ECON 210: HOMEWORK #2

Chapter 5
1.The demand for gasoline is relatively inelastic because if the price of
gasoline rises, many people will continue to buy the good. Thus,
consumers will still have a high quantity demanded for gasoline even
when the price rises. However, the demand for Exxons gasoline is
relatively elastic because there are many other places that sell
gasoline. Such that, if the price of gasoline at Exxon is too high,
consumers will just go to Shell to obtain a lower price of gasoline.
2. There are time periods when dealing with the price elasticity of
supply, such as the market period, short run, and the long run. The
market period impacts the supply curve by having a lag between when
the firm realizes it has a products that become instant hits on its hands
and when inventory can be replaced. The market period is a time
period so short that the output and the number of firms are fixed. The
short run impacts the supply curve from when the firms can employ
more people, have existing employees work overtime, or hire part-time
employees to produce more, but this is done in an existing plant. The
short run is a time period when plant capacity and the number of firms
in the industry cannot change. The long run impacts the supply curve
because existing firms can expand or build new plants, or firms can
enter or exit the industry. The long run is a time period long enough for
firms to alter their plant capacities and for the number of firms in the
industry to change.
3. An excise tax placed on cereal will be less likely to be passed to
consumers than an excise tax on wireless phone and data services.
This occurs because cereal is elastic good and when then price elastic
of demand is elastic, consumers bear a smaller burden of taxes while
more is borne by seller. Whereas, wireless phone and data services are
an inelastic goods and when demands are inelastic, a higher share of
the total tax burden is shifted to consumers.
4. 10%/15%= 67% is the cross elasticity of demand for these two
products. These products are substitutes because the cross elastic of
demand is positive and when the price of chicken rises, the quantity
demanded of turkey will rise, while the quantity demanded of chicken
will decrease.
Chapter 6
5. Sunk costs should not be taken into considerations when making
decisions about the present or the future because a sunk cost is a cost
that has been paid and connect be recovered. This means that the cost

should not enter into making decision-making affecting the present or

the future.
6. Eric did not maximize his utility because the marginal utility per
dollars is not equal for all products. The marginal utility per dollar for
sushi is 5 (40/8), whereas the marginal utility per dollar for sashimi is
10 (20/2), hence the marginal utility per dollar is not equal, meaning
Eric did not maximize his utility. Now, if both the utilities were equal in
unit, then Eric would have maximized his utility.
Chapter 7
7. The short run differs from the long run because the run is a period of
time over which at least one factor of production is fixed, or cannot be
changed; whereas the long run is a time period of time, sufficient for
firms to adjust all factors of production, including plant capacity. The
long run is not the same for all industries because the time required for
long run adjustments varies by industry. Such as family-owned
restaurants can gain capital quickly and come and go fairly rapidly,
while petroleum companies may have to take years to build capital and
require a long time to face obstacles.
8. If you work hard building your business and end up earning zero
economic profit for the year, this would not be considered a failed
business to an economist. An economist would view a zero economic
profit as a normal rate of return on capital, a return just sufficient to
keep investors satisfied and to keep capital in the business over the
long run.
9. I believe that all of the items would be considered a sunk cost
because in order to take the class, I had to pay tuition, buy the
textbook, and buy a new laptop. This means that I needed all these
items for the classroom. Thus, all of these items are sunk costs
because these costs have already been incurred and cannot be
recovered. The funds spending on tuition, the textbook, and my laptop
has already become obsolete and whether to drop a course or not
should have nothing to do with the cost because since these costs are
sunk they are not recoverable.
10. The long-run average total cost curve has sort of a flat bowl shape
because of economies of scale, constant returns to scale, and
diseconomies of scale. The curve declines early on because of
economies of scale, which result from such items as specialization of
labor and management, and potentially a better use of capital and
complementary production techniques. Thus, as a firms output
increases, the long-run average total cost tends to decline. Moreover,
the curve is rather flat t over a portion because of constant returns to

scale. Constant returns to scale means a range of output where

average total costs are relatively constant. Finally, the curve slopes
upward because of diseconomies of scale. This means that at some
point firms often become so big that management becomes
bureaucratic and unable to control its operations efficiently.
Consequently, diseconomies of scale is a range of output where
average total costs tends to increase.