2.Consider public policy aimed at smoking.
Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs $10 and the government wants to reduce smoking by 20%, by how much should it increase the price?
If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or five years from now?
Studies find that teenagers have a higher price elasticity of demand than do adults? Why might this be true?
3.
a. Suppose my marginal utility from chia pets is 80 and my marginal utility from sea monkeys is 40.
The price of a chia pet is $10 and the price of a sea monkey is $1. What should I do to maximize my utility? Explain your answer.
In module # 3 I asked you to watch the video “Are We in Control of Our Own Decisions?”. What examples did Dan Ariely provide?
7.For each of the following five questions, explain why the statement is true, false or uncertain:
a. To find the profit maximizing level of output, a firm uses the average cost because it indicates the cost of typical unit of output.
b. A firm in a competitive market shuts down temporarily when its revenues do not cover its variable costs.
c. When a monopoly sells an additional unit of output, its revenues increase by an amount equal to the price.
d. If a group of sellers could form a cartel, they would like to try to sell as much as a competitive market.
e. A monopolistically competitive market is characterized by one firm selling differentiated product.