Microeconomics Problems: PPF, Market Equilibrium, Total Revenue, and Efficiency

Question 1: Production Possibility Frontier

Brazil produces ethanol from sugar, and the land used to grow sugar can be used to grow food crops the right sets out Brazil’s production possibilities for ethanol and food crops.

1. a. Draw a graph of Brazil’s PPF and explain how your graph illustrates scarcity.

b. If Brazil produces 40 barrels of ethanol a day, how much food must it produce to achieve production efficiency?

2. a. If Brazil increases ethanol production from 40 barrels per day to 54 barrels per day, what is the opportunity cost of the additional ethanol?

b. If Brazil increases food production from 2 tons per day to 3 tons per day, what is the opportunity cost of the additional food?

3. The demand and supply schedules for potato chips.

a. Draw a graph of the potato chip market and mark in the equilibrium price and quantity.

b. If the price is 60¢ a bag, is there a shortage or a surplus, and how does the price adjust?

4. In Problem 3, a new dip increases the quantity of potato chips that people want to buy by 30 million bags per week at each price.

a. Does the demand for chips change? Does the supply of chips change? Describe the change.

b. How do the equilibrium price and equilibrium quantity of chips change?

5. In Problem 3, if a virus destroys potato crops and the quantity of potato chips produced decreases by 40 million bags a week at each price, how does the supply of chips change?

6. If the virus in Problem 5 hits just as the new dip in Problem 4 comes onto the market, how do the equilibrium price and equilibrium quantity of chips change?

7. a. What happens to total revenue if the price falls from $400 to $350 a chip and from $350 to $300 a chip?

b. At what price is total revenue at a maximum?

8. At an average price of $350, is the demand for chips elastic, inelastic, or unit elastic? Use the total revenue test to answer this question.

9. At $250 a chip, is the demand for chips elastic or inelastic? Use the total revenue test to answer this question.

10. The demand and supply schedules for tulips.

a. If tulips are not taxed, what is the price and how many bunches are bought?

Question 2: Opportunity Cost of Production Increase

b. If tulips are taxed $6 a bunch, what are the price and quantity bought? Who pays the tax?

11. A semiconductor is a key component in your laptop, cell phone, and iPod. The a provides information about the market for semiconductors in the United States. Producers of semiconductors can get $18 a unit on the world market.

a. With no international trade, what would be the price of a semiconductor and how many semiconductors a year would be bought and sold in the United States?

b. Does the United States have a comparative advantage in producing semiconductors?

Use the data on a mosquito control program in the a to work Problems 12 and 13.

12. What quantity of spraying would a private firm provide? What is the efficient quantity of spraying? In a single-issue election on mosquito spraying, what quantity would the winner provide?

13. If the government appoints a bureaucrat to run the program, would mosquito spraying most likely be underprovided, overprovided, or provided at the efficient quantity?

Which shows the demand for college education, to work Problems 14 to 16. The marginal cost is a constant $6,000 per student per year. The marginal external benefit from a college education is a constant $4,000 per student per year.

14. What is the efficient number of students? If all colleges are private, how many people enroll in college and what is the tuition?

15. If the government provides public colleges, what tuition will achieve the efficient number of students? How much will taxpayers have to pay?

16. If the government offers students vouchers, what is the value of the voucher that will achieve the efficient number of students?

17. The costs of Quick Copy, one of many copy shops near campus. If the market price of copying is 10¢ a page, calculate Quick Copy’s

a. Profit-maximizing output.

b. Economic profit.

Use the following information to work Problems 18 and 19. Lorie teaches singing. Her fixed costs are $1,000 a month, and it costs her $50 of labor to give one class. The a shows the demand schedule for Lorie’s singing lessons.

18. Calculate Lorie’s profit-maximizing output, price, and economic profit.

19. a. Do you expect other firms to enter the singing lesson business and compete with Lorie?

b. What happens to the demand for Lorie’s lessons in the long run? What happens to Lorie’s economic profit in the long run?

20. The Calypso, a U.S. natural gas distributor. It is a natural monopoly that cannot price discriminate. What quantity will Calypso produce, what price will it charge, and what will be the total surplus and deadweight loss if Calypso is an unregulated profit maximizing firm?