Midterm Review

1
Midterm Review
Ch.3. Supply and Demand Ch.4.
ElasticityCh.6. Production and Supply
2
Chapter 3

• Key Terms
• Buyers/sellers reservation price
• Buyers/sellers surplus
• Change in demand / supply
• Change in quantity demanded / supplied
• Equilibrium, equilibrium price / quantity
• Price ceiling
• Normal / inferior goods
• Complements / substitutes

3

• Points to note
• Own price change leads to a movement along
  demand/supply curve, that is, change in quantity
  demanded/supplied. Equilibrium does not change at
  own price change.
• Any other factor (e.g. spinach, income, other
  goods price change, income, etc.) change leads
  to a shift of demand / supply curve, that is,
  change in demand / supply. And equilibrium
  changes correspondingly in different cases.

4

• Q1 Suppose Subway restaurants can hire and fire
  labor as they like and they find out that,
  starting from January 1st, labor cost will
  increase. At the same time, the rent for their
  restaurant buildings specified in the contract is
  reduced. To promote its sales, Subway decide to
  launch a new years promotion which will give
  away 1 million dollars to one winner randomly
  drawn from registered consumers. Any consumer can
  register by purchasing one additional subway. As
  an economist, what would you expect to happen in
  Subway market in January?
• A. Equilibrium price change is ambiguous,
  equilibrium quantity will increase
• B. Equilibrium price change is ambiguous,
  equilibrium quantity will decrease
• C. Equilibrium price will increase, equilibrium
  quantity change is ambiguous
• D. Equilibrium price will decrease, equilibrium
  quantity change is ambiguous

5
Chapter 4

• Key terms
• Own-price elasticity of demand
• Cross-price elasticity of demand
• Income elasticity of demand
• Own-price elasticity of supply
• Perfectly elastic demand/supply
• Perfectly inelastic demand/supply
• Total revenue and price strategies
• Unitary elasticity

6

• Points to note
• Tell whether a good is elastic or inelastic from
  the calculation of own-price elasticity of
  demand.
• Tell the relationship of two goods (substitutes
  or complements) from the calculation of
  cross-price elasticity of demand.
• Tell whether a good is normal or inferior from
  the calculation of income-elasticity of demand.
• Tell the relationship between own-price
  elasticity of demand/supply and the slope of
  demand/supply curve.
• Tell that the own-price elasticity of supply is
  constantly equal to 1 when the supply curve pass
  origin but not when the supply curve does not
  pass origin.
• Tell that firm should increase price if the
  demand is inelastic, but decrease price if the
  demand is elastic in order to increase total
  revenue.

7

• Q2 Suppose the supply curve is specified by
  Q4P-8. Whats the own-price elasticity of supply
  when P4?
• A. ½ B. 8 C. 1/8 D. 2

8
Chapter 6

• Key terms
• Total revenue / Total cost
• Average total cost (ATC) and graph
• Average fixed cost (AFC) and graph
• Average variable cost (AVC) and graph
• Perfect / imperfect competitive market
• Short / long run
• Law of diminishing returns

9

• Points to note
• First decide whether operate or shutdown by
  shutdown condition P
• Second decide the profit-maximizing output level
  by MRMC (MRP)
• Third calculate profit
• If Pcost
• If AVCP
• If ATCP, operate with positive profit,
• profit TR-TC Q(P ATC)

10

• Q3 The graph gives the AVC, ATC, MC curves of a
  firm. Suppose the market price of the output is
  5, the firm ___ shutdown, its profit-maximizing
  output should be ___, and the firm should be
  making a profit of ___.
• should, 0, -180
• should not, 20, -160
• should not, 30, 150
• should not, 30, -150
• should not, 20, 60

MC
11
AVC
10
5
3
Q
30
40
20
11

• Good luck with your exam!!!