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Solutions to Microeconomics Class Discussion Questions

File 19 Class Discussions

1. Use the following demand schedule to depict how elasticity of demand changes over the demand curve and
how differing elasticity affect total revenue.

 Demand Schedule Price Quantity Total Revenue 9 800 7200 8 1000 8000 7 1200 8400 6 1400 8400 5 1600 8000 4 1800 7200 (200/1100)/(1/7.5) = 1500/1100 = 1.36 (200/1300)/(1/6.5) = 1300/1300 = 1.0 (200/1500)/(1/5.5) = 1100/1500 = 0.73

2. How can Darin Jones use the information presented in this chapter when pricing the products sold in
Darin's Music Emporium? Assume the majority of his customers will
interested in a variety of music software (cassettes, tapes, and disks) and other items such as posters.

Darin Jones can maximize profit by using elasticity of demand theory when pricing his products.
Class discussion may center upon elasticity of demand for products
sold in the Emporium.
Are products necessities or luxuries? Are they normal or
superior goods?
Can cross and income elasticity be used in pricing products?

3. Explain the concept of cross elasticity of demand as it relates to a product sold at the Emporium.

Many goods sold at the Emporium are complements. An example would be hardware like tape players and software like tapes.
Giving discounts on one can generate profits on another. Other goods are substitutes such as audio tapes and audio disks.
Pricing with these concepts in mind will maximize total revenue.

4. Contrast normal and inferior goods. Give examples of each type of good that may be sold at the Emporium.

Quantity sold of normal goods increases as income increases and for inferior goods it decreases as income increases.
New products such as audio disks and soon-to-be-sold audio disk recorders tend to be superior in nature.
Few of the goods sold in the Emporium are inferior.

File 20 Class Discussions

1) Give examples of a product you use little of because negative utility comes quickly.

Orange Juice bother my tummy.

2) Give examples of a product you use a lot of because negative utility comes slowly.

Pizza

3) Give example of advertisements that take advantage of the idea that there isn't declining utility with this product.

Lays potato chips, I bet you can't eat one.
Schaffer is the one beer to have when your having more than one.

4. How might Darin Jones use his knowledge of consumer behavior when planning his purchase of CD's,
tapes, and other goods sold at the Emporium?

Indifference analysis will affect all of Darin's customers but in different ways. Younger buyers have different
emotional needs and constrains than say his college-age buyers. Fads have a short product life cycle, and these
goods should not be over-ordered. The company that invented hula hoops eventually went bankrupt because
of excess inventory.

File 21 Class Discussions

1. Draw average and marginal product of labor curves on graph A. Draw average variable cost and marginal cost curves on graph B.
In each case explain how the location, direction, and rate of change of the marginal curves depict the shape of the average curves.
Note that the two graphs are mirror images of each other.

File 22 Class Discussions

Darin Jones has decided to open a fully-automated car wash with Linda Smith, a friend from college. Speedy Car Wash
would be fully-automated with annual fixed charges for costs such as depreciation and rent amounting to \$100,000.
Variable costs such as labor were expected to be \$2.00 per vehicle washed. Price was expected to average \$7.00
per vehicle, and they plan to wash 30,000 cars per year. 1. Calculate the expected first-year profit for Speedy Car Wash.

Total Profit = Total Revenue - Total Costs

= P Q - TFC + TVC

= P Q - TFC + VC/unit Q

= (\$7/unit 30,000 units) - (\$100,000 + \$2 30,000 units)

= \$210,000 - (\$100,000 + \$60,000)

= \$50,000

3. Calculate the break-even point for the data in Question #1 using the concept of contribution to margin.

Contribution to margin (C) = price - variable cost/unit

Break-even = Total Fixed Costs = \$100,000 = \$100,000 = 20,000 units
C                      \$7 - \$2          \$5

Note: C first goes to pay for TFC and then goes to profit. At 30,000 units, 20,000 units paid fixed costs (20,000 \$5/unit),
and 10,000 units for profit at \$5/unit is \$50,000.

4. Redo Question #3 taking an algebraic approach.

TR = (P/unit)Q and TC = TFC + (VC/unit )(Q)

At break-even TR = TC and by substituting

TR = ( P/unit)Q = TFC + ( VC/unit)Q and by substituting

\$7Q/unit = \$100,000 + \$2/unit X Q

\$5Q = \$100,000 Q = 20,000 units

5. List possible costs that might be incurred by Speedy Car Wash using the cost categories discussed in File 21.

Fixed Costs Variable Costs Explicit Costs Implicit Costs

rent labor all Darin's and Linda's

fixed assets some utilities accounting time and capital

property taxes advertising costs some utilities materials

File 23 Class Discussions

1. Apply the concepts of  the purely competitive modal to the Globalization of world markets that has occurred over the last 25 years.

The question is, does the purely competitive adjustment apply to the last 25 years?
Are profits disappearing from those who had monopoly power and were losing it over the period?
Is this why many companies are using accounting gimmicks to make their profit picture look better?

