1. Sales data for laptop computers sold in a market indicate the following: 1) A
ID: 1250938 • Letter: 1
Question
1. Sales data for laptop computers sold in a market indicate the following: 1) At a $1,500 price 120,000 laptops were sold and 2) When prices fell to $1,200 sales increased to 160,000 units sold.
Describe the nature of demand for these laptops AND describe any price elasticity of demand coefficients that would be consistent with these facts.
2. You know absolutely nothing about the price elasticity of demand coefficient for a hypothetical product. However, you DO know that whenever product selling prices have risen, the seller’s total revenues have risen dramatically.
Describe the nature of demand for this product AND describe any price elasticity of demand coefficients for the product that would be consistent with these facts.
3. Prices for a hypothetical good have been falling over an extended time period. Describe at least two non-governmentally-caused market demand conditions that might explain these decreases in price. Be specific in your answer.
4. Prices for a hypothetical good have been rising over an extended time period. Describe at least two non-governmentally-caused market supply conditions that might explain these increases in price. Be specific in your answer.
5. A number of idiot politicians have been suggesting that the government step in and establish stringent price ceilings for gasoline sales in this country. Explain why this is simply a bad idea. Be specific in your answer.
6. How does the Law of Diminishing Marginal Utility’s basic message help to explain the Law of Demand? Explain fully.
7.Describe how a consumer surplus might exist in a product market. Provide specific numerical examples/data in your answer.
8. Suppose that market forces of supply and demand interact in a market to determine an equilibrium price. Explain or describe how the determination of this price might serve to allocate or distribute this product to buyers in the market. Explain fully.
9. Suppose that market forces of supply and demand interact in a market to determine an equilibrium price. Explain or describe how the determination of this price might serve to determine which firms might actually participate in this market. Explain fully.
10. Describe how marginal utility and the selling price of a goods/services determine: 1) Which goods and services are purchased first and 2) What quantities of a good or service are purchased. Explain fully.
Explanation / Answer
1. Revenue is maximized when elasticity is 1. If the elasticity is greater than 1, then the firm should lower price to maximize revenue. If the elasticity is less than 1, then the firm should increase price to maximize revenue. Here, we see that when we raise the price revenue increases. So, the demand must be less than 1. That means that it is inelastic. 2. Revenue is maximized when elasticity is 1. If the elasticity is greater than 1, then the firm should lower price to maximize revenue. If the elasticity is less than 1, then the firm should increase price to maximize revenue. Here, we see that when we raise the price revenue increases. So, the demand must be less than 1. That means that it is inelastic. 3. We're looking for decreases in demand. A. An increase in awareness that the product causes cancer. Fewer people will want to buy the good due to this increase in information. This will decrease demand, price, and quantity. B. A substitute product is introduced. Some people will buy the substitute instead of the good. This will decrease demand, price, and quantity. 4. We are looking for non-government market *supply* conditions that would increase the price of a good. A. Input costs increase. Market wages or the cost of capital increases. This would increase a firm's marginal cost and, thus shift the market supply curve to the left. This would increase price and decrease quantity. B. A natural disaster. If there are 20 firms and an earthquake swallows 10 firms, then there will be 10 firms left. A decrease in firms will decrease supply, increase price and decrease quantity. 5. Those idiot politicians don't remember Jimmy Carter (the idiot president) and Richard Nixon (the crook president) who did exactly that. Price ceilings that are set below market price create shortages. So, instead of high gas prices, people simply don't have gas available. In the 70's, cars with empty tanks lined up around gas stations waiting for the next shipment of gasoline. The market price is the price where consumers demand the same quantity that producers are willing to produce. If the price ceiling is set below that, then producers will produce less but consumers will demand more. Thus, these two quantities will be different and we call the gap between them a "shortage." Shortages really suck because that means you have people who are willing to buy a product for a price and firms that are willing to sell at that price but the government won't let it happen because it has decided the price is too high. The graph looks like this: http://livingeconomics.org/images/glossary/shortage.gif 6. Math speak: The law of diminishing marginal utility implies that the utility function is concave. This results in convex indifference curves. Price decreases result in outward rotations of the budget constraint. Thus, the optimal point of consumption shifts outward. This implies that price is inversely related to quantity. This is equivalent to saying that demand curves are downward sloping. Simpler: The law of diminishing marginal utility means you get less utility from each unit you consume. So, the 5th burger gives me less utility than the first. The price I'm willing to pay for something is a reflection of the utility that I get from it. So, the more I consume of something, the lower the price will have to be for me to buy more. This implies that demand curves are downward sloping. 7. A consumer surplus just means that the consumer would be willing to pay a higher price than he or she ends up paying. Since the producer doesn't know the consumer's reservation price (the highest price the consumer is willing to pay), then the producer has to charge market price. If the consumer's reservation price is higher than market price, he or she enjoys a surplus. For example, I just ate a taco from Fuzzy's Tacos, the best damn tacos anywhere. I would be willing to pay $7 for one of these tacos. They are amazing. But I only have to pay $2 because that's the market price. So, I enjoy a $5 consumer surplus for consuming my taco. 8. Those buyers with the highest reservation prices will be the most likely to consume. Those buyers with a reservation price below the market price will not consume. A firm will never sell a product for less than the marginal cost. So, if a consumer's reservation price is below the firm's marginal cost, that consumer will never buy. If you want something, you have to pay for it. Those who want a product the most will be the most likely to buy it. 9. A firm will not participate in a market unless it can earn a profit. That is, it will only participate if the market price is above the firm's average total cost. Different firms may have different average total costs. So, those firms with the lowest costs will be the most likely to participate in a market. Those firms with the highest costs will be the most likely to stay out. 10. I will purchase a good if the marginal utility of that good is greater than the marginal utility I derive from the money I have to give up to purchase that good. Let's represent this as follows: Purchase if u(x)>v(Px) u is the utility derived from x, the quantity of the good. v is the utility derives from Px, the price of the good I will purchase those goods with the highest difference first. That is, I will first purchase those goods with the highest U(x) - v(Px) I will never purchase if I get more utility from the money than the good. Don't purchase if u(x)Related Questions
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