Microeconomics Workbook - Middlesex Community College

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2014Introduction to MicroeconomicsWorking the BasicsBy Fred J. ColangeloProfessor of Business and EconomicsMiddlesex Community College

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Microeconomics is the branch of economics that analyzes themarket behavior of consumers and firms in an attempt tounderstand the decision-making process of firms andhouseholds. Microeconomics is concerned with the interactionbetween individual buyers and sellers and the factors thatinfluence the choices made by buyers and sellers. In particular,microeconomics focuses on patterns of supply and demand andthe determinations of price and output in individual markets.This textbook is an interactive workbook that will help studentmaster the basic concepts of microeconomics that they wouldencounter in a microeconomics class. The workbook consists ofseven chapters where the student will be required to performbasic fundamental exercises using pencil and eraser to help themmaster the basic concepts of supply and demand, shifts in supplyand demand, equilibrium, elasticity, externalities, public finance,tax systems, consumer choice, production and costs topics suchas total and marginal revenue .Chapter 1: Supply and Demand .2Chapter 2: Equilibrium .13Chapter 3: Elasticity .19Chapter 4: Externalities .22Chapter 5: Public Finance and Choice .30Chapter 6: Consumer Choice .35Chapter 7: Production and Cost .41Page 2

Chapter 1 – Supply & DemandIn the world of economics, behaviors of buyers and sellers are important. Buyers determine thedemand side of the market; they include consumers who purchase goods and services. Sellerson the other hand determine the supply side of the market; they produce and sell goods andservices. The interface between buyers and sellers determines what the market prices will beand amounts that will be supplied to the market through the forces of supply and demand.The lessons of supply and demand can be applied to many different types of problems. The lawof demand states that when the price of a good or service falls the quantity demanded increasesand when the price of a good or service rises the quantity demanded decreases as long as allthings remain equal, ceteris paribus. The formula used to determine how this happens is shownbelow.P QD and P QD This chapter will contain a series of four working exercises with various scenarios to helpreinforce the student’s understanding on how supply and demand work. These exercises includethe topics:o Supply Scheduleso Supply Curveso Demand Curveso Demand Shiftso Supply Shifts Page 3

Exercise 1This exercise is designed to help reinforce the student’s understanding of the topic of Supply and Demand.This exercise can be used in conjunction with any economics textbook that addresses this topic.NOTE: As you are working through each scenario in this exercise make sure that you label all parts of yourdiagrams to avoid mistakes. This exercise should be done using a ruler if necessary so that your linesare accurate and pencil and eraser so that you can make changes if you make a mistake.Do not use pen!PRICEFirms supplying goods want to maximize their profits; thehigher the price of their product per unit the greater theprofitability. When price is low and expenses highcompanies are less profitable and they will generallyproduce less. The following is individual supplyinformation for Frank and Company. At 5.00 per poundFrank and Company would be able to supply sevenhundred pounds of coffee per month, the rest of theproducers 5300, at 4.00 supply of six hundred pounds;the rest of the producers 4400, at 3.00 supply of fivehundred pounds, the rest of the producers 3500, and at 2.00 two hundred pounds, the rest of the producers2800. Any price 2.00 or less company will lose money. Inthe space to the right create Supply Schedule for Franksand Company and a Market Supply Schedule.Using the blank graph to the right create an Individual SupplyCurve for Frank and Company based on the informationprovided above in Scenario 1.QUANTITYPage 4

PRICEUsing the blank graph to the right to create a Market SupplyCurve based on the information provided above in the inScenario 1.QUANTITY Page 5

This exercise is designed to help reinforce the student’s understanding of the topic of Supply and Demand.This exercise can be used in conjunction with any economics textbook that addresses this topicNOTE: As you are working through each scenario in this exercise make sure that you label all parts of yourdiagrams to avoid mistakes. This exercise should be done using a ruler if necessary so that your linesare accurate and pencil and eraser so that you can make changes if you make a mistake.Do not use pen!The following provides Jonathans Soup Kitchen supplydemands for peanuts that he would serve each monthat his church’s soup kitchen before dinner in theupcoming year.PRICEAt 6.00 per pound Jonathans Soup Kitchen would beable to purchase five pounds of peanuts per month, at 5.00 six pounds; at 4.00 eight pounds; at 3.00 tenpounds; and at 1.00 twelve pounds. In the space to theright create Jonathan’s Soup Kitchen Demand Schedulefor Peanuts.Using the blank graph to the right and the informationprovided in Scenario #1, create an Individual DemandCurve for Jonathans Soup Kitchen peanut requirementsfor the upcoming month.QUANTITYPage 6

