1. (TCO A) Suppose you are hired to manage a small manufacturing facility that produces Widgets.

(a.) (15 points) You know from data collected on the Widget Market that market demand has recently increased and market supply has recently decreased. As manager of the facility, what decisions should you make regarding production levels and pricing for your Widget facility?

Remember that supply and demand are about the market supply and market demand, which is bigger than your own company. You are being given data on supply and demand for the whole market and are being asked what effect that has on you as a small part of that market.

(b.) (15 points) Now, suppose that following the supply and demand changes in (a), a substitute good goes up in price, and your costs of production decrease. What new decisions will you make regarding production levels and pricing for your Widget facility? (Points : 30) (a.) ANS. With an increase in demand and an increase in supply, P* will be indeterminate. Q* will definitely increase. The decisions to be made follow the changes in Q* and P*.

Production levels should be increased. The price of the Widgets should remain the same.

(b.) ANS. Here the determinant of demand is an increase in the price of a substitute good. This will cause an increase in demand. The determinant of supply is an increase in costs. This will cause a decrease in supply. Now the change in Q* is indeterminate, and P* will definitely go up.

Correct decisions are: increase price and keep the current production levels.

2. (TCO B) Here is some data on the demand for lettuce:

Price Quantity
$10 100
$ 8 120
$ 6 140
$ 4 160
$ 2 180

(a.) (15 points) Is demand elastic or inelastic in the $6-$8 price range? How do