...
• General questions about points made in columns
• Questions in which students analyze and explain the economic concept involved
in an article
• Economic modeling questions based on the economics involved in an article
Appendix: Sample Questions
Professor Dearden uses WSJ articles as the basis for questions testing economic
modeling skills.
The Wall Street Journal reported last week that General Mills will increase prices on a
quarter of its breakfast cereals next month as a result of rising prices of grain and other
commodities. In this problem, you will analyze the perfectly competitive market for 20 oz.
boxes of oat cereal and an individual oat cereal producer’s decisions.
Before the price increase, suppose the short-run cost function of producing q boxes
of cereal is:
Cs(q)=F+0.9q+0.05q2.
Note: Each seller has the same cost function.
The market demand function for 20 oz. boxes of oat cereal is:
QD=1200-300p.
a. What is the short-run marginal cost function of producing oat cereal?
b. What is the minimum of the short-run average variable cost?
c. What is the firm’s short-run supply curve?
Suppose there are 10 sellers of oat cereal. What is the market supply function?
(Hint: At price p, if each individual seller supplies ___, then 10 sellers supply ___.)
d. Use the market supply function that you derived in part d and the market demand
function to find the equilibrium price and quantity.
With the price increase of oats, the cost of producing q boxes of cereal is now:
Cs(q)=F+1.4q+0.05q2.
e. What is the firm’s new short-run supply curve?
f. Suppose there are 10 sellers of oat cereal. What is the new market
supply function?
g. Use the market supply function that you derived in part f and the market demand
function to find the equilibrium price and quantity.
Notice that the price increase in oats caused each seller’s marginal cost curve to shift
up by $0.50 per box. What is the price increase associated with this increase in marginal
cost? That is, what is the difference between the price that you derived in part e to the
one you derived in part f? Write a brief essay comparing the increase in marginal cost to
the price increase