Microeconomics 2302: Potential Questions and Study Guide for Exam 2

This assignment provides a detailed study guide and potential exam questions for a Microeconomics 2302 exam, focusing specifically on the concept of elasticity. The guide explores various aspects of elasticity, including price elasticity of demand and supply, income elasticity, and cross elasticity of demand. It delves into how firms, governments, and analysts utilize these concepts for decision-making, pricing strategies, and market analysis. The document presents questions on elasticity calculations, the factors influencing elasticity, and the application of elasticity in different market scenarios. It also touches upon related economic concepts like production costs, market structures such as pure competition and monopoly, and the application of marginal cost and marginal revenue principles. The study guide aims to provide students with a comprehensive understanding of elasticity and its implications within the field of microeconomics, aiding in exam preparation and comprehension of core economic principles.

Microeconomics 2302 Potential questions
and study guide for Exam 2

ELASTICITY QUESTION 1
A)
Elasticity is considered as a measure of the sensitivity of variable towards change in another
variable. Further, the price elasticity measures the sensitivity of quantum demanded and provided
relating to price changes.
B)
Firms might care about price elasticity of demand, as if the product has elastic demand, then it
states that the amount that is demanded will make changes as there is also a change in the
product price.
C)
In case there is elastic supply, then produce might care, as they can raise the output without
increasing cost. However, firms might care if there inelastic supply, because it is complex to
make changes in production in a specified time period.
D)
Firms might care about cross elasticity of demand, as it states about the reaction of customer
towards the changes in their product prices. It helps the firms in setting the best selling price for
their products.
E)
Government and firms might care about the income elasticity of demand; it is because it helps in
classifying goods, demand forecasting, product pricing, diversifying, collecting taxes and
designing strategies.
F
The formula says about the assessment of the amount of quantity demanded of a product makes
response to price changes of that product.

Yes, information can be calculated as required by calculation of answer by considering the %
amended (increase or decrease) in the quantity demanded and % by the % amended (increase or
decrease) in price.
To a higher extent, it can provide information about the response of product’s price change.
G)
i. Price Elasticity of Demand: This is stated as the comparative response of the demanded
quantity to price changes. It is stated as the % change in the quantity that is demanded to % price
change.
Price Elasticity of Supply: This is the comparative response towards the quantity towards price
changes. It is stated as the percentage quantity supplied change to a percentage price change.
Income Elasticity of Demand: This is the comparative demand response towards the income
change or percentage demand change because of the percentage change in income.
Cross Elasticity of Demand:This the comparative demand response to price changes of other
good, this quantifies the demand determinant’s other prices.
ELASTICITY QUESTION 2
A
Total revenue test help firm in its overall pricing strategy, and determines the extent by which a
product is either elastic or inelastic, which thus helps the firm in maximizing its total revenue.
B
The variables of price elasticity are namely; availability of substitutes, the time horizon, and if
or if not the good is a necessity or a luxury. If there is an increment in apple juice price, then one
can switch to orange, pineapple or any other juice, nut if there is an increment in gas price, then
there is no other option. Another example is Disney World Ticket.
C
Time is essential to the farmer as in short-run when tomatoes price increase they can increase the
supplied quantity, and in the long run, they can purchase more land.

D
Pepsico Executive will benefit because in case a product is of better quality, then the market
price increases, and there is more monopoly of that product.
i. It supports better decision making because firms make use cross elasticity of demand doe
measuring the significance of complementary products and in which manner these products
makes a comparison to their own products.
E
An analyst would take benefit, as the cross elasticity of demand determines the quantity
demanded elasticity and responsiveness for coca-cola, showing that it would increase product
supply, creating a monopoly, increasing reasonable prices and maximizing revenue.
i. The understanding supports better decision making as it forms adequate opportunities to
increase product supply while appealing customers because of better quality.
ELASTICITY QUESTION 3
A
i. The implicit costs are stated as opportunity cost, whereas the explicit costs are the paid
expenditures with the own tangible assets of the company.
ii. Organization production should care about explicit cos; on the other implicit cost does not
directly impact the organization.
B
i. Production function assists the technological relation within quantities of physical inputs and
output quantity of the product.
ii. Production functions tell the firm about how inputs are affected and what factors contribute to
the specified economic growth.
iii.By addressing the allocative efficiency in the usage of factor inputs within production and the
resultant income distribution to those factors, at the same time summarizing technological issues
of attaining efficiency.

