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Homework Set 3

Principles of Economics
Date: Question #1: Draw a perfectly inelastic supply curve.
Answer: Question #2: If elasticity of demand is 0.5 and price is lowered from $20 to $19, by
what percentage will quantity demanded rise?
Answer: Question #3: (a) Illustrate a tax increase. (b) State what happens to equilibrium price and quantity
Answers: m price and quantity. Question #4: If the price of eye surgery falls by 50-percent and the quantity of contact
lenses demanded falls by 25-percent, find the cross-price elasticity of demand for
theses two goods.
Answer: Question #5: A perfect competitor would never charge more than market price
because ________________; the perfect competitor would never charge less than
market price because ________________________.
Answers: Question #6: How much is the firm’s most efficient output?
Answer: Question #7: At an output of 9, MC = 20 and AVC = $25. At an output of 10, MC =
$32 and AVC = $26. What is the lowest price the firm will accept in the short-run?
Answer: Question #8: The perfect competitor operates at the __________________ point of
his or her average total cost curve in the long-run.
Answer: Question #9: A monopoly is a firm that has ____________________substitutes.
Answer: Question #10: The five barriers to entering a monopolized industry are:
5 Question #11: There are basically only two justifications for monopolies:
2 Question #12: The main economic criticism of monopolies and big business in
general is that they are ________________________________.
Answer: Question #13: Price discrimination occurs when a seller charges
_________________________ for the same good or service.
Answer: Question #14: The monopolistic competitor’s demand curve slopes
Answer: Question #15: U.S. Steel and a few cigarette companies were all engage in
_________________________ to attain their economic ends.
Answer: Question #16: The oligopolist ________________________ at the minimum point of
his or her ATC curve.
Answer: Question #17: The most important cartel in the world today is

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University of Nairobi