Microeconomics Answers

Assume, in an industry where firms are making an economic profit, the creation of an internet platform has broken down all entry barriers and resulted in a huge increase in the number of firms entering the industry. What will be the implication on profit to the existing firms in this industry? Use graphical demand and supply analysis to support your explanation

a) Alberto has utility function U (x,y)= 2*sqrt x +y. His income is $400, unit price of good y is Py= $20 and original unit price of good x is Px=$10. Compute X and Y, Alberto's uncompensated demands for good x and y. Compute level of utility that Alberto reaches under these prices.
b) assume unit price of good x becomes Px= $20. What's cheapest bundle (Xc, Yc) that allows Alberto to reach same level of utility found in a) under these new prices. How much does the bundle cost?
c) Compute compensating variation of that price change.

Describe with the help of a diagram how equilibrium is reestablished with a decrease in supply given demand

a firms C'=0.51q^2-7q+55.5. The values of its AFC at 20th unit of problem is 25. The demand function of this firm is 4q-200+4p=0. Should this firm opt for profit or sales maximization?

FInd the demand functions for each of the ff.:
1. U = x1^a x2^b
2.U = min{ax1, bx2}
3. U = ax1 + bx2)

A firm has a U-shaped average cost curve. The market demand is a downward-sloping straight line.

A). Can this firm ever be a natural monopoly? If not, why not? If so, what conditions must be met for it to be a natural monopoly? (10 pts)
B). Show the equilibrium price, quantity, and profit for this monopoly equilibrium. (7 pts)

Firm 1 is initially a monopoly. Then, a competitive fringe enters the market. The fringe supply is horizontal at p* (a price that is above Firm 1's minimum average cost). Show that the dominant firm-competitive fringe equilibrium price, p*, is less than the original monopoly equilibrium price, p (10 pts).
Also show how much the dominant produces, Qd, and how much the fringe produces, Qf, in the new equilibrium (7 pts).

Bill has an income of $200. He may buy up to $100 worth of food stamps, where a food stamp can be used to purchase $1 worth of food costs him 25¢. [Assume there is no black market for food stamps.]
A. Under what conditions would he prefer receiving $75 cash instead of being able to buy up to $100 worth of food stamps? Explain using a graph. (15)
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B. If Bill got $100 worth of food stamps for free (instead of having to buy them at a discount), would he be more or less likely to prefer in cash ($100) to food stamps than in (A)? (10)

Steve's utility function is U = BC, where B = beer cans per week and C = pack of cigarettes per week. As a result, his marginal rate of substitution is MRS = -B/C, where beer is on the vertical axis and cigarettes are on the horizontal axis. Steve's income is $120, the price of a can of beer is $2 and that of a pack of cigarettes is $1. [In answering the following, use graphs and math.]
A. How many cans of beer and packs of cigarette does Steve consume? (12)
B. Due to a new tax, the price to Steve of a can of beer rises to $3. Now how much beer and how many packs of cigarettes does Steve consume? (13)

Initially, a firm uses L* units of labor and K* units of capital to produce q* units of output. The firm has the usual smooth-shaped isoquants (labor and capital are imperfect
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substitutes). To encourage additional employment, the government starts paying 25% of the firm's wage payments (the rate offered by the U. S. government in the late 1970s under the New Jobs Tax Credit program).
A. If the firm continues to produce q* units, show in a graph how its choice of inputs changes. (6 pts)
B. Does the government program achieve its objective of increasing employment? (3 pts)
C. In a graph, show the firm's original output-expansion path and its new path. (6 pts)

A monopoly produces a life-saving medicine at a constant cost of $10 per dose. The demand for this medicine is perfectly inelastic so long as price is less than the $100 (per day) income of the 100 patients who need to take this drug once a day.
A. Show the equilibrium price and quantity and the consumer and producer surplus in a graph. (8 pts)
B. The government imposes a price ceiling of $30. Show the new equilibrium. What is the change in consumer and producer surplus? What is the deadweight loss (if any) from this price control? (9 pts)