ECON 361

Extra Credit – Optional

Due Wednesday, May 29

Possible 35 points.

All answers must be typed (except graphs).

1.     Explain the three components of efficiency we discussed in class.  (3 pts.)

2.                 2.  Your statisticians have determined the following demand function for your good:

    Qd = 25 – 6P - .50(I) – 2(Pb) + 3(Ph)

    Where I = Income, Pb = Price of balloons, Ph = Price of hats

    From this information answer the following.

1. Are balloons complements or substitutes to your product?  Explain your answer (make sure you explain THE ECONOMIC THEORY and don’t simply say “because the sign is….). (2 pts.)

2. Are hats complements or substitutes to your product?  Explain your answer (make sure you explain THE ECONOMIC THEORY and don’t simply say “because the sign is….). (2 pts.)

3.     NEW PROBLEM - Suppose:  Q_d = 45 - 4P - 6I + 2Ps,    and    Q_s = -25 + 4P - 5W

1. If W = 6, I =3, and Ps = 4 what are the shortened versions of the supply and demand functions and the market clearing values of P and Q?  SHOW ALL WORK and CIRCLE YOUR ANSWERS  (3 pts.)

    Q_d =

    Q_s =

    So Market Clearing P =

    Market Clearing Quantity demanded =

    Market Clearing Quantity supplied =

b.    Graph this situation and then IN WORDS (in “c” below) – explain what is going on in this market. (Graph = 4 pts.)

GRAPH:

c.     EXPLANATION: (talk about minimum price for suppliers and maximum price for demanders).  So your answer should include numbers. (4 pts.)

4.       NEW PROBLEM -  Assume the following for Don's Deli:

    a.  Fill in the MP column. (3 pts.)

    b.  With which worker does diminishing marginal returns set in? (1 pt.) ________________

    c.  Given that Don sells his sandwiches for $2.00 each, and he pays his (unionized) workers $23 per hour -- how many workers should he hire?  (Assume labor is the only cost of production).  Explain and show work.  (3 pts.)

5.  Betty's Bridal makes Bridal cakes.  She can use either skilled or unskilled labor.  The marginal product of the skilled labor is 24 cakes per day.  The marginal product of the unskilled labor is 16 cakes per day.  (All cakes are of the same quality).  Betty pays the skilled labor $12 per hour for 8 hours per day and the  unskilled labor $7.00 per hour for 8 hours per day.

    a.  Determine Betty’s marginal product per dollar spent per hour for both skilled and unskilled labor. (2 pts.

    b.  If Betty is trying to use her inputs in the "best" way possible -- should she hire more skilled or unskilled labor and why?  Show all work.  (2 pts.)

6.  Explain the concept of “derived demand” with respect to inputs and then explain how it relates to marginal revenue product (or value of the marginal product).  Provide both an explanation and an example.  Do not copy from notes – your answer won’t count!! (3 pts.)

7.     The price elasticity of supply coefficient is +.2.  Explain a reason, as per class discussions, that this is so low.  (1 pt.)

8.             8.  If the income elasticity of demand for your good is -6, where would you market this good and why?  (1 pt.)

         9.  The cross price elasticity of demand between your good and a competitor’s good is +6.  Explain a decision that a manager might make using this information.  (1 pt.)