Suggested Answers (Revised)

Here are the revised answers:

solutions.pdf

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Errata for Suggested Solution

For those of you who have actually tried out the questions and drawn the diagrams, you will realize that there is a mistake in the suggested answers to review question 1 (a) (i), the equilibrium quantity should decrease instead of increase. Many thanks to Mr Teo Guo Shou for pointing this out.

Suggested Solutions to Review Questions

Click to view the suggested solutions:

solutions.pdf (no longer valid)

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I will post the answers to the review questions sooner or later, preferably sooner ;),hopefully by the end of this week. If time permits, I will post more review problems.

 Good luck for your finals.

Revision Question 2

A small town is currently served by many competing supermarkets.

a. Using a diagram of the market for groceries, show the consumer surplus, producer surplus and total surplus. Assume constant marginal cost.

b. Suppose the supermarkets combine into in a single company. Using your diagram, explain what happen to consumer surplus, producer surplus and total surplus. Relative to the competitive market, what is the transfer from consumers to producers? What is the deadweight loss?

c. Suppose the company has a monopoly on bottle water sales in the town, with increasing marginal cost. If the price of tap water increases, what is the change in the chain’s profit maximizing levels of output, price and profit for bottled water? Explain using a diagram.

d. The company is also considering building a bridge across a river. The bridge would cost $2 million to build and nothing to maintain. The following table shows the chain’s anticipated demand over the lifetime of the bridge.

 

Price per Crossing ($)	Number of Crossings, in Thousands
8	0
7	100
6	200
5	300
4	400
3	500
2	600
1	700
0	800

i. Should the company build the bridge? Why or why not? If it builds the bridge, what price will be charged by the company?

ii. Should the government build the bridge? Why or why not? If it builds the bridge, what price will be charged by the government?

 

Revision Question 1

Grain has an elastic demand, and gasoline has an inelastic demand.
a) Suppose that the government places a tax on each product that lowers the supply of each product by half (that is, the quantity supplied at each price is 50% of what it was).

1. What happen to the equilibrium price and quantity in each market?
2. Which product experiences a larger change in price?
3. Which product experiences a large change in quantity?
4. What happens to total consumer spending on each product?

b) Explain why a drought around the world raises the total revenue that farmers receive from the sale of grain, but a drought only in Thailand reduces the total revenue that Thai farmers receive.

c) Studies indicate that price elasticity of demand for gasoline is 0.4. If a liter of gasoline currently cost $2 and the government wants to reduce the consumption of gasoline by 20%, by how much should it increase the price?

Answers for Practice Quiz 2

There are some problems with the javascript. Apologies for that. Here are the answers. Check them after you attempt the quiz.

1. A

2. B

3. B

4. A

5. C

6. D

7. D

8. B

9. A

10. D

11. A

12. A

13. C

14. D

15. C

16. C

17. D

18. A

19. C

20 B

Practice Quiz 2

Another quiz for you to try. This one covers all the topics tested.

Start Practice Quiz 2. (no longer valid)

Good luck for your quiz next week!