File 24 Class Discussion Questions

1. Are there aspects of the business done by Darin's Music Emporium which involve monopoly power? Explain.

Many of the innovative hardware and software products sold by the Emporium are unique, especially when first introduced,
and thus possess monopoly product characteristics. Price for these products may be high (skim pricing) or price
may be low

Page 78 Class discussion questions 1. Comment on the statement "Advertising is a waste of economic resources."

This is a normative statement (see page 1) designed to stimulate class discussion.

2. Darin's Music Emporium is in a monopolistically competitive industry. What can

Darin Jones do to differentiate the products associated with his Music Emporium?

Why would he want to do this? Discussion may center on areas of product differentiation such as price, quality, variety, store environment and image, quality of workers, etc. Darin should use

product differentiation to make his products more price inelastic.

3. What is your college community doing and what could they do to enhance product diversification?

Discussion may concern tuition payment plans, food, and dorm life. Topics such as

job placement, co-op programs, and enhancement of career opportunities would prove interesting.

Page 80 Class discussion questions

1. Does competition among progressive oligopolies eventually eliminate the high profit needed to be progressive?

Class discussion may center upon the recent restructuring by the computer and home electronics industries. IBM and Digital Equipment are examples of companies that

have seen a substantial decrease in profit but still must keep pace with the many innovations being generated by their competitors. To date, the consumer seems to

be receiving better products at lower prices. This profit squeeze has expanded

to Japan so the final answer to this question will have to wait a few years.

2. Who was hurt by the recent demise of some Rust Belt industries with oligopoly power?

In the short run, all constituents were hurt: owners, managers, workers, and some customers. Because of restructuring, much of the Rust Belt escaped the 1990-91 recession.

3. How may Darin's Music Emporium be affected by suppliers and competitors who are progressive oligopolies?

The Emporium is dependent upon a constant stream of new products, many of which

are bought from progressive oligopolies. Some may question the technological obsolescence created by these companies to increase sales.

File 26

1. Using a kinked demand curve, show an oligopoly making a profit. (see figure 79A)

2. What changes in this situation would result in the firm breaking even or even

incurring a loss?

A decrease in demand or an increase in cost could eliminate profit. A change

in consumer attitudes increased demand for foreign cars during the 1980's.

OPEC price controls decreased supply and increased factor costs in the 1970's. Page 82 Quick Notes MRP decreases because of diminishing returns. For imperfect markets, MPR also

decreases because the selling price of the final product drops.

File 27

1. Use the concepts explained in this chapter to analyze what college students can do to increase the amount they will earn upon graduation.

2. What do the theories described in this chapter indicate will be the result of the increase in fringe benefits being legislated in Washington,
negotiated by unions,
and demanded by employees?

3. What theories explained in this chapter should Darin consider when making a decision to buy either a 286 computer/cash register
costing \$6,000 or just
a cash register costing \$2,000?

Darin should choose the equipment with the largest MRP per dollar. If this

calculation proves difficult, he should contrast the equipment on the margin.

This would entail comparing costs and benefits of each machine.

File 28

1. Could Darin's Music Emporium be affected by unions?

Small merchandising companies such as Darin's Music Emporium will not have to

deal with unionized employees. These companies do deal with transportation and

manufacturing companies that are unionized.

File 29

2. Bob Gates, founder, developer, and primary owner of Microsoft Corporation, is said to be worth about 70 billion dollars.
Discuss in "positive economic terms" (see file 1) this accumulation of wealth (see Question #3).

Some of the 70 billion dollars is interest on invested capital. Most is a payment for enterprise. In a market system, profit belongs
to the entrepreneur until competition increases, and profit falls.

3. Discuss Question #2 in normative economic terms.

Question concerns economic policy (file 1). At what rate should enterprise be taxed? Opinions will vary. Risk continues as most
of the profit is still invested in Microsoft. Many feel people involved with Microsoft are overcompensated. Many felt people involved
with Digital Equipment Corporation, one of the hardware success stories of the 1980's, were overcompensated. In the last few years,
Digital stock is down over 80% and many have lost their jobs. 4. Name some industries that have recently lost their economic rent.
Was this rent deserved? Why did they lose the rent? Who was hurt? Who was helped?

File 30

1. Use the data depicted in the following table to demonstrate why majority rule is sometimes economically inefficient. (New Material)

2. Why do the majority often vote down public goods?

This question is more complicated than this quantitative analysis indicates. Measuring costs and benefits is subjective, difficult, and not precise.

3. Assume the benefit received by citizens from public

goods is a function of income. What would a graph

of the function look like?

Many would draw a straight line with a negative slope. Others start with a positive slope, but

then turn negative as the wealthy receive little help. This graph takes into account the idea

that much of the wealth generated by real estate, communications, and other industries would not exist

without government spending.

