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If the market demand decreases by 50% what will be the new clearing price and
quantity for this market?
Price X Y
20 40 50
30 40 40
40 60 50
50 55 60
60 60 40
70 70 60
1. Find the cross elasticity of commodity X and Y when price changed from
i. 20 to 30
ii. 40 to 50
iii. 60 to 70
2. Interpret your answers in I, ii and iii above
Use the production possibility frontier (PPF) to illustrate and explain the scarcity, choice
and opportunity cost of a farmer who is producing maize and sorghum. Use your own
values.
Assume the market for fertilizer is perfectly competitive. Firms in the market are producing output, but they are currently making economic losses.
a.How does the price of fertilizer compare to the average total cost, the average variable cost, and the marginal cost of producing fertilizer?
b.Draw the two graphs, side by side, illustrating the present situation for the typical firm
and for the market.
c.Assuming there is no change in demand or the firms’ cost curves, explain what will happen in the long run to the price of fertilizer, marginal cost, average total cost, the quantity supplied by each firm, and the total quantity supplied in the market.
Bob’s lawn mowing service is a profit maximizing firm operating in a perfectly competitive
market. Bob mows lawns for $27 each. His total cost each day is $280, or which $30 is a fixed cost. He mows 10 lawns a day. What are Bob’s decision rules about when to shut down and when to exit the market? Answer using numbers! Refer to the shut down and exit rules from the lectures on perfect competition.
Output. TotalCost Price. AveageVariableCost. AverageTotalCost. MargianlCost. Profit.
0 $1,000 $500 ? ? ? ?
1 $1,200 $500 ? ? ? ?
2 $1,350 $500 ? ? ? ?
3 $1,550 $500 ? ? ? ?
4 $1,900 $500 ? ? ? ?
5 $2,300 $500 ? ? ? ?
6 $2,750 $500 ? ? ? ?
7 $3,250 $500 ? ? ? ?
8 $3,800 $500 ? ? ? ?
9 $4,400 $500 ? ? ? ?
10 $5,150 $500 ? ? ? ?
a. Complete the above table. What is the firm’s fixed cost? How can you tell? Hint: if the firm is not producing output, it still must pay its fixed cost but incurs no variable cost.
[6:28 pm, 17/02/2022] Anshuman✌️: Suppose that business travelers and vacationers have
the following demand for airline tickets from New York
to Boston:
QUANTITY DEMANDED QUANTITY DEMANDED
PRICE (BUSINESS TRAVELERS) (VACATIONERS)
$150 2,100 1,000
200 2,000 800
250 1,900 600
300 1,800 400
a. As the price of tickets rises from $200 to $250, what
is the price elasticity of demand for (i) business
travelers and (ii) vacationers? (Use the midpoint
method in your calculations.)
b. Why might vacationers have a different elasticity
than business travelers?
A discriminatory farmer monopolist sells the product to college students and lecturers.
The demand function for students is Qsd=200-25p and the demand function for
lecturers is Qld=400-25p.Marginal cost is $1 per product. Calculate the amount of
product the monopolist sells for students and Lecturers. At what price level? [5
marks]
b. Suppose a firm is operating in a monopolistically competitive market structure.
i.Mention at least three characteristics of this market structure. [3 marks]
ii.What type of demand curve would the firm experience? Why? [2 marks]
iii.Draw the cost and revenue curves for a typical monopolistically competitive firm
in the short run for a given price level and explain how the firm chooses the level of
output that maximizes profit. [5 marks]
A firm is described as combining managerial coordination with market exchange in order to produce its good or service. Does similar behavior occur in government bureaus? Explain.
Explain consumer’s equilibrium condition with help of indifference curve approach. How will
a change in consumer’s income affect his equilibrium?
