Problem Set 3 Econ 213
Problem Set 3
Name
Problem Set 3 is to be completed by 11:59 p.m. (ET) on Monday of Module/Week 6.
1. Data for the market for graham crackers is shown below. Calculate the elasticity of demand between the following prices.
Price of crackers
Quantity Demanded (per month)
$3
80
$2.5
120
$2
160
$1.5
200
$1
240
$1.00 - $1.50: ___$-0.45________________________________
$1.50 - $2.00: ____$_-0.77______________________________
$2.00 - $2.50: _____$_-1.28_____________________________
$2.50 - $3.00: ____$_-2.22______________________________
If the price of graham crackers is $2.50 should firms raise or lower their prices if they want to increase revenue? Explain this in terms of elasticity.
Since the elasticity increases, the price would be lower
2. Assume the competitive market shown below faces a short run price of $10. Using the graph below, identify the following:
Profit maximizing output: _110___________________
Approximate mark up over cost __$2.50_____________________
In the long run, the price falls to $7.50. Why does this happen?
The demand increased, since they can produce more at a lower price
What is the new profit maximizing output? ______90_________________
3. A local hardware store is trying to decide whether to stay open. They have found that their industry is extremely competitive and profits have shrunk considerably. Knowing that you have taken an economics course the owners have asked for your opinion. Draw a completely labeled graph to help you explain the shutdown decision. You should show two graphs in your answer, one for the market as a whole, and one for this store in particular. Assume that the store is losing money; however, explain why they may want to stay open for a little while longer. (NOTE: Your answer should be a written explanation of your graph.)
It is beneficial to the company for the company to stay open because they will be paying for the fixed costs whether they stay open or not. Since they are able to cover the
Name
Problem Set 3 is to be completed by 11:59 p.m. (ET) on Monday of Module/Week 6.
1. Data for the market for graham crackers is shown below. Calculate the elasticity of demand between the following prices.
Price of crackers
Quantity Demanded (per month)
$3
80
$2.5
120
$2
160
$1.5
200
$1
240
$1.00 - $1.50: ___$-0.45________________________________
$1.50 - $2.00: ____$_-0.77______________________________
$2.00 - $2.50: _____$_-1.28_____________________________
$2.50 - $3.00: ____$_-2.22______________________________
If the price of graham crackers is $2.50 should firms raise or lower their prices if they want to increase revenue? Explain this in terms of elasticity.
Since the elasticity increases, the price would be lower
2. Assume the competitive market shown below faces a short run price of $10. Using the graph below, identify the following:
Profit maximizing output: _110___________________
Approximate mark up over cost __$2.50_____________________
In the long run, the price falls to $7.50. Why does this happen?
The demand increased, since they can produce more at a lower price
What is the new profit maximizing output? ______90_________________
3. A local hardware store is trying to decide whether to stay open. They have found that their industry is extremely competitive and profits have shrunk considerably. Knowing that you have taken an economics course the owners have asked for your opinion. Draw a completely labeled graph to help you explain the shutdown decision. You should show two graphs in your answer, one for the market as a whole, and one for this store in particular. Assume that the store is losing money; however, explain why they may want to stay open for a little while longer. (NOTE: Your answer should be a written explanation of your graph.)
It is beneficial to the company for the company to stay open because they will be paying for the fixed costs whether they stay open or not. Since they are able to cover the