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Ten basic microeconomics discussion questions

1. List four shift factors of demand and explain how each affects demand.

2. In 1999, Domino's Pizza, a corporate sponsor of the Washington Redskins (a football team) offered to reduce the price of its medium-size pizza by $1 for every touchdown scored by the Redskins during the previous week. Until that year, the Redskins weren't scoring many touchdowns. Much to the surprise of Domino's, in week one of 1999, the Redskins scored six touchdowns. As a result, the price of Domino's pizzas fell from $8 a pie to $2 a pie the following week. The quantity of pizzas demanded soared he following week from 1 pie an hour to 100 pies an hour. What was the price elasticity of demand for Domino's pizza?

3. Early Classical economists found the following "diamond/water" paradox perplexing: "Why is water, which is so useful and so necessary, so cheap, when diamonds, which are so relatively unnecessary, are so expensive?" In modern economic terms, explain the water/diamond paradox.

4. Assume labor costs are 17.5% of revenue per vehicle for General Motors. In union negotiations during the late 1990s, GM attempted to cut its workforce to increase productivity. Together with the job reductions they planned, GM officials hoped to make the company's North American operations fully competitive with its U.S. and Japanese rivals with respect to total costs. Why are productivity gains so important to GM?

5. Your average total cost is $40; the price you receive for a good is $12. Should you keep on producing the good? Why?

6. What portion of the marginal cost curve is the competitive firm's supply curve? How is a competitive firm's marginal cost curve related to the market supply curve?

7. Monopolists differ from perfect competitors because monopolists always make a profit? True or false? Why?

8. What are the "monopolistic" and the "competitive" elements of monopolistic competition?

9. How is price elasticity of demand related to the tax revenue received from an imposed sales tax?

10. Identify three well-founded reasons supporting a potentially beneficial role for government intervention in the workings of the private marketplace.

Solution Preview

1. List four shift factors of demand and explain how each affects demand.

Price of complements/substitutes: As the price of complements increases, the demand for the good will decline. This is because the use of the good becomes more costly, as the price its complement rises. As the price of a substitute increases, the demand for the good will increase. This occurs as consumers shift away from the more expensive option.

Change in preferences: If a good becomes more fashionable or if tastes change, the demand for the good will shift outward. In the same way if a fad involving the good passes demand will decline (beanie babies, Pokemon cards, etc).

Change in average consumer income: As consumers become more wealthy they will have more to spend on normal goods. This will cause demand for normal goods to increase. If average income falls, demand for normal goods will fall as well. Likewise, demand for inferior goods falls when income increases and rises when income falls.

Change in population: as the number of people increases, the demand for all goods in general will increase as well. Likewise a smaller population will result in less demand for all goods in general

2. In 1999, Dominos Pizza, a corporate sponsor of the Washington Redskins (a football team) offered to reduce the price of its medium-size pizza by $1 for every touchdown scored by the Redskins during the previous week. Until that year, the Redskins weren't scoring many touchdowns. Much to the surprise of Domino's, in week one of 1999, the Redskins scored six touchdowns. As a result, the price of Domino's pizzas fell from $8 a pie to $2 a pie the following week. The quantity of pizzas demanded soared he following week from 1 pie an hour to 100 pies an hour. What was the price elasticity of demand for Dominos pizza?

We can find the elasticity of demand using EoD = % change in quantity/% change in price. This gives us 99/.75 = 132, an extremely high price elasticity of demand.

3. Early Classical economists found the following diamond/water ...

Solution Summary

Price elasticity, market structure, and other microeconomics discussion questions

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