What would be the Market Supply Schedule if theremaining churches in the Jonathans Soup Kitchengeographical area were to purchase fifty pounds at 6.00per pound; sixty pounds at 5.00 per pound; seventypounds at 4.00 per pound; eighty pounds at 3.00 perpound; and one hundred pounds at 1.00 per pound? Inthe space to the right, create a Market Demand Schedulefor Peanuts.PRICEMake sure that you include all market information as youneed to create a complete schedule.Using the blank graph to the right, create a MarketDemand Curve for peanuts based on the informationprovided in the above in Scenario #3.QUANTITY Page 7

PRICES1Use the graph to the right to answer each of the followingquestions. In the spaces provided indicate whether themovement is a shift or change in demand /supply.S2A1. A movement from A to B representsin .2. A movement from A to T represents ain .3. A movement from B to A representsin .4. A movement from T to A represents ain .BTPRICEQUANTITYUse the graph to the right to answer each of the followingquestions. In the spaces provided indicate whether themovement is a shift or change in demand /supply.1. A movement from C to D representsin .2. A movement from Z to C represents ain .3. A movement from D to C representsin .4. A movement from C to Z represents ain .D1D2DCZQUANTITYPage 8

PRICEThis exercise is designed to help reinforce the student’s understanding of the topic of Shifts in Supply andDemand. This exercise can be used in conjunction with any economics textbook that addresses this topic.NOTE: As you are working through each scenario in this exercise make sure that you label all parts of yourdiagrams to avoid mistakes. This exercise should be done using a ruler if necessary so that your linesare accurate and pencil and eraser so that you can make changes if you make a mistake.Do not use pen!Use the blank graph to the right to help determine thepossible Shift In Demand if the taste for Starbucks coffeewas changed but did not improve its taste in fact it wasworse. Show the direction of your movement using arrow for positive shifts and arrow for negative shifts.Also draw the new demand curve. Briefly explain why thismight happen.D1PRICEQUANTITYUse the blank graph to the right to help determine thepossible Shift In Demand if income increases and you aredealing with a normal good. Show the direction of yourmovement using arrow for positive shifts and arrowfor negative shifts. Also draw the new demand curve.Briefly explain why this might happen.D1QUANTITY Page 9

PRICEUse the blank graph to the right to help determine thepossible Shift In Demand if income increases and you aredealing with an inferior good. Show the direction of yourmovement using arrow for positive shifts and arrowfor negative shifts. Also draw the new demand curve.Briefly explain why this might happen.D1PRICEQUANTITYUse the blank graph to the right to help determine thepossible Shift In Demand for a high end product in Detroitif there is a major layoff at the Ford Plant. Show thedirection of your movement using arrow for positiveshifts and arrow for negative shifts. Also draw the newdemand curve. Briefly explain why this might happen.D1QUANTITYPage 10

PRICEUse the blank graph to the right to help determine thepossible Shift In Demand if the number of buyers increasesin a particular market. Show the direction of yourmovement using arrow for positive shifts and arrowfor negative shifts. Also draw the new demand curve.Briefly explain why this might happen.D1PRICEQUANTITYUse the blank graph to the right to help determine thepossible Shift In Demand if a future price increase isexpected. Show the direction of your movement using arrow for positive shifts and arrow for negative shifts.Also draw the new demand curve. Briefly explain why thismight happen.D1QUANTITY Page 11

PRICEUse the blank graph to the right to help determine thepossible Shift In Demand for a product if the taste waschanged to improve it. Show the direction of yourmovement using arrow for positive shifts and arrowfor negative shifts. Also draw the new demand curve.Briefly explain why this might happen.D1PRICEQUANTITYUse the blank graph to the right to help determine thepossible Shift In Demand for a product if there was anexpected change in weather causing snowfall in Florida.Show the direction of your movement using arrow forpositive shifts and arrow for negative shifts. Also drawthe new demand curve. Briefly explain why this mighthappen.D1QUANTITYPage 12

