ECON 303

Practice Questions for Exam 1

(Answers to practice questions will be provided in the class)

1. Suppose a firms current profit is $50 million and interest rate is 4%.
a. What is the value of the firm if it continues for 3 years with no growth in
profit?
b. What is the value of the firm if it continues for 3 years with 3% annual growth
in profit?
c. What is the value of the firm if it continues for ever with 3% annual growth in
profit?
2. Suppose a firms current profit is $80 million, the interest rate is 6%, and the expected
growth rate of the firms profit is 5%.
a. What is the value of the firm if it continues for 3 years?
b. What is the value of the firm if it continues for ever?
c. What is the value of the firm on the ex-dividend date if it pays it current profit
as dividend and continues for ever?
Table A (To be Used for Practice Questions 3 & 4)
# Units of Activity
Total Benefit
Total Cost
0
0
0
1
10
5
2
18
11
3
25
18
4
29
27
5
31
38
3. On Table A,
a. What is the marginal benefit from the second unit of activity?
b. What is the marginal cost of the third unit of activity?
c. What is the activity level that maximizes net benefit?
d. What is the level of net benefit at four units of activity?
4. On Table A,
a. What is the marginal benefit from the first unit of activity?
b. What is the marginal cost of the fifth unit of activity?
c. What is the maximum level of net benefit?
d. What is the level of net benefit at five units of activity?
5. Suppose total benefits and total costs are given by B(Y) = 90Y - 4Y2 and C(Y) = 5Y2.
a. What is the marginal benefit?
b. What is the marginal cost?
c. What is the value of Y that maximizes net benefits?
d. What is the maximum level of net benefits?

Page 1 of 4

ECON 303
Practice Questions for Exam 1
(Answers to practice questions will be provided in the class)

6. Suppose total benefits and total costs are given by B(Y) = 50Y - 6Y2 and
C(Y) = 10Y + 4Y2.
a. What is the marginal benefit?
b. What is the marginal cost?
c. What is the value of Y that maximizes net benefits?
d. What is the maximum level of net benefits?
7. Suppose the generalized demand function for good X is given by Qd = 20 - 4Px + 2Py
+ M. The price of good Y is $15, and income is $150.
a. What is the demand function for good X?
b. What is the inverse demand function for good X?
c. What does the positive coefficient of Py say about the relationship between
goods X and Y in consumption?
d. What does the positive coefficient of M say about good X?
8. Suppose the generalized demand function for good X is given by Qd = 30 - 2Px - 3Py
- M. The price of good Y is $2, and income is $10.
a. What is the demand function for good X?
b. What is the inverse demand function for good X?
c. What does the negative coefficient of Py say about the relationship between
goods X and Y in consumption?
d. What does the negative coefficient of M say about good X?
9. Suppose market demand is Qd = 60 - 6P and market supply is Qs = 4P.
a. What is the equilibrium price?
b. What is the equilibrium quantity?
c. What is the market outcome if a price ceiling of $3 is imposed?
d. What is the market outcome if a price floor of $9 is imposed?
10. Suppose market demand is Qd = 30 - 4P and market supply is Qs = -2 + 4P.
a. What is the equilibrium price?
b. What is the equilibrium quantity?
c. What is the market outcome if a price ceiling of $3 is imposed?
d. What is the market outcome if a price floor of $6 is imposed?
11. What is the effect on market price and quantity of college textbooks when a
significant improvement in the technology of publishing college textbooks is
accompanied by a decrease in the number of high school graduates entering
colleges?
12. What is the effect on market price and quantity of breakfast cereals when an increase
in the cost of producing breakfast cereals is accompanied by an increase in the price
of milk, a complement for breakfast cereals?

Page 2 of 4

ECON 303
Practice Questions for Exam 1
(Answers to practice questions will be provided in the class)

13. Suppose market demand changes from Qd0 = 60 - 6P to Qd1 = 90 - 6P and market
supply is Qs = 4P.
a. What is the change in equilibrium price?
b. What is the change in equilibrium quantity?
14. Suppose market supply changes from Qs0 = -4 + 4P to Qs1 = -6 + 4P and market
demand is Qd = 20 - 2P.
a. What is the change in equilibrium price?
b. What is the change in equilibrium quantity?
15. Suppose the price of microwave ovens falls from $250 to $200 and, as a result,
quantity demanded of microwave ovens increases from 20 million units to 25
million units.
a. What is the own-price elasticity of demand for microwave ovens?
b. If the price of microwave ovens increases by 15%, what would be the expected
change in the quantity demanded of microwave ovens?
16. Suppose the price of vacuum cleaners increases from $50 to $60 and, as a result,
quantity demanded of vacuum cleaners decreases from 15 million units to 10
million units.
a. What is the own-price elasticity of demand for vacuum cleaners?
b. If the price of vacuum cleaners decreases by 10%, what would be the expected
change in the quantity demanded of microwave ovens?
17. The demand for good X has been estimated by Qd = 12 - 3Px + 4Py. Suppose that
good X sells at $2 per unit and good Y sells for $1 per unit.
a. What is the own-price elasticity of demand for good X?
b. If the price of good X increases by 10%, what would be the expected change in
the quantity demanded of good X?
18. The demand for good X has been estimated by Qd = 15 - 3Px - 2Py. Suppose that
good X sells at $1 per unit and good Y sells for $2 per unit.
a. What is the own-price elasticity of demand for good X?
b. If the price of good X decreases by 10%, what would be the expected change
in the quantity demanded of good X?
19. If quantity demanded for sneakers falls by 6% when price increases 20%, what is the
own-price elasticity of demand for sneakers?
20. If quantity demanded for sneakers increases by 30% when price decreases by 15%,
what is the own-price elasticity of demand for sneakers?

Page 3 of 4

ECON 303
Practice Questions for Exam 1
(Answers to practice questions will be provided in the class)

21. If the price of pork chops falls from $8 to $6, and this leads to an increase in demand
for apple sauce from 100 to 140 jars, what is the cross-price elasticity of apple sauce
and pork chops?
22. If the price of lamb meat increases from $8 to $10, and this leads to an increase in
demand for fish from 40 to 60 pounds, what is the cross-price elasticity of lamb meat
and fish?
23. The demand for good X has been estimated by Qdx = 12 - 3Px + 4Py. Suppose that
good X sells at $2 per unit and good Y sells for $3 per unit.
a. What is the cross-price elasticity of demand for good X?
b. If the price of good Y increases by 10%, what would be the expected change in
the demand for good X?
24. The demand for good Y has been estimated by Qdy = 100 - 5Py - 6Px. Suppose that
good Y sells at $4 per unit and good X sells for $5 per unit.
a. What is the cross-price elasticity of demand for good Y?
b. If the price of good X decreases by 10%, what would be the expected change
in the demand for good Y?

Page 4 of 4