginal Utility

Marginal Utility

Per Dollar

Workbook Part 7:

1. Suppose a 10% change in the price of gasoline decreases the quantity of gasoline

demanded by .5%. Calculate the elasticity of demand and determine whether the demand

is elastic, inelastic, or unit elastic.

2. Suppose a rise in movie ticket prices from $8.00 to $10.00 reduces the quantity of tickets

sold from 1000 to 600. Calculate the demand elasticity for movie tickets and determine

whether the demand elasticity is elastic, inelastic, or unit elastic.

3. In 2010, an excise tax on the production of cigarettes increased the price of a pack of cigarettes

from $4.00 to $5.00. This decreased the quantity of cigarettes demanded by 5%. Calculate the

elasticity of demand and determine whether the demand is elastic, inelastic, or unit elastic.

7. Suppose incomes increase by 10%. As a result of the price increase, the quantity of BMW’s

increase by 25%. Calculate the income elasticity and determine whether the good is a normal

good, an inferior good, or a luxury good.

Workbook Part 8:

Briefly explain the principle of diminishing marginal utility.

____________________________________________________________________________________

Use the table below to answer questions 1 – 4

1. Complete the table above.

2. Suppose Slices of Pizza costs $2 and a double cheeseburger costs #3. If you had a

budget of $12, according to the table above, how much of each good would you

purchase in order to maximize your utility?

3. What is the maximum utility you can get with your $12 if all you can is pizza and

cheeseburgers?

4. Now, suppose double cheeseburgers go on sale for $2. What is the new utility

maximizing combination given a $12 budget?

11. A Big Mac meal costs $3.00 giving you an additional 5 units of utility; a meal at the Four

Season's Hotel costs $27.00 giving you an additional 50 units of utility. Based only on the

information you have, using the theory of rational choice you would most likely:

A) choose to eat the Big Mac meal.

B) choose to eat at the Four Season's Hotel.

C) would be indifferent between eating the Big Mac and eating at the Four Season's

Hotel.

D) will decide that eating at the Four Season's Hotel is preferable because though the

marginal utilities of both the meals are the same, the total utility is greater in the case

of the meal at the Four Season's Hotel.

Workbook Part 9:

1. Explain why the principle of diminishing marginal productivity only occurs in the short-run

____________________________________________________________________________________

2. Explain the relationship between the economic concept of diminishing marginal productivity and

the principle of increasing marginal costs?

____________________________________________________________________________________

Output

Fixed

Cost

Variable

Cost

Total

Cost

Marginal

Cost

Average

Fixed

Cost

Average

Variable

Cost

Average

Total

Cost

0 - 100 - - - -

1 100

2 80

3 75

4 340

5 5

6 260

7 387

8 43

9 400

10 60

Output

Total

Cost

of Labor

Total

Cost

of Capital Total Cost

Average

Total

Cost

1 100 250

2 150 450

3 200 625

4 250 750

5 300 850

6 350 1150

7 400 1490

8 450 1950

9 500 2290

10 550 2700

11 600 3140

12 650 3850

3. Complete the table below and answer the corresponding questions.

a. Is this a short-run or a long-run cost table? How do you know? _______________________

______________________________________________________________________________

Workbook Part 10:

7. Complete the table below.

P = MR Output

Total

Revenue

Fixed

Cost

Variable

Cost

Total

Cost

Marginal

Cost

Average

Total

Cost Profit

20 0 50 - -

1 18

2 80

3 10

4 26

5 74

6 25

7 179

8 164

9 56 0

8. What range of production is this firm experiencing economies of scale? _________

9. What is the minimum efficient level of production? ____________

10. At what point does diseconomies of scale set in? ___________________

Workbook Part 11:

3. Why do firms in a competitive market earn zero profits in the long run? _____________

______________________________________________________________________________

5. Explain why a perfectly competitive firm will still earn a positive accounting profit even

though they earn zero economic profit?

______________________________________________________________________________

6. What factors are necessary for a monopoly to exist?

______________________________________________________________________________

Problems and Exercises:

1. Complete the table below and answer the corresponding questions.

Market Firm

S = MC

D = MR = P

ATC

a. According to the table above, is this a perfectly competitive firm or a monopolist?