PRICEThis exercise is designed to help reinforce the student’s understanding of the topic of supply shifts. Thisexercise can be used in conjunction with any economics textbook that addresses this topic.NOTE: As you are working through each scenario in this exercise make sure that you label all parts of yourdiagrams to avoid mistakes. This exercise should be done using a ruler if necessary so that your linesare accurate and pencil and eraser so that you can make changes if you make a mistake.Do not use pen!The Orange Patch Farm (OPF) is a grower of oranges andpumpkins. The following provides what Orange PatchFarm would supply for orange juice based on the followingprices. At 1.00 per gallon OPF would supply ten thousandgallons of orange juice per season, at 1.50 per gallon OPFwould supply fifteen thousand gallons of orange juice perseason, at 2.00 per gallon OPF would supply twentythousand gallons of orange juice per season, and at 3.00per gallon OPF would supply thirty thousand gallons oforange juice per season. Create an OPF Individual SupplyCurve to the right.QUANTITYThe following provides what Other Producers (OP) wouldsupply for orange juice based on the following prices. At 1.00 per gallon OP would supply a hundred thousandgallons of orange juice per season, at 1.50 per gallon OPwould supply one hundred and fifty thousand gallons oforange juice per season, at 2.00 per gallon OP wouldsupply two hundred thousand gallons of orange juice perseason, at 3.00 per gallon OP would supply three hundredthousand gallons of orange juice per season. In the space tothe right create a Market Supply Schedule for OJ. Page 13

Chapter 2 - EquilibriumAs determinants of supply or demand change due to factors such as input prices, prices of similarproducts, the number of suppliers in a market, consumer expectations, and and changes intechnology, the supply/demand curves will shift which cause changes in the equilibrium priceand equilibrium quantity. Shifts could be positive shift which would move and supply or demandcurve to the right or a negative shift which would move and supply or demand curve to the left.Some shifts could be a combination of large and small together which could cause changes toequilibrium.This chapter will contain a series of two working exercises with various scenarios to help reinforcethe student’s understanding on how equilibrium works. These exercises include the topics:o Combined Shiftso Simultaneous Changes in Supply and Demando Equilibrium Quantity and DemandPage 14

PRICEThis exercise is designed to help reinforce the student’s understanding of the topic of shifts in equilibrium.This exercise can be used in conjunction with any economics textbook that addresses this topic.NOTE: As you are working through each scenario in this exercise make sure that you label all parts of yourdiagrams to avoid mistakes. This exercise should be done using a ruler if necessary so that your linesare accurate and pencil and eraser so that you can make changes if you make a mistake.Do not use pen!Use the diagram to the right to illustrate your answer.1. Using the graph show simultaneous changes insupply and demand by using a LARGE increase insupply and a SMALL increase in demand.A. Describe what happens to the price?Answer:B. Describe what happens to the quantity?Answer:PRICEQUANTITYUse the diagram to the right to illustrate your answer.1. Using the graph show simultaneous changes insupply and demand, with a SMALL increase insupply and a LARGE increase in demand.A. Describe what happens to the price?Answer:B. Describe what happens to the quantity?Answer:QUANTITY Page 15

PRICEUse the diagram to the right to illustrate your answer.1. Using the graph show simultaneous changes insupply and demand, with a LARGE decrease insupply and a SMALL decrease in demand.A. Describe what happens to the price?Answer:B. Describe what happens to the quantity?Answer:PRICEQUANTITYUse the diagram to the right to illustrate your answer.1. Using the graph show simultaneous changes insupply and demand with a SMALL decrease insupply and a LARGE decrease in demand.A. Describe what happens to the price?Answer:B. Describe what happens to the quantity?Answer:QUANTITYPage 16

PRICEUse the diagram to the right to illustrate your answer.1. Using the graph show simultaneous changes in supplyand demand with a SMALL decrease in supply and aSMALL decrease in demand.A. Describe what happens to the price?Answer:B. Describe what happens to the quantity?Answer:PRICEQUANTITYUse the diagram to the right to illustrate your answer.1. Using the graph show simultaneous changes insupply and demand with a SMALL decrease insupply and a NO CHANGE in demand.A. Describe what happens to the price?Answer:B. Describe what happens to the quantity?Answer:QUANTITY Page 17

