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# CLEP test Short Answer - Utility Elasticity Production

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1. Which gives you a greater utility 12 gallons of water per day or 20 gallons of water per day?

2. At which level do you get a greater marginal utility: 12 gallons per day or 20 gallons per day?
3. A rise I the price of a certain commodity from \$15 to \$20 reduces quantity demanded from 20, 000 units to 5,000 units. Can you please explain how to calculate the price of elasticity?

4. If the price of elasticity of demand for gasoline is 0.3, and the current price is \$1.20 per gallon, what rise in the price of gasoline will reduce its consumption by 10%.

5. A rise in the price of a product whose demand is elastic will reduce the total revenue of the firm. Can you please explain this concept in terms of relative percentage changes and concepts.

6. A firm's total fixed cost is \$360,000. Construct a table of its total and average fixed costs for output levels varying from zero to 6 units.

7. With the following data, calculate the firm's AVC and MVC . Why is the MVC the same as the AVC for he 1st three units?

8. If the marginal revenue product of a gallon of oil used as input by a firm is \$1.20 and the price of oil is \$1.07 per gallon, what can the firm do to increase profits? Note: Average cost is total cost/output.

9. Labor costs \$10 pr hour. Nine workers produce 180 bushels of product per hour, while ten workers produce 196 bushels. Land rents for \$1,000 per acre per year. With ten acres worked by nine workers, the marginal physical product of an acre of land is 1,400 bushels per year. Does the farmer minimize costs by hiring nine workers and renting ten acres of land? If not, which input should be use in larger relative quantity?

#### Solution Preview

1. 20 gallons of water per day. More of a resource means more utility
2. At 12 gallons per day. The marginal utility diminishes as we have more of a particular good with us. So at 20 gallon marginal utility will be low
3. Price elasticity of demand [(q2-q1)/(q2+q1)] /[(p2+p1)/(p2-p1)]
=[(5000-20000)/(5000+20000)]/[(20+15)/(20-15)]=4.2

4. % Change in quantity = price elasticity * change in price
%Change in price required = ...

#### Solution Summary

Answers 9 short answer questions on different topics of macroeconomics. These are commonly asked questions (part of CLEP test) which are quite helpful for students preparing for exams.

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