ECON 213 - PROBLEM SET 3

Problem Set 3

Name: __________Ulecia A. Culmer______________________________

Problem Set 3 is due 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: _________-0.45 Inelastic__________________________

$1.50–$2.00: _____________-0.76 Inelastic______________________

$2.00–$2.50: _____________-1.31 Elastic______________________

$2.50–$3.00: ______________-2.22 Elastic_____________________

Now, assume the price of graham crackers is $2.75. Should firms raise or lower their prices if they want to increase revenue? Explain this in terms of elasticity.

A firm should lower their price because graham crackers are inelastic at a lower price. The higher the price is the less likely a costumer will purchase graham crackers

2. Assume the competitive market shown below faces a short run price of $10. Using the graph below, identify the following:

Profit-maximizing output: ______110_________________

In the long run, the price falls to $7.50. Why does this happen?

An increase in demand would temporarily increase the price of the good in the short run. This would temporarily increase profits, making economic profit and welcoming more firms into the market. After some time, the price would settle back down to its original price, maintaining its increase in quantity supplied, because of the increase in supply with new firms entering the market.

What is the new profit-maximizing output? ________90_______________

10

20

30

40

50

60

70

80

90

100

110

120

130

$0.00

$2.50

$5.00

$7.50

$10.00

$12.50

Quantity

P=MR

MC

ATC

P

r

i

c

e

,

C

o

s

t

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 2 completely labeled graphs to help you explain the shutdown decision. One graph must be for the market as a whole, and the other must be 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 must include a written explanation of your graph.)

4. Use the production function below to answer the following questions:

Units of Labor	Total Output	MP
0	0
1	5
2	15
3	30
4	42
5	52
6	60
7	65
8	67
9	63
10	55

a.) Calculate marginal productivity (MP) and put this in the table.

b.) At what level of employment does diminishing marginal productivity begin?

c.) At what level of employment does marginal productivity become negative?

d.) Why does marginal product become negative?