___________.

b. What is the profit maximizing level of output? ___________________________

c. How much profit does this firm make at the profit maximizing level of output? _______

d. What is causing profit to decrease beyond the profit maximizing level of output? _________________________________________________________________________

_________________________________________________________________________

2. Use the graphs below to answer the following questions

a. Is the firm pictured above experiencing positive or negative profits? _______________

b. Draw and label the profit/loss rectangle on the graph of the firm.

c. Explain the process of returning to zero economic profits works.

______________________________________________________________________________

d. Illustrate the process you explained in part c on the graphs above

S = MC

ATC

$60

$40

$30

$25

10 20 22

Market for iPods

5. Use the graph below to answer the following questions.

a. How many iPods would a perfectly competitive market produce? ________________

b. What price would the perfectly competitive market charge? ________________

c. How much profit would the perfectly competitive market make? ________________

d. How many iPods would a monopolistic market produce? ________________

e. What price would a monopolistic market charge? ________________

f. How much profit will the monopolistic market make? ________________

Workbook Part 12:

1. Name all the market structure(s) which applies to each of the following statements. (Perfect Competition, Monopoly, Monopolistic Competition, Oligopoly)

a. Earns zero economic profit in the long-run. b. A market structure in which one firm makes up the entire market.

c. A market structure where positive short-run profits causes firms to enter the market

d. Market structure where collusion is most likely Significant barriers to entry exist.

e. Product differentiation is the main source of market power f. The market structure with the greatest incentive advertise. g. All firms sell identical products and have identical cost curves. h. Firms engage in strategic decision making. i. Price = average total cost in the long run j. Price is greater that marginal revenue k Price equals marginal revenue

l. Firms seek to maximize profits m. Produces where marginal revenue = marginal cost n. Market is made up of a small number of interdependent firms. o. Firms face a perfectly elastic demand curve. p. Market structure which the highest HHI.

2. Explain the difference between the cartel model of oligopoly and the contestable market model of oligopoly. ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________

3. Why do firms in a monopolistically competitive market have and incentive to increase

their total costs by advertising? ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________

4. Why do we have laws against monopolies and collusive oligopolies?

______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________

Labor Markets

Use the table below to answer the following questions

Number of

Workers Total

Product Marginal Product

Average Product Price MRP MRC

Total Labor Cost MFC

Marginal Profit

27 270 $3.50

28 279 $3.50 $9.00

29 287 $3.50 $9.25

30 294 $3.50 $9.50

31 300 $3.50 $9.75

32 305 $3.50 $10.00

33 309 $3.50 $10.25

34 312 $3.50 $10.50

35 314 $3.50 $10.75

1. Complete the table above

2. A competitive labor market would hire _______workers at a wage of ______________

3. Draw a graph illustrating the competitive markets hiring decision (two side-by-side graphs)

4. A mopsonistic labor market will hire _________ workers at a wage of ______________

5. Draw a graph illustrating the monopsonistic markets hiring decision (two side-by-side graphs)

7. Now suppose a labor union successfully negotiated a labor contract setting wages at $14. What

would this do to the competitive labor market depicted in the above table?

_____________________________________________________________________________________

8. Draw a corresponding graph to your answer for question 7.

9. Now suppose a labor union successfully negotiated a labor contract setting wages at $14. What

would this do to the monopolistic labor market depicted in the above table?

_____________________________________________________________________________________

10. Draw a corresponding graph to your answer for question 9.

11. Suppose the demand for the firm’s product has increased due to a change in preferences. The

increase in demand increased the price of the good to $4.50.

a. Complete the table below for the new price level.

Number

Workers

Total

Product

Marginal

Product

Average

Product Price MRP MRC

Total

Labor

Cost MFC

Marginal

Profit

27 270

28 279 $9.00

29 287 $9.25

30 294 $9.50

31 300 $9.75

32 305 $10.00

33 309 $10.25

34 312 $10.50

35 314 $10.75

b. As a result of the new price the new competitive wage rate is _______and ________workers

will be employed

c. Draw two side-by-side graphs representing the derived demand for this firm’s labor demand