Final Exam – Boeing estimates the elasticity of demand for new commercial jets

Instructions: Write a small paragraph (2
or 3 sentences) to explain each of your answers..
Each question counts 25 points for a total of 100 points.

1. Boeing estimates the elasticity of demand for new commercial
jets is –1.25. Explain why the following statements are either true or false
(i.e., state whether true or false and explain why.)
a. “The price effect dominates the quantity effect.”
b. “A 4 percent increase in the number of jets sold will require
a 5 percent decrease in the price of jets.”
c. “A 5 percent decrease in the price of jets will increase
Boeing’s total revenue.”

2. According to production engineers, the firm’s production
function gives the following outputs that can be produced from various
combinations of labor and capital. The firm can purchase labor services (w)
for $20 per unit and capital services (r) for $40 per unit.

Units of Capital

1

2

3

4

Units
of
Labor

1
2
3
4
5

20
42
62
77
87

22
45
69
87
100

28
58
87
110
130

40
87
137
197
250

a. If the firm wishes to produce 87 units of output, which input
combination is economically efficient? Explain your answer.

b. If input prices change to $40 per unit of labor (w = 40) and
$20 per unit of capital (r = $20), what is the economically efficient input
combination to produce 87 units?

3. Explain the difference between economies of scale and
diseconomies of scale.

4. In long-run competitive equilibrium, product price equals
long-run average cost and also equals long-run marginal cost. Thus, economic
profit equals $0. Please explain why firms have not incentive to exit the
industry.