iv. The information related to problems of allocative efficiency will be required.
v. It would be gained from checking the distribution of goods and/or services.
C
The three crucial short term relationships are Total Product (TP), Marginal Product (MP), and
Average Product (AP). MP and AP curve show the Law of Diminishing Returns.
The core manager would care about these crucial relationship to assess supply and demand
aspects in market with the objective to make better decisions and earn effective profits.
ELASTICITY QUESTION 4
A
i. The principle of diminishing returns has operations in the short run where firms are not able to
change each and every factor of production; it is applicable as some production facts are kept
fixed. The assumptions are; using Units of capital and labour as variable factors, the factor’s
price does not change, and each variable factor is efficient equally.
B
The seven short production costs are Total Fixed Costs (TFC), Total Variable Costs (TVC),
Total Variable Costs (TVC), Average Fixed Costs (AFC), Average Variable Costs (AVC),
Average Cost (AC), and Marginal Cost (MC). They are significant to managers as they show the
overall cost of production of a firm.
C
The long-run average cost curve reflects the lowest cost per unit of the firm at every output level,
making the assumption that all production factors are variable.
ATC means TC/Q, it refers to the per cost unit that is inclusive of all fixed as well as variable
costs, to make better pricing decisions.
D
Economies of scale term to these decreased costs per unit that take place because of increasing
total output.

Production process means the output rises or falls at the same time and in step with rising or fall
in the inputs.
Diseconomies of scale take place when a business expands largely, and there is an increase in
cost per unit.
Understanding of these concepts assist managers in better decision making it is because it
increases the productivity of managerial term and firm has alternatives to decentralize decision-
making authority to enhance efficiency further and to decline managerial costs.
ELASTICITY QUESTION 5
A)
i.
The four characteristics of pure competition are; first is small firms are having large numbers
that none of them on an individual basis is in a state to manipulate prices and level of output in
the industry. . Second is thatfirms sell identical products which means all sellers supply identical
products, and the products offered by all the competitive firms are same to each other. Third,
sellers as well as buyers have prefect knowledge regarding prices and technology in regarding
the existing prices in market. Fourth is perfect resource mobility or free entry or exit, which
means in this market new firm can easily enter or exit industry in the long run.
B)
i.There are necessarily three decision questions, namely; should the firm produce, how much to
produce, and what P&L should be realized.
C)
i.
Maximum profit will take place at the quantity where the variation between TR and TC is
highest. As per this approach, the firm makes a calculation: Profit = TR – TC for every output
level, after then chooses the output having most considerable profit amount. „ It can be explained

that, from the point of view of business manager that a more significant price states that total
revenue would be more for each quantity sold while a lower price state that total revenue will
be less for each quantity sold. A profit-maximizing firm will give priority to the quantity of
output in which total revenues are near to total costs, thereby minimizing losses.
ELASTICITY QUESTION 6
A)
i.The three characteristics of MR = MC rule are; 1) the rule makes the assumption that MR
should be equivalent to the minimum-average-variable cost. 2) The rule is better for firms in any
industry type, but not works for pure competition. 3) In pure competition, price is equal to MR,
thus in a pure competitive market, the restatement of the rule can be done, as the firm must
produce the level of output in which P = MC, because of P = MR.
B)
i. The profit level can be held by the multiplication of ATC with quantity.
ii. Pure competition is assumed to generate the output quantity that reduces economic losses if
the price is more than AVC but not more than ATC.
iii. Lowest AVC is the point of shut down that making a temporary decision to stop production
because of existing market conditions.
ELASTICITY QUESTION 7
A)
To be specific, the increasing MC portion that is above the AVC curve is by which the supply
curve is derived from a competitive firm in the short period.
B)
i. The characteristics of long-run equilibrium of a purely competitive firm are; easy entry and
exit, identical costs, constant cost industry. In the long-run equilibrium entry removes profit, and
exit eliminates losses.

