ECON 213 PROBLEM SET 3 (2015)

| November 9, 2018

Problem Set 3
Name:
________________________________________

Problem
Set 3 is to be completed 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: ___________________________________
$1.50 –
$2.00: ___________________________________
$2.00 –
$2.50: ___________________________________
$2.50 –
$3.00: ___________________________________

If the
price of graham crackers is $2.50 should firms raise or lower their prices if
they want to increase revenue? Explain this in terms of elasticity.

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

Profit maximizing output: _______________________

Approximate mark up over cost _______________________

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

What is the new profit maximizing output? _______________________

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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 a completely labeled graph to help you explain the
shutdown decision. You should show two graphs in your answer, one for the
market as a whole, and one 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 should be a written explanation of your
graph.)

4.
What
combination of the two goods below allows you to maximize your utility with a
budget constraint of $14? Show how you arrived at your conclusion in the space
provided below. Place your final answers on the lines at the bottom of this
page.

PRICE = $0.50 per bottle

Bottles
of glue

Total
Utility (Utils)

1

15

2

23

3

30

4

35

5

38

6

40.5

PRICE = $2.00 per bale

Bales
of hay

Total
Utility (Utils)

1

10

2

22

3

36

4

52

5

70

6

90

Bottles
of glue: _________________________
Bales of
hay: ____________________________

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