Question 1:
Teachers at the local school have contacted the company We R’ Write with a complaint. Teachers noticed that when We R’ Write sold individual pencils, students made sure to take care of the pencils. However, when the company started selling larger packages of pencils, students started needlessly breaking their pencils, using them for purposes other than doing school work, or even just throwing them away.
You have been provided with information regarding the quantity and total utility gained from students purchasing different numbers of pencils that is presented in Table 1 below. Table 2 provides information concerning pens, which will be used to answer the question in the third bullet below.
- Explain the law of diminishing marginal utility from the standpoint of economic theory as it applies to the situation described in the scenario.
- Explain what specifically We R’ Write should understand about marginal utility as the quantity consumed increases that would explain why students become more reckless with their pencils when they purchase more. Make sure to use economic concepts in your answer. Also, use the table below as a guide to help you explain this behavior to We R’ Write so they can relate the information to the teachers.
- Using the table below and economic theory, what combination of pencils and pens would maximize utility? Briefly explain how you determined this point.
Table 1. Utility Associated with Consuming Pencils
| Quantity of Pencils Consumed | Total Utility | Marginal Utility | Individual Pencil Price | Marginal Utility per Dollar for Pencils |
| 0 | 0 | — | — | — |
| 10 | 50 | 5 | $0.25 | $1.25 |
| 20 | 93 | 4.3 | $0.25 | $1.08 |
| 30 | 127 | 3.4 | $0.25 | $0.85 |
| 10 | 151 | 2.4 | $0.25 | $0.60 |
| 50 | 165 | 1.4 | $0.25 | $0.35 |
| 60 | 173 | 0.8 | $0.25 | $0.20 |
| 70 | 180 | 0.7 | $0.25 | $0.18 |
Table 2. Utility Associated with Consuming Pens
| Quantity of Pens Consumed | Total Utility | Marginal Utility | Individual Pen Price | Marginal Utility per Dollar for Pens |
| 0 | 0 | — | — | — |
| 2 | 3.00 | 1.500 | $3.50 | $5.25 |
| 4 | 3.45 | 0.225 | $3.50 | $0.79 |
| 6 | 3.89 | 0.220 | $3.50 | $0.77 |
| 8 | 4.31 | 0.210 | $3.50 | $0.73 |
| 10 | 4.65 | 0.170 | $3.50 | $0.60 |
| 12 | 4.94 | 0.145 | $3.50 | $0.51 |
| 14 | 5.15 | 0.105 | $3.50 | $0.37 |
Question 2:
Two workers are currently trying to produce both pens and pencils for a company named We R’ Write. Worker A can produce 100 pencils per day or 50 pens. Worker B can produce 100 pencils per day or 20 pens.
- If the workers continue to try and produce both, how many pencils will each worker produce, and how many pens will each worker produce?
- What is the opportunity cost of producing pencils and for producing pens for each worker?
- After specialization, how many pencils will be made in total by both workers?
- After specialization, how many pens will be made in total by both workers?
- What is the difference in the total number of pencils made by both workers after specialization?
- What is the difference in the total number of pens made by both workers after specialization?
Question 3:
We R’ Write currently purchases the wood used to make their pencils, the rubber used to make erasers for their pencils, and the lead for the pencils from other firms. However, We R’ Write is considering purchasing these firms so they can personally produce all the components used for making pencils.
- As an economist, what would you call the current way We R’ Write is acquiring the products needed to make their pencils (purchasing from other firms)?
- What benefits and problems could We R’ Write have with the current way of doing business?
- As an economist, what would you call We R’ Write’s proposal to purchase the firms that make the pencil components?
- What benefits and problems could We R’ Write have concerning the purchase of these other firms?
Question 4:
We R’ Write has collected some cost information for you regarding the production of pens. In the table below, you are provided with the total output of pens per day corresponding to different levels of labor. You are also provided with the price of labor per day, the total fixed costs per day, and the price per pen.
- Currently, We R’ Write is using 75 employees on the production line. Is this level producing maximum profits? How did you determine this answer?
- What is the level of profit made when 90 workers are used per day to produce pens? How did you determine this?
- Should We R’ Write continue to produce or temporarily shut down in the short run, if 12,000 pens are produced per day? Why, or why not?
- At what level of output and workers used are profits maximized? Identify two ways you can find this maximum profit using the information in the table below.
