Question

In the early 1990’s Heinz Pet Products, makers of 9-Lives cat food, closed eight smaller plants and centralized operations at its factory in Bloomsburg, Pennsylvania. It expanded the Bloomsburg factory from 250,000 square feet to 1 million, and increased the use of other resources by the same proportion. Output at that factory increased from 3 million cases a year to 65 million. From this information we know that the factory experienced

Select one:

a. diseconomies of scale, and average total cost rose.

b. economies of scale, and average total cost rose.

c. diseconomies of scale, and average total cost fell.

d. economies of scale, and average total cost fell.

If a typical individual were to go to the circus performance after performance, the marginal utility of each additional performance would

Select one:

a. increase, at a decreasing rate.

b. eventually decline.

c. decline at first, but eventually rise.

d. remain unchanged.

The Mr. Coffee coffeemaker was introduced in 1971, the first automatic drip coffeemaker on the market. It was immensely successful and highly profitable. Today many companies produce automatic drip coffeemakers and consumers perceive only slight differences between them. With this additional competition, Mr. Coffee’s profits are no better than those of other small appliances.

With only the information given above, an economist would probably explain the drop in Mr. Coffee’s profits as follows:

Select one:

a. Mr. Coffee must have experienced an increase in some important cost of production, resulting in a drop in profits.

b. Consumer taste for coffee must have declined, leading to a shift to the left in the demand for coffee makers.

c. Mr. Coffee’s high profits must have attracted new firms into the market for coffeemakers.

d. The government must have taxed away Mr. Coffee’s excess profits.

Hurricanes in 2005 that hit the natural gas producing areas of the U.S. Gulf Coast caused

Select one:

a. neither the supply curve nor the demand curve for natural gas to shift in 2005; there was a movement along the curves.

b. only the supply curve for natural gas to shift to the left in 2005.

c. only the demand curve for natural gas to shift to the left in 2005.

d. both the supply curve and the demand curve for natural gas to shift to the left in 2005.

Answer 1

1st Question

Option d) Economies of scale and average total cost fall

Economies of scale can be described as proportionate saving in cost due to increased production.

ATC = TC/Q

Even if we assumes TC Remains the same, output has increased exponentially.

Mathematically, whenever denominator rises, fraction falls.

which means with increase in quantity ATC falls.

There is increased production from 3 million to million so we have economies of scale.

2nd Question

option c

Here the catch with only the information given above.

Let us first try to eliminate the options.

There is no information provided about government taxes therefore option d is eliminated.

Same reason goes for option a , there is no information provided of increased cost for Mr. Coffee, Hence option a is eliminated too.

Similarly for option b, no information regarding dip in consumer taste, so option b too can not be the solution.

Also, from the information provided it is implicit that higher profitability of Mr. Coffee attracted firms. Increased firms lead to increased competition. Consumer has substitute for Mr. Coffee which lead to decreased demand of Mr. Coffee's Coffee.

3rd Question

option b

Hurricane hit the producing area, which implies it affected the supply.

Because producing area must have affected it adversely which would have lead to decrease in production and supply curve have shifted towards left.

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