Part 1: Short Answers
1. Draw a market supply and demand diagram for minivans. Give an example of something that
would shift the supply of minivans. Which direction will it move the supply? On the same
diagram or a new one, illustrate the new equilibrium. Which direction did price move?
Quantity? Does this follow the law of supply or the law of demand?
2. Robert has $12 to spend. He has resolved to spend his $20 on either beer or pizza.
Number of
objects
Price of a
slice of
pizza
Total utility
pizza
Marginal
utility of
slices
Price of
beer
Total utility
of beer
Marginal
utility of
beer
1 $3 8 8 $2 5 5
2 $3 13 $2 8
3 $3 17 $2 11
4 $3 18 $2 12
5 $3 18 $2 13
6 $3 18 X $2 13 X
Fill out the rest of the table. How many slices of pizza and bottles of beer will Robert buy?
Would Robert buy more or fewer beers if they only cost $3?
Part 2: Long Answers
1. Consider a market in a perfectly competitive long run equilibrium. Draw the cost diagram
for an average firm, including average fixed cost, average variable cost, average total cost,
and marginal cost. Suppose advances in production technology make each product easier to
make than it was before. Draw a new cost diagram including all of the same curves as
before. Does this firm now make negative, zero, or positive economic profit in the short
run? Based on that, should the number of firms in the market go up, down or stay the
same? Draw an overall market supply and demand diagram to illustrate what happens in
the market in response to this technological advancement. After the dust has settled, what
profit will the firm make in the long run?
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