Economics of Enterprise Answers

A consumer,John spends all of his income on 2 goods X and Y. The two goods are both normal but are not complementary. The price of good X is reduced but the price of good Y is unchanged. The consumer continues to spend all of his income on the two goods.

a.& Distinguish between the substitution effect and the income effect of price reduction in good X.
b. Explain three assumptions concerning consumer behavior.

Mensy Ltd produces two goods that have income elasticity values as follows.
Good A=-0.5 and good B=4
Explain the income elasticity of demand for good A and good B

You recently sold to your brother 200 shares of Disney stock, and the transfer was made through a broker, and the trade occurred on the NYSE. This is an example of:

Jane Doe, who has substantial personal wealth and income, is considering the possibility of starting a new business in the chemical waste management field. She will be the sole owner, and she has enough funds to finance the operation. The business will have a relatively high degree of risk, and it is expected that the firm will incur losses for the first few years. However, the prospects for growth and positive future income look good, and Jane plans to have the firm pay out all of its income as dividends to her once it is well established. Which of the legal forms of business organization would probably best suit her needs?

Question 2
The Blair Company’s three assembly plants are located in California, Georgia and New
Jersey. Previously, the company purchased a major subassembly, which becomes part
of the final product, from an outside firm. Blair has decided to manufacture the
subassemblies within the company and must now consider whether to rent one centrally
located facility (e.g., in Missouri, where all subassemblies would be manufactured) or to
rent three separate facilities, each located near one of the assembly plants, where each
facility would manufacture only the subassemblies needed for the nearby assembly
plant. A single, centrally located facility, with a production capacity of 18,000 units per
year, would have fixed costs of $900,000 per year and a variable cost of $250 per unit.
Three separate decentralized facilities, with production capacities of 8,000, 6,000 and
4,000 units per year, would have fixed costs of $475,000, $425,000 and $400,000,
respectively, and variable costs per unit of only $225 per

Explain whether the following goods and services would have a positive, negative, or
near-zero income elasticity of demand (i.e., normal or inferior goods), and the magnitude
of the income elasticity of demand (for example: greater than1 (“income elastic”), or less
than 1 (“income inelastic”)), and explain your reasons.
a. Cars
b. MBTA
c. Eating at the restaurant

Why invest capita in purely competitive industries with equilibrium margins that
are razor thin and entrants that erode quasi profits? Suppose volume is not
exceptionally large, why then?

Question 8
The Lumins Lamp Company, a producer of old-style oil lamps, estimated the following
demand function for its product:
Q = 120,000 – 10,000P
where Q is the quantity demanded per year and P is the price per lamp. The firm’s fixed
costs are $12,000 and variable costs are $1.50 per lamp.
a. Write an equation for the total revenue (TR) function in terms of Q.
[1.5 marks]
b. Specify the marginal revenue function.
[1.5 marks]
c. Write an equation for the total cost (TC) function in terms of Q.
[1.5 marks]
d. Specify the marginal cost function.
[1.5 marks]
e. Write an equation for total profits (π) in terms of Q. At what level of output (Q) are
total profits maximised? What price will be charged? What are total profits at this
output level?
[2 marks]
f. Check your answer in Part (e) by equating the marginal revenue and marginal
cost functions, determined in Parts (b) and (d), and solving for Q.
[2 marks]
g. What model of market pricing behavior has been assumed in this problem?
Explain