Study Questions For The Third 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.  Also, there will be questions over your reading assignments as well.

TOPIC:  Elasticity

1. Understand the concept of elasticity generally speaking.

2. Know what the concept of the price elasticity of demand means?

3. Know how to calculate the price elasticity of demand using the three different ways we discussed (formulas will be provided).

4. Know what the calculation tells you -- what does elastic, unitary, inelastic mean?

5. Graph curves that are perfectly inelastic in a range of prices -- relatively inelastic, elastic.

6. 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)?

7. Know the relationships between price elasticity of demand, marginal revenue, and total revenue.

8. Why is TR maximized when MR = 0?

9. How does knowing about demand elasticity help the manager with a pricing strategy and why.

10. What are the determinants of the price elasticity of demand - theories?  Applications?

11. What does derived demand mean?

12. What is the elasticity of derived demand?

13. What are the four factors or principles that affect the derived demand elasticity?  Understand all of them.

14. Know what the concept of cross price elasticity means.

15. Know how to calculate the cross price elasticity using the implied elasticity equation.

16. What does the sign tell you when you calculate a cross price elasticity?  How might a manager use this information?

17. Know what the concept of income elasticity means.

18. Know how to calculate the income elasticity using the implied elasticity equation.

19. What does the sign tell you when you calculate a income elasticity?  How might a manager use this information?

20. Know what the concept of advertising elasticity means.

21. Know how to calculate the advertising elasticity using the implied elasticity equation.

22. What does the sign tell you when you calculate a advertising elasticity?  How might a manager use this information?

23. Be able to apply these elasticity coefficients in applications -- if demand falls, for example, how much advertising is needed to bring it back up?

24. Understand the concept of the price elasticity of supply.

25. Know how to calculate the price elasticity of supply.

26. What factors influence the price elasticity of supply?

27. How does the elasticity of a supply curve effect quantity and price changes when demand changes (shifts)?

TOPIC:  Production Theory - Basics

1. What does a firm do?

2. According to Coase -- why do firms exist?

3. Explain Coase's theory -- in your answer you should explain what transaction costs are, where they come from, and what role the entrepreneur plays in the theory of the firm.

4. What does internalization mean exactly?

5. What is the standard short run production function used by neoclassical economics?

6. In criticizing the standard production function, why might one say that we should not look at capital as a dollar amount or even a physical amount, but as a "structure" or puzzle?  What does this mean?

7. How does time fit into the structure of production?

8. Explain the structure of production using a Hayekian triangle.

9. What does "derived demand" mean with respect to an input?

10. What are the two dimensions of production that a manager has to deal with (one is in the short run and the other is in the long run)

11. Make sure you remember what short and long run mean.

12. What are the "three stages of production" we talked about in class?  Make sure you know the key points - what is happening at the beginning and end of each stage?

13. In which stage will a firm (theoretically) operate and why?  In other words, explain why a firm will always produce in the range of decreasing marginal returns to labor?

14. Know the meaning of total product, average product and marginal product - how they all relate.

15. Make sure you review the law of diminishing marginal returns and know what it means (what causes it) and be able to graph the marginal productivity curve.

16. Would a firm hire a worker that produced negative marginal productivity?  Explain.

17. What does "derived demand" mean with respect to an input?

18. What does the value of the marginal product (VMP) (or marginal revenue product) of an input mean?  How is it calculated?  How does it relate the value of the input to the consumer?

19. What is the rule for the best input usage for a firm (using VMP theory)?

20. What about multiple inputs -- what is the least cost combination of inputs rule?  Explain.

21. Be able to apply these rules in examples.

22. What is the long run production function?

23. What are increasing, constant and decreasing returns to scale with respect to productivity or output?

24. How might a manager measure returns to scale?  Examples?