Home Page Courses Return to EC 100 Course Page

STUDY QUESTIONS FOR INTRODUCTION TO ECONOMICS

  1. How are fixed and variable costs different? Provide an example of a fixed cost and a variable cost.
  2. A Mount Holyoke alumna, May B. Bright, is thinking about opening a new business near the college. As a joint major in computer science and economics, she had dreamed of hand-making personal computers using name brand parts ordered from a large wholesaler of computer parts, while also writing her own computer software. She wanted to call her business, Bright Computers. She planned to sell the computers herself, targeting primarily current Mount Holyoke students, faculty and staff, and local area residents. The software would be proprietary and be preloaded on her computers, although she also hoped to sell the software to a larger clientele over the internet. The software products will not be available for sale over the internet until at least one year after the computer business has been underway. What factors should she consider before taking the leap and opening this business?
  3. Suppose Bright Computers is established in the Village Commons. During the first year of operation, the company is expected to have an average fixed cost of $300 per computer at an output of 100 computers. If May B. Bright makes 200 computers during that first year, what would her average fixed cost per computer be?
  4. If a large chain of computer retail stores, Monster Computer Warehouse, decided to locate an outlet in the Village Commons, would this likely impact the prices charged by May B. Bright? If the answer is yes, does this violate any of the conditions necessary for perfect competition?
  5. What does the demand curve look like for a firm operating under conditions of perfect competition?
  6. Would May B. Bright benefit or be harmed by Odyssey Book Shop selling software and computer peripheral equipment? (Assume that Monster Computer Warehouse has decided not to locate in the area.)
  7. May B. Bright has a two-year lease on her shop space with the Village Commons, Inc. Assume the time remaining on this lease is 18 months. Beginning this month, the Village Commons, Inc. has been allowed to pass along a $50 per month increase in the cost of maintenance on the Village Commons as a whole to each leasee. This provision was written into the original lease. May B. Bright had already written a small software program that charts the cost curves for Bright Computers for each and every month. How would the cost curves have changed after the extra $50 per month charge is added (ceteris paribus)?
  8. May B. Bright finds out that if she increases the price of her computers over $999 then sales fall sharply. On the other hand, if she lowers her price below $999 then she does not see any significant increase in demand for her computers. What can you say about the price elasticity of demand for Bright Computers? What does the demand curve, faced by Bright Computers, look like?
  9. Does marginal revenue equal price under all forms of competition? If no, then under what forms of competition (or lack thereof) would one find marginal revenue not equal to price?
  10. Suppose the Odyssey Book Shop receives a consulting study that shows the effects of cutting the prices of textbooks sold (by lowering their profit margin). The results indicate that a reduction in these textbook prices would have a negligible effect on demand for the textbooks and no effect on how many faculty members order their textbooks through Odyssey rather than the Mount Holyoke College Book Store. Will Odyssey lower its prices? What can you say about the elasticity of demand for these textbooks? Would the study results likely be different if all textbooks were sold at both the Mount Holyoke College Book Store and Odyssey Book Shop? If textbooks are sold at both stores, are there conditions under which the prices of textbooks would not fall? Explain.
  11. Could a point on the short run average cost curve ever be located beneath the long run average cost curve? Why or why not?
  12. Can marginal cost ever be negative? If yes, provide an example.
  13. How do we construct an aggregate supply curve for an entire industry? What about the aggregate demand curve for an entire industry?
  14. What are "normal" profits? Under what conditions would a 50% profit rate be considered normal?
  15. In neoclassical microeconomics, what is meant by "long term" and "short term" and how would production decision be different in the latter than in the former?
  16. Malaman Industries produces specialized paper products in South Down, Massachusetts. The production process results in some amount of toxic chemicals being released into a local stream. People in South Down like to use the stream for recreational purposes and people who live near the stream enjoy the wildlife that depends upon the stream for water. Does the price that Malaman charge for its products reflect the social value of these products? Should the price be higher or lower? Why? Should the state or local government intervene in this example of free enterprise? Why or why not? If it should intervene, what are some possible types of intervention?
  17. Assume that Malaman has the following total profit function: Total Profit = -$10,000 - $2,400 * Q + $300 * Q2. Based on this equation, at what quantity does Malaman maximize profits (absent any government intervention)? What is Malaman's fixed costs?
  18. Why do so many governments use tobacco taxes to raise revenues? (Remember that these taxes have been an important source of government revenues for a very long time, long before tobacco was recognized as a health hazard.)
  19. Suppose you received an anonymous gift of a ticket to Tower Theaters. You decided on the basis of having a free ticket that would go to see a movie this weekend. However, you lose the ticket. Do you go to the movies anyway? What would your decision be based on? If you are a fully utility-maximizing individual, what would your decision be based on? What if you were walking to Tower when you discovered the ticket was missing? Would this effect your decision? Would it change your decision if, after discovering the ticket was missing and deciding not to go to the movie, you find a ten dollar bill on the sidewalk and there's no one around who might claim it? Is your decision-making consistent with utility-maximization? Explain.
  20. As the price of DVD (digital video disk) players falls, what is likely to happen to the demand for movies recorded on DVDs?

    Hope you're enjoying the beautiful weather!

    Home Page Courses Return to EC 110 Course Page