Study Questions For The Second Exam
ECON 361
These questions are not designed to take the place of studying your notes and the reading assignments. Do not e-mail me and ask me to answer all or some of these questions for you. If you have missed class, it is your responsibility to get the notes from another student. Once you have answered these questions yourself, if you are unsure of any of your answers, let me know and I will tell you if you are correct or not. Don't be afraid to ask me questions, I just want you to try to answer the questions yourself first.
MAKE SURE - you use your notes, the in-class exercises and the homework when you study -- some problems on the exam will be very similar.
TOPIC: Demand Analysis - (the questions in red are review from the last exam -- so start with #10).
Markets ration what to whom?
What is meant by "revealed or demonstrated preference"? (Koch talked about this as well)
What is a demand curve?
Why must someone have both the willingness and ability to demand? Explain.
Explain diminishing marginal utility and how it relates to the downward sloping demand curve.
What are two other theories (besides diminishing marginal utility) that explain why a demand curve is downward sloping?
Know the factors that determine or change demand and how to show the changes in the demand curve (graphically).
What is the difference between a change in quantity demanded and a change in demand?
What is consumer surplus? Show this on a graph.
Given some data that gives you a demand function (such as Quantity Demanded = 9 - 4P), be able to graph a demand curve.
From the same function as above, be able to show what would happen to the demand curve if the price (P) changed.
From the same function as above, find the inverse demand or solve for the price equation.
After adding in variables such as income or the price of a substitute or the price of a complement into a demand function, be able to find the new equation for quantity demanded and the inverse demand.
Be able to show how that demand curve would change with a change in the value of one of the variables (such as income). Be able to graph these changes too.
Understand what the signs on the variables in a demand function mean.
How would a manager use the information given in a demand function?
What is a reservation price?
Be able to determine the amount (in $) of consumer surplus from a demand function and a given market price.
How might a manager use this information? How might a firm try to capture some consumer surplus?
TOPIC: Supply Analysis
What assumption is typically made about the owners of firms regarding their motivation for being in business?
Define the short run and the long run. Again, what can managers do in the long run that they can't do in the short run?
What is a supply curve?
What is the law of diminishing marginal returns? Explain.
How does the law of diminishing marginal returns apply to the upward slope of a supply curve (and increasing marginal opportunity costs)?
Explain why input costs of a firm are related to opportunity cost and also to consumers. Relate this to the upward slope of the supply curve as well.
Know the factors that determine or change supply and how to show the changes in the supply curve (graphically).
What is the difference between a change in quantity supplied and a change in supply?
What is producer surplus? Show this on a graph.
Determine the amount of consumer surplus given supply curve data and a price. (i.e., the area of the triangle).
How might a consumer capture some producer surplus? How might a producer capture more producer surplus?
Given some data that gives you a supply function (such as Quantity Supplied = -9 + 4P), be able to graph a supply curve.
Make sure you understand why there is a + sign in front of 4P and a negative sign in from of the 9 in the supply equation above.
From the same function as above, be able to show what would happen to the supply curve if the price (P) changed, when Qs = zero, etc.
After adding in variables such as wages, materials costs, technology, etc. into a supply function, be able to find the new equation for quantity supplied and the inverse supply (the shortened version).
Be able to show how that supply curve would change with a change in the value of one of the variables (such as wages). Be able to graph these changes too.
Understand what the signs on the variables in a supply function mean.
How would a manager use the information given in a supply function?
TOPIC: Supply and Demand Analysis
What does "satisfactory inventory level" mean? What is a market clearing price?
Why do managers try to get there?
What signals in markets tell managers to change price -- and therefore quantity demanded and supplied changes too?
Explain this market adjustment - both in words and graphically.
Given some data that provides you with both a demand function and a supply function - be able to find market clearing value of P and Q.
Following from #5 above, be able to find new market clearing prices and quantities given changes in variables in one or both of the demand/supply functions -- and be able to graph these changes.
Why is it desirable for markets to "clear?"
What are externalities? Give an example. How do externalities change the benefits from trade for society?
What is a price floor? Price ceiling?
Show graphically the effects of a price floor and price ceiling.
After determining a market clearing price and quantity with supply and demand functions - be able to determine the amount of a shortage or surplus in a market if the price is not at the market clearing price.
What might be some unintended consequences of price floors and price ceilings -- examples?
With price controls -- scarce goods must be rationed some way besides price -- therefore the FULL economic price (pecuniary and non-pecuniary) is equal to what in this case?
Given your answer to the question above -- show graphically how consumer and producer surplus changes when there is a price floor or a price ceiling.
Why do economists contend that price controls decrease efficiency?
Be able to graphically show changes in the market clearing price and quantity when either or both supply and demand change.
TOPIC: Elasticity (this will be on the next exam)
Understand the concept of elasticity generally speaking.
Know what the concept of the price elasticity of demand means?
Know how to calculate the price elasticity of demand using the three different ways we discussed (formulas will be provided).
Know what the calculation tells you -- what does elastic, unitary, inelastic mean?
Graph curves that are perfectly inelastic in a range of prices -- relatively inelastic, elastic.
Know the relationship between elasticity and total revenue -- what should your pricing decision be in each case (i.e., if you have an elastic demand, what will happen to total revenue when you drop your price and why)?
Know the relationships between price elasticity of demand, marginal revenue, and total revenue.
Why is TR maximized when MR = 0?
How does knowing about demand elasticity help the manager with a pricing strategy and why.
What are the determinants of the price elasticity of demand - theories? Applications?
What does derived demand mean?
What is the elasticity of derived demand?
What are the four factors or principles that affect the derived demand elasticity? Understand all of them.
Know what the concept of cross price elasticity means.
Know how to calculate the cross price elasticity using the implied elasticity equation.
What does the sign tell you when you calculate a cross price elasticity? How might a manager use this information?
Know what the concept of income elasticity means.
Know how to calculate the income elasticity using the implied elasticity equation.
What does the sign tell you when you calculate a income elasticity? How might a manager use this information?
Know what the concept of advertising elasticity means.
Know how to calculate the advertising elasticity using the implied elasticity equation.
What does the sign tell you when you calculate a advertising elasticity? How might a manager use this information?
Be able to apply these elasticity coefficients in applications -- if demand falls, for example, how much advertising is needed to bring it back up?
Understand the concept of the price elasticity of supply.
Know how to calculate the price elasticity of supply.
What factors influence the price elasticity of supply?
How does the elasticity of a supply curve effect quantity and price changes when demand changes (shifts)?