4. Does the attitude toward the production of public goods differ from generation

to generation? Give examples of these differences, especially as they relate

to current discussions concerning which goods to produce.

Social scientists are beginning to study the effects of different generations upon society. The baby boomers now in their 30's and 40's have a very different attitude

than older and younger generations. (see "Generations" in the bibliography)

5. Should Medicare pay for a cancer drug which increases the cure rate from 6.9% to 7.0%? Expected cost, \$200,000 per life saved. This question is currently being pondered by government officials.

This normative question will be discussed (and answered?) during the 1990's.

6. Discuss the cost-benefit statistics concerning government regulation presented

in section IV on page 96. Include in your discussion the subjective nature of

measuring the cost and benefit of this type of data.

Data is one author's attempt to calculate the cost of government safety programs. The study required many subjective assumptions which if changed, and many think

they should be changed, would change the study's conclusions. We have an abundance

of economic data, most requiring assumptions and derived by groups with a vested interest in a particular conclusion. Developing unprejudiced data may require combining the Office of Management and Budget, now under the President, and the Congressional Budget Office into one bureau similar in independence to the Federal Reserve System

File 31

1. Discuss the economic consequences of government trying to affect the supply and demand for the following:

Housing: Government tax policies help people achieve the American dream of

owning their own home. Benefits received are immense, go disproportionately

to the wealthy, and are extremely regressive from a tax point of view. American

houses are substantially larger than those in Germany and Japan, are built with resources that are difficult to replace, and are costly to heat and air condition.

Education: America is spending substantially more on education than her economic rivals with little to show for these expenditures. With the return on a college education dropping, questions to consider include:

1. Should government funds be directed toward college majors where there is a shortage of workers?

2. Should government funds be directed toward vocational training?

3. Should money be directed toward pre-school education, where studies indicate

the economic return is higher than other areas? Medical Care

Government involvement in medicine has resulted in two recent trends:

1. A substantial increase in medical costs

2. A substantial increase in longevity 3. Is the increase in longevity worth the increase in medical costs? Who wants to vote for a shorter life?

2. Do farmers receive too much economic rent?

Like the last question, the costs have been high and the benefits high. Interesting questions include:

A. Will the country someday subsidize manufacturing to the extent it now

subsidizes agriculture?

B. Are government subsidies an attempt to delay or negate both the costs

and benefits of creative destruction

File 32

1. Distinguish between a monopoly and monopoly power.

A monopoly industry has one producer. Monopoly power is the ability to control market activity (set price by restricting quantity) and receive economic rent. Oligopoly companies often possess monopoly power.

2. Do we need a regulatory agency, such as the Competitiveness Council, to protect business and individuals from too much government regulation?

Government regulation is under scrutiny because of international competition, a recent recession, and slow economic growth. Some feel the US needs an industrial policy to combat these problems and this agency could be part of it. Others feel these problems should be left to the market. Interestingly, President Clinton's economic advisors favor an industrial policy while former President Bush's economic advisors stressed free market activities.

3. Analyze the causes and effects of the 1980's deregulation of industry.

Those believing in deregulation feel the market is capable of regulating itself.

The most recent emphasis on market self-regulation began in England during the

1970's and with the fall of Communism in Russia and Eastern Europe, appears to

be spreading around the world. Caused by slow economic growth and expounded by supply-side economists, deregulation was to be one of the answers to our economic problems. Whether deregulation will have a positive economic effect will take a

while to determine and hopefully, banking deregulation will be the only catastrophic failure of the experiment.

File 33

1. Are citizens provided with enough correct information about the problem of poverty in the United States?

Subjective question in which the class may focus on the media, Office of the President, Congress, and or local politicians. Reliability of the data and its complicated nature, may also be discussed.

2. Why do you feel the Lorenz Curve for college graduates has been depicting an increase in income inequality?

Attitudes of the students should prove interesting. Reasons include oversupply of some majors, inability's of some students, international competition, and the difficulty in measuring income because of the recent increase in fringe benefits.

Appendix 2

1. Use a supply and demand

graph to depict the econ-

omic effects of protective

tariffs. List methods, in

by countries to restrict

(New Material)

1. Tariffs

2. Quotas both required and voluntary

3. Health, safety, and pollution standards applied to foreign goods

4. Other barriers such as red tape and artificial

restrictions (a Japanese specialty)

2. Using data presented in this learning unit,

draw a before and after specialization PPF

for the production of computers and shirts

by the United States and Canada.

3. What are some of the structural changes

the United States can make to improve her

competitive position?

A. Education and training could be improved

B. Real interest rates could be made internationally competitive

C. Infrastructure could be improved

4. Has the federal government helped those hurt in the past by the creative

destruction caused by economic change such as the current increase in

international competition? Should more be done to help those now being

adversely affected by this international competition?

A. Businesses, farmers, and workers all at one time or another have been protected from the forces of creative destruction

B. This economic policy question is currently being debated, though not in the context of creative destruction, and the answer is to be determin