Economics Questions and Answers

Part1

Suppose that as a consumer you have $34 per month to spend on munchies—either pizzas, which cost $6 each, or Twinkies, which cost $4 each.

1. Create a set of marginal utility tables for each product, like the ones below. Remember that they must show diminishing marginal utility as more of each product is consumed.
2. Create the corresponding set of total utility tables for each product.
3. Graph the budget constraint with Pizzas on the horizontal axis and Twinkies on the vertical axis. What are the intercepts? Can you express the budget constraint as an algebraic equation for a line?

# of Pizzas	1	2	3	4	5	6	7
Marginal Utility
Total Utility

 

# of Twinkies	1	2	3	4	5	6	7
Marginal Utility
Total Utility

Should you purchase a Twinkie first or a Pizza first to get the “biggest bang for the buck”? How can you tell? What should you purchase second, third, etc. until you exhaust your budget?

Confirm that the combination of Twinkies and Pizzas you end up with will maximize your total utility by computing the total utility from other points on the budget line and comparing them to what you chose.

Part 2

Independent trucking is an industry that can be considered perfectly competitive. Draw a graph showing market supply, market demand, and equilibrium price and quantity. Draw a corresponding graph for the individual firm/trucker using the market equilibrium price and marginal cost curve. If you line up the two graphs horizontally, the equilibrium price should be the same on both graphs.

Now suppose that GDP increases as U.S. manufacturers produce more output. What impact will this have on the independent trucking industry in the short run, in terms of the market price, output of an individual firm, and market equilibrium quantity? Explain your reasoning. What impact will the increase in manufacturing output have in the long run? Show graphically and explain your reasoning.

Part 3

Draw the graph for a monopoly with demand, marginal revenue, and marginal cost curves. Identify the profit-maximizing output level (Qm) and price (Pm).

Suppose the monopolist sells Qm units of output at the regular price and then puts the product on sale at a lower price, Ps. Show the new price and quantity. Identify the consumer surplus of the additional sales. What happens to the firm’s profits? Does price discrimination lead to a more efficient or less efficient outcome? Why or why not?

Solution

As a consumer if you were allocated $34 to spend each month on Munchies, either on Pizzas which cost $6 each, or Twinkies which cost $4 per piece. Further assuming that you’re each preference is stated by the given Total Utility Table.

Part 1

A and B

The Margin and Total Utility Table for Pizzas

	The # of Pizzas
	1	2	3	4	5	6	7
Total Utility	60	108	138	156	162	166	166
Marginal Utility	60	48	30	8	6	4	0
Marginal Utility/P	60/6 = 10	48/6 = 8	30/6 = 5	8/6 = 1.33	6/6 = 1	4/6 = 0.67	0/6 = 0

The Margin and Total Utility Table for Twinkies

	The # of Twinkies
	1	2	3	4	5	6	7
Total Utility	44	76	100	120	136	148	152
Marginal Utility	44	32	24	20	16	12	4
Marginal Utility/P	44/4 = 11	32/4 = 8	24/4 = 6	20/4 = 5	16/4 = 4	12/4 = 3	4/4 = 1

C

Budget Constraint Depicting X and Y Intercepts

If we compare both the goods, the Twinkies and Pizzas on the per dollar base, we will further divide the Marginal Utility by P, yielding the final lines. Now, if we choose the highest Marginal Utility/P to the lowest until all the budget of $34 is spent. The equilibrium of the individual/consumer would be 3 Pizzas and 4 Twinkies.

The sequence of the purchase (keeping in order of the Marginal Utility/P is 1) a Twinkie, 2) a Pizza, 3) a Pizza and a Twinkie, 4) a Pizza, and 5) A Pizza and a Twinkie.

In the end, the student must note that with 4T and 3P, the individual/consumer would have exhausted his budget, so the marginal utility each dollar spent would be the same for both the goods. The total utility of those purchases would be 100+138 = 238. No other set of affordable purchases would warrant total utility than these.

Part 2

In a competitive industry, which is perfectly competitive, Average Revenue, Marginal Revenue, Price and Demand are the same. As the products sold in such markets or produced by such industries are identical, and there is a perfect symmetry of information; therefore, firms are not price makers but rather price takers. In the long-run run, perfectly competitive firms, in this case, truck companies, earn an only economic profit; however, in the short run, they earn an abnormal profit.

When the United States’ economy expands (manufacturing grows), the demand for truck services will increase, which means that truck companies may earn a profit in short run.

Part 3

At the normal price, the consumer surplus is A-B-C; however, when the price decreases, the consumer surplus expands to A-D-E. When the price decreases, the consumer surplus increases and producer surplus decreases,

Inter terms of output; the price discrimination produces better outcomes, as price discrimination allows a firm or company to focus/engage different consumer groups. As a firm can engage multiple consumer groups, it produces more, which is good for both firms (higher revenue) and the economy (higher employment rate). It is imperative to acknowledge that it is the existence of different demand curves in a market (steep and flat), which allows companies to discriminate.