| Output (Pens Produced) | Number of Workers Employed Per Day | Price of Labor Per Worker Per Day | Total Variable Cost of Labor (Round to nearest Whole number) | Total Fixed Costs per Day (Round to nearest Penny) | Total Cost per Day | Price Per Pen | Total Revenue | Profit | Average Variable Cost | Average Fixed Cost | Average Total Cost | Marginal Costs | Marginal Revenue |
| 0 | 0 | $560 | $0.00 | $500 | $500 | $3.50 | $0.00 | -$500 | — | — | — | — | — |
| 1,000 | 15 | $560 | $8,400 | $500 | $8,900 | $3.50 | $3,500 | -$5,400 | $8.40 | $0.50 | $8.90 | $8.40 | $3.50 |
| 2,700 | 30 | $560 | $16,800 | $500 | $17,300 | $3.50 | $9,450 | -$7,850 | $6.22 | $0.19 | $6.41 | $4.94 | $3.50 |
| 5,100 | 45 | $560 | $25,200 | $500 | $25,700 | $3.50 | $17,850 | -$7,850 | $4.94 | $0.10 | $5.04 | $3.50 | $3.50 |
| 7,900 | 60 | $560 | $33,600 | $500 | $34,100 | $3.50 | $27,650 | -$6,450 | $4.25 | $0.06 | $4.32 | $3.00 | $3.50 |
| 12,000 | 75 | $560 | $42,000 | $500 | $42,500 | $3.50 | $42,000 | -$500 | $3.50 | $0.04 | $3.54 | $2.05 | $3.50 |
| 15,700 | 90 | $560 | $50,400 | $500 | $50,900 | $3.50 | $54,950 | $4,050 | $3.21 | $0.03 | $3.24 | $2.27 | $3.50 |
| 18,100 | 105 | $560 | $58,800 | $500 | $59,300 | $3.50 | $63,350 | $4,050 | $3.25 | $0.02 | $3.28 | $3.50 | $3.50 |
| 20,300 | 120 | $560 | $67,200 | $500 | $67,700 | $3.50 | $71,050 | $3,350 | $3.31 | $0.02 | $3.33 | $3.82 | $3.50 |
| 21,900 | 135 | $560 | $75,600 | $500 | $76,100 | $3.50 | $76,650 | $550 | $3.45 | $0.02 | $3.47 | $5.25 | $3.50 |
| 22,300 | 150 | $560 | $84,000 | $500 | $84,500 | $3.50 | $78,050 | -$6,450 | $3.77 | $0.02 | $3.79 | $21.00 | $3.50 |
| 22,300 | 165 | $560 | $92,400 | $500 | $92,900 | $3.50 | $78,050 | -$14,850 | $4.14 | $0.02 | $4.17 | $0.00 | $3.50 |
| 21,500 | 180 | $560 | $100,800 | $500 | $101,300 | $3.50 | $75,250 | -$26,050 | $4.69 | $0.02 | $4.71 | -$10.50 | $3.50 |
Question 5:
We R’ Write has made some changes over the last year, hoping to increase total revenues generated. Specifically, We R’ Write increased the price of their pencils and decreased the price of their pens. However, We R’ Write has seen total revenues actually go down. Given the information in the table below, complete the following:
- Calculate the price elasticity of demand for pencils and pens.
- Interpret the price elasticity of demand for pencils and pens.
- Indicate if the demand for pencils is price elastic, inelastic, or unit.
- Indicate if the demand for pens is price elastic, inelastic, or unit.
- Tell We R’ Write if the decision to decrease the price of pencils was correct or not, and why.
- Tell We R’ Write if the decision to increase the price of pens was correct or not, and why.
| Price | Quantity Demanded | |||
| Item | Last Year | This Year | Last Month | This Month |
| Pencils | $0.30 | $0.25 | 25,000 | 62,000 |
| Pens | $3.00 | $3.50 | 77,000 | 30,000 |
Question 6:
Nearly 50 firms make pencils and pens in the United States. We R’ Write is one of those firms. These firms range from large companies such as Bic, Paper Mate, and Pilot to generic-brand pencils and pens. There are also higher-end pens and pencils produced by firms such as Montblanc and Cross. We R’ Write would like to determine how they can better compete against the other firms in the market. For this question, address the following:
- What is the market structure for the pen and pencil market in the United States? What characteristics of the pen and pencil market help you draw your conclusion?
- Given the market structure, how can We R’ Write better compete against other firms in the market?
- At an industry trade show this past December, We R’ Write management heard rumors that the three largest pen manufacturers in the United States are considering a merger. If this merger takes place, the new company will potentially control 62% of the total market share of pen sales. Could the federal government block this type of merger? If so, what specific problems would the federal government have with this type of merger?
Question 7:
We R’ Write produces pens and pencils for sale. We R’ Write also belongs to The Pen Makers Society of America. This society has numerous lobbyists in Washington, DC, attempting to get a bill passed that would provide subsidies for the nearly 50 pen makers in the United States for making pens. These subsidies will be paid by adding an additional $0.25 on to every school lunch provided in public schools across the United States. However, the National Parent Teachers Association (National PTA) also has lobbyists in Washington, DC, who are trying to block this bill.
- Would you characterize We R’ Write’s products as private goods, public goods, natural monopolies, or open-access goods? Explain why you arrived at this conclusion.
- Describe the type of legislation that The Pen Makers Society of America is attempting to get approved. Does this legislation fit into one category or many? Why?
Question 8:
We R’ Write is really worried about their production line for pens. The company is concerned that they are employing more workers on the production line than necessary. We R’ Write has provided you with the production information for pens in the table below that corresponds to different numbers of workers on the production line.
- Describe where the law of diminishing marginal productivity begins for We R’ Write.
- We R’ Write currently uses 75 workers on the production line per day. Given the calculations in the table, is this number optimal? Why, or why not?
- If you could make a suggestion regarding the optimal number of workers We R’ Write should use on the production line, what would it be? Why?
