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Answers to 10 common Microeconomics final exam questions

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1. This question deals with demand and supply and refers you to the table below:
a. Given the table, respond to the questions below. It may be helpful to graph the data as you respond to the questions.

Price Quantity Demanded/Month Quantity Supplied/Month
$5 6,000 10,000
$4 8,000 8,000
$3 10,000 6,000
$2 12,000 4,000
$1 14,000 2,000

b. What is the equilibrium price and equilibrium quantity?
c. Suppose the price is currently at $5. What problem would exist in the economy? What would you expect to happen to price?
d. Suppose the price is currently $2. What problem exists in the economy? What would you expect to happen to price?

2. Explain the demand and supply factors for rising health care costs in the United States.
Hint: The supply and demand should correlate.

3. Describe the difference between average revenue and marginal revenue. Why are both of these revenue measures important to a profit-maximizing firm?

4. Explain how a firm in a competitive market identifies the profit-maximizing level of production. When should the firm raise production, and when should the firm lower production?

5. In many countries, the government chooses to "internalize" the monopoly by owning monopoly providers of goods and services. (In some cases these firms are "nationalized" and the government actually buys or confiscates firms that operate in monopoly markets). What would be the advantages and disadvantages of such an approach to ensuring the "best interest of society" is promoted in these markets? Carefully explain your answer.

6. In many college towns, private independent bookstores typically locate on the periphery of the college campus. However, in some college towns, the University has used political power to restrict private bookstores near campus through community zoning laws. Use your knowledge of markets to predict the price and quality of service difference in the market for college textbooks under these two different market regimes.

7. Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade patterns, absolute advantage or comparative advantage? Why?

8. How does an import quota differ from an equivalent tariff?

9. Describe the difference between a diminishing marginal product of labor and a negative marginal product of labor. Why would a profit-maximizing firm always choose to operate where the marginal product of labor is decreasing (but not negative)?

10. The National Collegiate Athletic Association (NCAA) has long argued that nationally-prominent college athletes are compensated with an investment in human capital that far exceeds the monetary reward of playing professional sports. Examine this argument in light of your knowledge of human capital theory and the economic theory of labor markets.

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Solution Summary

The answers cover the following topics:
1. Supply and demand
2. Health care costs
3. Average revenue vs. marginal revenue
4. Profit maximization
5. Advantages and disadvantages of monopolies
6. Market structure
7. Absolute advantage vs. comparative advantage
8. Quotas vs. tariffs
9. Marginal product of labor
10. Investment in human capital

Solution Preview

a. The demand curve will slope downwards. The supply curve will slope upwards.
b. Equilibrium occurs at the price where the quantity demanded equals the quantity supplied. In this market, the equilibrium quantity is 8,000 and the equilibrium price is $4.
c. At a price of $5 the quantity supplied is 10,000 and the quantity demanded is 6,000. The problem is an excess supply of 4,000. We expect sellers to lower their price to try to sell their unsold inventories. The market price will fall towards equilibrium.
d. At a price of $2 the quantity supplied is 4,000 and the quantity demanded is 12,000. The problem is an excess demand of 8,000. We expect buyers to offer to pay more, prompting sellers to sell more. The market price will rise towards equilibrium.

2. With the Baby Boom generation now becoming senior citizens, the demand for health care is increasing, shifting the demand curve for health care to the right. Senior citizens also require more expensive health care, increasing health care providers' costs and shifting the supply curve to the left. Each of those ...

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