The diagram to the right shows the supply and demandcurves for SUV’s in a particular geographical area.Assume that all SUV’s sell for the same marketdetermined price. The diagram shows factors thatmight cause a shift in the supply and demand curves.What would be the equilibrium price of an SUV in thismarket be?per sedanWhat would be the equilibrium quantity for SUV’sbought and sold?per monthPRICE (in thousands)This exercise is designed to help reinforce the student’s understanding of the topic of shifts in equilibrium.This exercise can be used in conjunction with any economics textbook that addresses this topic.NOTE: As you are working through each scenario in this exercise make sure that you label all parts of yourdiagrams to avoid mistakes. This exercise should be done using a ruler if necessary so that your linesare accurate and pencil and eraser so that you can make changes if you make a mistake.Do not use pen!302010100200300400500600QUANTITY (in thousands)Suppose that the price of an SUV was 35,000.In this case, there would be which would exert pressure on prices.A.A. Shortage (excess demand) of 100 SUV’s per month; upwardB. Shortage (excess demand) of 400 SUV’s per month; upwardC. Surplus (excess supply) of 400 SUV’s per month; downwardD. Shortage (excess supply) of 500 SUV’s per month; downwardHow much was the demand?Suppose that the price of an SUV was 15,000.In this case, there would be which would exert pressure on prices.A. Shortage (excess demand) of 400 SUV’s per month; upwardB. Shortage (excess demand) of 300 SUV’s per month; upwardC. Surplus (excess demand) of 500 SUV’s per month; downwardPage 18

D. Surplus (excess supply) of 500 SUV’s per month; downwardHow much was supplied?Suppose that the price of an SUV was 40,000.In this case, there would be which would exert pressure on prices.A. Shortage (excess demand) of 100 SUV’s per month; upwardB. Shortage (excess demand) of 300 SUV’s per month; upwardC. Surplus (excess demand) of 500 SUV’s per month; downwardD. Surplus (excess supply) of 600 SUV’s per month; downwardHow much was the demand?Suppose that the price of an SUV was 20,000.In this case, there would be which would exert pressure on prices.A. Shortage (excess demand) of 100 SUV’s per month; upwardB. Shortage (excess demand) of 200 SUV’s per month; upwardC. Surplus (excess demand) of 500 SUV’s per month; downwardD. Surplus (excess supply) of 600 SUV’s per month; downwardPRICEHow much was supplied?The diagram to the right shows the supply and demandcurves for oil. Assume that everything is equal, whatprice will equilibrate the market price for oil? per barrel12080The result in equilibration is the Quantity suppliedand the Surplus is equal to4020406080100120QUANTITY (in thousands) Page 19

Chapter 3 – ElasticityThe lessons on the importance of elasticity illustrate how it can have an effect on price and howprice increases and decreases can have an impact on quantity demand and how it could effect afirm’s total revenue.The price elasticity of demand measures the responsiveness of quantity demanded to a changein price. Price elasticity is defined as the percentage change in quantity demanded divided by thepercentage change in price. To determine this price elasticity of demand (ED) percentagechange in quantity demanded percentage change in price.ED Percent Change in Quantity DemandedPercent Change in PriceNote that, following the law of demand, price and quantity demanded show an inverserelationship. For this reason, the price elasticity of demand is, in theory, always negative. But inpractice and for simplicity, this quantity is always expressed in absolute value terms—that is, asa positive number.This chapter will contain a series of five working exercises with various scenarios to help reinforcethe student’s understanding on how elasticity works. These exercises include the topics:o Elastic Supply and Demand Curveso Inelastic Supply and Demand Curveso The Percent Changes of Priceo The Percent Changes in Quantity Demandedo Elasticity Of DemandPage 20

