Question

1. 1. Using proper terminology, explain why it may be more “costly” for a Mary to go to UVA, where the tuition is over $60,000 a year (yes, Mary is an out-of-state student), than going to trade-school, where the tuition is only $5,000 a year.

2.The market for wool manufacturers is perfectly competitive and in long-run equilibrium. Show this equilibrium for the market overall and individual producers, assuming P = $20. Now assume that demand for wool increases, raising P to $25. Show what happens in the SR and how LR equilibrium is regained.

3. Jillian consumes three goods: apples, oranges and grapes. The price of grapes falls. How will Jillian respond to this change? What is the economic principle behind this response?

4. Draw a firm’s average cost curves and marginal cost curve. Of these costs, which can’t change in the short-run?

5. TractorCo produces farming equipment in a perfectly competitive market. The company produces 1000 tractors at a price of $18. It loses $6000 a year. Draw the S/D curves for the market and for TractorCo, and label the loss on the curve.

Answer 1

1. The opportunity cost of Mary going to UVA is very high, $60000 which she could have saved by not going to UVA and the chance of going to trade school. Thus the opportunity cost is very high.

On the other hand, the opportunity cost of going to trade school is $5000 which she could have saved by not going to trade school and the chance of going to trade schools. Thus the opportunity cost is very low.

As a result, Mary going to UVA turns out to be more costly as the opportunity cost is very high compared to Mary going to trade school.