The productive efficiency is gained by producing where Price is equal to minimum ATC.
The implication of allocative efficiency is that Price must be equal to MC.
ELASTICITY QUESTION 8
A)
i. The six characteristics of pure monopoly are; 1) single seller- it is single product of its
provided goods, 2) no near substitutes: Since it is sole seller, so no substitutes exist, 3) Price
Maker; It controls the supplied quantity and overall price, 4) blocked entry) there is no
immediate competitor, 5) non-price competition; the produce generated might be standardized or
differentiated, 6) economies of scale; decreasing ATC with added size of firm acting as entry
barrier.
However, these all characteristics are varied from pure competition market structure because
they share no control no price, they are price takers, several firms are selling identical products
and several substitutes are available.
B)
i. The six barriers are economies of scale, natural monopoly case, patents, license, ownership and
pricing. The monopolist has all of the economies of scale, thereby makes it productive for
themselves, the main objective of monopolist will be fulfilled that are discourage new entrants
and having cost advantages. Since the monopolist has single ownership, it can meet its goal of
the rising market price.
C)
i.
By considering the price sensitivity of product decision of reduction of price will be taken to
ensure high profitability through increase in demand.
ELASTICITY QUESTION 9
A)

i.
The monopolist will choose the profit maximization output level in which MR = MC, after that
charges the price for that output quantity as identified by the market demand curve. In case the
price is higher than AV, then positive profits will be earned by the monopolist.
B)
i.
The three forms of price discrimination are First-degree price discrimination, wherein the
monopoly seller should be aware of the absolute maximum price that is to be paid by the
customer. Second-degree price discrimination states the price of product or service differs in
accordance with quantity demanded.Third-degree price discrimination means the price differs
according to the traits of the consumer. The main conditions to get successful implementation are
that seller should have control on product supply, and be capable divide market.
C)
i.
A dilemma of regulation is that regulated price that attains allocative efficiency is also expected
to lead to losses.
ELASTICITY QUESTION 10
A)
i.
In pure competition, price is equivalent to marginal cost and firms gain an economic profit of 0.
In pure competition, different firms selling products are identical. On the other hand, in a
monopoly, the price is setting is higher than marginal cost and firm gains a +economic profit. In
a monopoly there is no existence of competition. The single seller creates a monopoly and enjoys
sole control.

However, in monopolistic competition, the firms sell near substitute products, there is fierce
competition because of non-price competition in monopolistically competitive market. In this
market, a few numbers of sellers are needed.
B)
i.
Product differentiation is engaged with making changes in the product marketing mix to
differentiate it from the one offered by competitors. It differentiation factors are form, , price,
features, style, durability, quality, reliability, performance, reparability and customization. The
examples include, Apple, Coca Cola, and Rolex
All three companies use them to impact their price point and loyalty positively.
C)
i.
The new employee would be explained that firstly monopolistic competition is an imperfect
competition type where there are several producers selling products which are different from
each other and are not perfect substitutes. Secondly, in the short run, a monopolistically
competitive firm increases profit or reduces deficit with generating the quantity that is
corresponding to marginal revenue = marginal cost. In case the average total cost is lower than
the market price, then the economic profit will be generated by the firm.
ELASTICITY QUESTION 11
A)
i. There are several characteristics of oligopoly market, namely; industry led by a large number
of firms, either identical or differentiated products are sold by the firm, and considerable barriers
to entry are there. Further traits are interdependence, presence of price rigidity etc. On the other
hand, in pure competition there are large numbers of small firms competing in the market,
identical products are sold, and there are no entry and exit barriers. In contrast, in monopolistic
competition there are large numbers of small firms competing with one another, with free entry

and exit, selling differentiated product, with better substitutes. However, in monopoly market,
there is a single vendor dominating the market, with no replaceable products, and higher entry
and exit barriers.
B).
i. Profit maximization is the leading business gal, and the same always takes place when
marginal proceeds is equivalent to marginal cost. It is complicated for the oligopoly to identify at
what output it can do profit maximization. In this market structure, firms make frequent changes
in prices, and the rule of profit maximization reflects that it should select that output level where
MC = MR and there is a rise in Marginal Cost.
C)
i. Firms operating in an oligopoly might collude to establish a price for a market to maximize the
profit of industry. It comes up with several issues inclusive of higher customer prices, thereby
declining the customer surplus. The new firms would be dampened to enter the market. Issues
would be faced by industry due to monopoly and higher prices.
ii.The game theory states the actions of all firms impacts the result of each. This sets out a lower
price schedule, to generate sound decision making of free and competing rivals in a strategic
setting. It helps in determining likely results and analyzing strategies while arriving at decisions
herein, goal attainment is based on their interactions with others.