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Basic Microeconomics Problems

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Jim owns and manages a Dine-In Barbeque Restaurant. He has been in business for over 10 years and his restaurant has a steady patronage. Consider how each of the following scenarios impacts the market for Jim's product. You need to state whether the scenario will impact the industry demand curve or supply curve and state the direction that the curve will shift.

a. A severe drought has created a shortage of tomatoes. Jim makes his own barbeque sauce. One of the main ingredients of his sauce is fresh tomatoes.
b. Jim launches a successful advertising campaign on the local cable TV station.
c. A new barbeque competitor opens up across town.
d. A new factory opened up in the town. The factory employs 1200 people and the average income of Jim's city has increased significantly because of this. Assume that barbeque is a normal good.

30. Sophia owns a quilting shop. Recently, her suppliers increased the cost of their fabrics. Sophia would like to pass on the cost to her customers, but she does not know what impact that will have on her total revenue. Last year, when she passed on a similar price increase, she had the following results:

Price before increase = $10 per yard

Price after increase = $12 per yard

Quantity sold before increase = 120 yards

Quantity sold after increase = 90 yards

a. Calculate the elasticity of demand using the midpoint method.
b. State whether the demand elasticity that you calculated is elastic, inelastic, or unitary
elastic.
c. Recommend whether or not she should pass on the price increase to her customers.

31. Kevin and Lilly make and sell rustic lamps. Their primary inputs are cedar logs, electrical wire, and lamp shades. They have three hourly employees that they bring on when the number of orders that they receive increases. They advertise on billboards that require yearly contracts and work out of a rented office space under a yearly rental agreement. They produce 50 lamps a month. Their monthly costs are as follows:

Advertising = $500

Cedar Logs = $250

Electric Wire = $ 300

Hourly Wages = $550

Kevin and Lilly's Salary = $1,200

Lamp Shades = $700

Rent = $1,500

a. Divide the costs into fixed and variable. Calculate the total cost, total fixed cost, and
total variable cost.
b. Calculate the average total cost, average variable cost and average fixed cost.
c. Name two things that can be done in the long-run that business are unable to do in
the short-run?

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Solution Preview

Please refer attached file for complete solution. Expressions typed with the help of equation writer are missing here.

Solution:

Jim owns and manages a Dine-In Barbeque Restaurant. He has been in business for over 10 years and his restaurant has a steady patronage. Consider how each of the following scenarios impacts the market for Jim's product. You need to state whether the scenario will impact the industry demand curve or supply curve and state the direction that the curve will shift.

a. A severe drought has created a shortage of tomatoes. Jim makes his own barbeque sauce. One of the main ingredients of his sauce is fresh tomatoes.
Shortage of tomato will increase the tomato costs. Supply curve will shift towards left. Demand curve will remain unaffected.
b. Jim launches a successful advertising campaign on the local cable tv station.
Such advertizing campaign may influence taste and preferences of consumers and they may dine more. Demand curve will shift towards right. Supply curve remain unaffected.
c. A new barbeque competitor opens up across town.
Since number of suppliers have increased, supply will increase i.e. supply ...

Solution Summary

There are three problems. Solution to first problem discusses the effect of given events on demand and supply curves. Solution to second problem calculates the price elasticity of demand. Solution to third problem identifies and calculates various fixed and variable costs.

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