Economics 121 Quiz Answers - Fall 1996

Quiz 4 Answers

In a study commissioned by the College, consultants estimate that an increase in the comprehensive fee from $19,550 to $20,550 would cause the number of returning students to drop by 2.3%. Also, it would reduce applications for next year's class from 1600 to 1440.

a) Estimate and interpret the elasticity of demand for the returning students.

The elasticity of demand for returning students is:

Demand for returning students is inelastic.

b) Estimate and interpret the elasticity of demand for applicants.

The elasticity of demand for applicants is:

The elasticity of demand for applicants is elastic.

c) Comparing these elasticities, do they seem reasonable? Explain.

These answers seem reasonable because applicants have more substitutes: other schools to apply to. Returning students face a higher cost of changing schools so their substitutes are relatively more expensive.

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Quiz 5 Answers

This quiz is based on the information for a purely competitive company shown in the table below.

(a) How much are the company's fixed costs?

Fisxed costs (TFC) are $200. Found by looking at TC at an output of 0.

(b) At what price is the company selling its product?

Price is $260. Found by looking at total revenues at any quantity: TR = P x Q.

(c) How much output should the company produce if it wishes to maximize its profit?

The company should produce 5 (Q = 5) because this is where profit is highest. Found by looking at profit column or by finding where P = MC.

(d) Suppose the price of the company's output changes to $240. Should the company increase or decrease its production? Is this consistant with the "Law of Supply"?

If price falls to $240, the firm should cut back its output to 4 (Q = 4) because this is now where P = MC. It is consistant with the "Law of Supply" in that, as price falls, firms reduce their quantity supplied.

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Quiz 6 - Answers

Economics 121 A & B

Fall 1996 - Prof. Becker

(See graph on Quiz 6)

(a) What price will the publisher select for the textbook? How many will be sold?

Publisher will select quantity where MR = MC and price along demand at this quantity: Q=4,000, P=60.

(b) What price and quantity would the professors suggest the publisher choose?

Professors will want the largest quantity that will keep the publisher from "exiting" the market. This is where P = ATC: Q=7,100, P=29 (approximately).

(c) What is the allocatively efficient price and quantity? Why is it not feasible?

Allocatively efficient price and quantity are where P = MC: Q=8,000, P=20.

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Quiz 7 - Answers

At a large university there are two bookstores. One is located on campus in the student center and the other is located just off campus. Instructors inform both stores of their textbook choices. Both stores carry new and used books for every class.

Each store must decide on a price for the introductory economics textbook: either $40 or $45. Their "payoffs" matrix is shown below. It gives the profit for each bookstore from sales of this book. (e. g., If the on-campus price is $45 and the off-campus price is $40, then the on campus store's profit is $5,500 and the off-campus store's profit is $9,500.)

(a) (5 points) What kind of market structure is this? Explain your answer.

This is an oligopoly with some product differentiation. We know it is an oligopoly because there are only two firms.

(b) (5 points) Though the stores sell the same book, there is some differentiation. How can you tell from the payoffs matrix?

We know there is some differentiation because when one firm raises its price above that of the other, it does not lose all of its sales.

(c) (5 points) Is there an equilibrium (a Nash equilibrium)? Explain.

There is a Nash equilibrium: both charge a price of 40. At this point, neither store will want to change its price.

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