Microeconomics Answers

Cost of producing Product X Cost of producing

Country A $10 $8

Country B $20 $5

(i) Without a trade what is the cost of producing product X for

country A and which one for B? (15 Marks)

(ii) Which country has a comparative advantage for product X and

product Z and why? (15 Marks)

(iii) Which country has an absolute advantage for both products and

why? (15 Marks)

(iv) If the two countries trade with each other which product will

prefer to export and why? (15 Marks)

You are the manager of a firm that receives revenues of $40,000 per year from product X and $90,000 per year from product Y. The own price elasticity of demand for product X is -1.5, and the cross-price elasticity of demand between product Y and X is -1.8. How much will your firm’s total revenues (revenues from both products) change if you increase the price of good X by 2 percent? b. An individual consumes three goods, Q1, Q2, and Q3. The proportions of total Income devoted to the consumption of Q1 and Q2 are 75 and 15%, respectively. The income elasticities for Q1 and Q2 are 𝜀1,𝑀 = 0.75 and 𝜀2,𝑀 = −1.5, respectively. How would you classify the three goods? (5mks) c. Suppose that a firm’s marginal cost of production is constant at shs.25. Suppose further that the price elasticity of demand ( 𝜀𝑃 ) for the firm’s product is -5.0. i) Using optimal price formula what price should the firm charge for its product. ii) Suppose that 𝜀𝑃 = −0.5.What price should the firm charge for its product? Comment on this price.

Suppose the demand function for a firm’s product is given by 𝐿𝑛 𝑄𝑥 𝑑 = 7 − 1.5𝐿𝑛𝑃𝑥 + 2𝐿𝑛𝑃𝑦 − 0.5𝐿𝑛𝑀 + 𝐿𝑛𝐴 Where Px = $15, Py = $6, M = $40,000, and A =$350. a. Determine the own price elasticity of demand, and state whether demand is elastic, inelastic, or unitary elastic. (3mks) b. Determine the cross-price elasticity of demand between good X and good Y, and state whether these two goods are substitutes or complements. (3mks) c. Determine the income elasticity of demand, and state whether good X is a normal or inferior good. (3mks) d. Determine the own advertising elasticity of demand. (3mks

The market research Department of Paradox Enterprises has determined that the demand for fingolds is 𝑄 = 1,000 − 5𝑃 + 0.05𝑀 − 50𝑃𝑧 where P is the price of glibdips, M is income, and 𝑃𝑧 is the price of ballzacks. Suppose that P = $5, M = $20,000, and 𝑃𝑧 = $15. a. Calculate the price elasticity of demand for fingolds (3mks) b. Is the firm maximizing its total revenue at P = $5. If not, what price should it charge? (3mks) c. At P = $5, compute the income elasticity of demand for fingolds(3mks) d. At P = $5, cross-price elasticity of demand for fingolds. 

Consider the demand curve Q =100 - 50P. Draw the demand curve and indicate which 

portion of the curve is elastic, which portion is inelastic, and which portion is unitary 

elastic

A person has $100 to spend on two goods X and Y whose respective prices are $3 and $5.

a) Find the equation of the budget line and sketch its graph

b) What will be the equation of the new budget line if the original budget falls by 25%? 

Sketch its graph

c) What will be the equation of the new budget line if only the price of X doubles? Sketch 

its graph

A household consumes only apples (A) and bananas (B). The preference of the house hold is 

given by the utility function U(A, B) = A0.8B

0.2. If the income of the household is $20 and 

the price of apple (A) and banana (B) is $4 and $2, respectively, then 

a) Find the optimal consumption of A and B

b) Show the equilibrium condition graphically

Explain the rationale why buffet or all-you-can-eat restaurants offering unlimited meals.

Explain the concept of Isoquent and isocost and how they used to atain equilibrium

If good X is an input into Good Y and good Y is a substitute for good Z, what can we expect to happen to demand, price, quantity of Good Z if there is a decrease in the price of good X?