This exercise is designed to help reinforce the student’s understanding of the topic of elasticity. This exercisecan be used in conjunction with any economics textbook that addresses this topic.NOTE: As you are working through each scenario in this exercise make sure that you label all parts of yourdiagrams to avoid mistakes. This exercise should be done using a ruler if necessary so that your linesare accurate and pencil and eraser so that you can make changes if you make a mistake.Do not use pen!Graph AGraph BGraph CGraph DPRICEP2P1P1Q2Q1QUANTITYQ2Q1QUANTITYGraph CGraph DPRICEA.B.C.D.P2PRICERefer to the illustration to the right. Which of thegraphs best illustrates an elastic demand curve? Circlethe letter of your choice.Graph BPRICEGraph AP2P2P1P1Q2Q1Q2 Q1QUANTITYQUANTITYGraph AGraph BGraph CGraph DPRICEP2P1P1Q2Q1QUANTITYQ2Q1QUANTITYGraph CGraph DPRICEA.B.C.D.P2PRICERefer to the illustration to the right. Which of thegraphs best illustrates a perfectly elastic demandcurve? Circle the letter of your choice.Graph BPRICEGraph AP2P2P1P1Q2Q1Q2 Q1QUANTITYQUANTITY Page 21

Graph AGraph BGraph CGraph DPRICEP2P1P1Q2Q1QUANTITYQ2Q1QUANTITYGraph CGraph DPRICEA.B.C.D.P2PRICERefer to the illustration to the right. Which of thegraphs best illustrates a perfectly inelastic demandcurve? Circle the letter of your choice.Graph BPRICEGraph AP2P2P1P1Q2Q1Q2 Q1PRICEQUANTITYUsing the Figure to the right, calculate the TotalRevenue when a) the price is 9.00; b) the price is 8.00; c) the price is 2.00; and d) the price is 1.00.Use the space below to show your formulas andresults.QUANTITY9876543212468101214 1618QUANTITYPage 22

This exercise is designed to help reinforce the student’s understanding of the topic of elasticity. This exercisecan be used in conjunction with any economics textbook that addresses this topic.NOTE: As you are working through each scenario in this exercise make sure that you label all parts of yourdiagrams to avoid mistakes. This exercise should be done using a ruler if necessary so that your linesare accurate and pencil and eraser so that you can make changes if you make a mistake.Do not use pen!PRICEThe illustration to the right shows the demand for agood. Use the information below and theillustration to the right to solve the followingscenarios.P4P3P2P1 15.00 10.00 6.00 5.00Q1Q2Q3Q4 3.04.06.09.0DemandP4XP3YP2ZTable 1SP1Consider the points between X and Y.The price changes by %The quantity demanded changes by %The elasticity of demand isThis is considered to beQ1Q2Q3Q4QUANTITYUse the information from Table 1 and the illustration above to help solve this scenario. Consider the pointsbetween Y and Z. The price changes by approximately % and the quantity demanded changesby approximately %. In this region the demand is .Use the information from Table 1 and the illustration above to help solve this scenario. Consider the pointsbetween Z and S. The price changes by approximately % and the quantity demanded changesby approximately %. In this region the elasticity of demand is and is thereforeconsidered to be . Page 23

PRICEThe diagram illustrated to the right shows the weeklydemand schedule and prices for DVD rentals. Use theinformation provided to help solve the followingscenarios.Suppose that the cost of DVD rentals were loweredfrom 4.00 to 3.00. 54321050100150200250QUANTITYA. Describe what would happen to total revenue?B. Describe what would happen to quantity?C. Describe what the % changes for price and quantity demanded? Use the midpoint to determineanswer.D.Is the demand elastic or inelastic? Use the midpoint to determine answer.Use the diagram used above to help solve the following scenario. Suppose that the cost of DVD rentals werelowered from 3.00 to 2.00.A. Describe what would happen to total revenue?B. Describe what would happen to quantity?C. Describe what the % changes for price and quantity demanded? Use the midpoint to determineanswer.D. Is the demand elastic or inelastic? Use the midpoint to determine answer.Page 24

PRICEThis exercise is designed to help reinforce the student’s understanding of the topic of elasticity. This exercisecan be used in conjunction with any economics textbook that addresses this topic.NOTE: As you are working through each scenario in this exercise make sure that you label all parts of yourdiagrams to avoid mistakes. This exercise should be done using a ruler if necessary so that your linesare accurate and pencil and eraser so that you can make changes if you make a mistake.Do not use pen!Using a Slope equal to -1;981. Calculate the % change in price.2. Calculate the % change in quantity.3. Calculate the % elasticity ofdemand.4. Show the translations of differentvalues of elasticity.5. Plot the elasticity numbers.7654Note the elasticity numbers as you movedown the demand curve and show whereit is Perfectly Elastic and PerfectlyInelastic.321123456789QUANTITYP10 9Q0 1% P%% Q%ED9 81 2%% Page 25

This exercise is designed to help reinforce the student’s understanding of the topic of elasticity as it effectsrevenue. This exercise can be used in conjunction with any economics textbook that addresses this topic.NOTE: As you are working through each scenario in this exercise make sure that you label all parts of yourdiagrams to avoid mistakes. This exercise should be done using a ruler if necessary so that your linesare accurate and pencil and eraser so that you can make changes if you make a mistake.Do not use pen!For most supply and demand curves priceelasticity along a curve varies. With mostgoods we can refer to any particular pointor section of a demand or supply curve. Ateach various point along the curve yourelasticity varies. Use the figure to the rightto show how elasticity varies along thelinear curve by graphing elasticity andgraphing the total revenues as it relates tothe curve.PRICE (s) 181. Where are the elastic points of theDemand Curve? Show this on yourgraph.2. Where are the inelastic points of theDemand Curve? Show this on yourgraph.3. At what point is it unit elastic? Show thison your graph.NOTE: Keep in mind Elastic: ED 1,Inelastic: ED 1, Unit Elastic: ED 1.224681012141618QUANTITYTOTAL REVENUE (s)What happens to ED if the price changesfrom 16 to 18? Change from 4 to 6? 90 8450 361024681012QUANTITYPage 26 141618

PRICEThis exercise is designed to help reinforce the student’s understanding of the topic of elasticity. This exercisecan be used in conjunction with any economics textbook that addresses this topic.NOTE: As you are working through each scenario in this exercise make sure that you label all parts of yourdiagrams to avoid mistakes. This exercise should be done using a ruler if necessary so that your linesare accurate and pencil and eraser so that you can make changes if you make a mistake.Do not use pen!1. Use the illustration to the right to determine the following:A. What is the % change when the price decreases from 25.00 to 15.00?B. What is the % change for quantity when the pricedecreases from 25.00 to 15.00?C. What is ED when the price decreases?D. What is the Total Revenue?E. Is demand Elastic or Inelastic?F. What is the % change for price when the price increasesfrom 15 to 25?G. What is the % change for quantity when the priceincreases from 15 to 25?H. What is ED when the price increases?I. What is Total Revenue?J. Is demand Elastic or Inelastic?P AVEED at midpointbetween point A and B.B 25 P A15 QD D20Q AVE4060QUANTITY(in millions)Formula using the Midpoint:ED Percent Change in Quantity DemandedPercent Change in Price QD / Q AVE P / P AVE2. Determine the following using the midpoint formula from above?A. What is the ED?B. Is demand Elastic or Inelastic?3. What determination would you make based on your findings? Page 27

Externalities are common in virtually every area of economic activity. They are defined spillover effects arising from the production and/or consumption of goods and services for which noappropriate compensation is paid. Externalities can cause market failure if the pricemechanism does not take into account the full social costs and social benefits of production andconsumption.This chapter will contain a working exercises with various scenarios to help reinforce thestudent’s understanding of externalities and its effects. These exercises include the topics:o Private Costso Social Costso Market Equilibriumo Efficient EquilibriumPage 28

This exercise is designed to help reinforce the student’s understanding of the topic of externality. Thisexercise can be used in conjunction with any economics textbook that addresses this topic.NOTE: As you are working through each scenario in this exercise make sure that you label all parts of yourdiagrams to avoid mistakes. This exercise should be done using a ruler if necessary so that your linesare accurate and pencil and eraser so that you can make changes if you make a mistake.Do not use pen!Positive/Negative/NonePRICEIndicate what kind of an externality the following activities create. In the space to the right ofeach scenario indicate a positive externality, a negative externality, or no externality at all.1. You purchase and drink a bottled water in the hallway during a break from class2. College students are required and can get a free smallpox vaccine shot3. At a

This textbook is an interactive workbook that will help student master the basic concepts of microeconomics that they would encounter in a microeconomics class. The workbook consists of seven chapters where the student will be required to perform basic f

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