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1) New cars are normal good and people’s incomes increase. Simultaneously, auto manufacturers must pay more for their worker’s health insurance. What is the effect on price and quantity of new cars?
2) The table below gives a supply schedule.
Point | Price (RM) | Quantity Supplied
A 5 10
B 15 30
C 25 50
D 35 90
a. Using the midpoint method, calculate the price elasticity of supply between points A and B; between B and C and between C and D.
b. Why is the elacticity of supply always positive?
c. Why does the elasticity of supply increase in value as more time passers after a price hike?
A two-year-old child is eating peanuts one at a time from a large box. Even though the child doesn’t understand formal economic theory, he knows when to stop eating because he is full. Describe how this child has already mastered marginal analysis.
A senator wants to raise tax revenue and make work-
ers better off. A staff member proposes raising the
payroll tax paid by firms and using part of the extra
revenue to reduce the payroll tax paid by workers.
Would this accomplish the senator’s goal? Explain
Assume that house prices always rose and never fell. When the demand for housing
increases, prices in the housing market rise but not always by very much. For prices to rise
substantially, the supply of housing must be relatively inelastic. That is, if the quantity
supplied increases rapidly whenever house prices rise, price increases will remain small.
Many have suggested government policies to increase the elasticity of supply. What specific
policies might hold prices down when demand increases? Explain.
With the help of well-lebelled diagrams, compare the long run equilibrium of a firm under a perfectly competitive market structure and a monopoly market structure
Using indifference curves show the price effect, the substitution effect and income effect for the rise in the price of inferior good.
Answer True or False, then justify your response with practical economic examples:
a. The introduction of mobile money transfers and ATMs has reduced the demand for money tending to lower interest rates. (5 marks)
b. Open Market Operations are more effective in a developing country like Kenya when compared with the Bank Rate Policy. (5 marks)
c. Since Quantitative credit control instruments are more targeted and more objective, it is always advisable that they be applied at all times over the Selective instruments. (5 marks)
d. Inflation is always associated with more money chasing few goods.
examples:
a. The introduction of mobile money transfers and ATMs has reduced the demand for money tending to lower interest rates. (5 marks)
A company is considering constructing a Flyover bridge over the busiest road to avoid the
traffic. The bridge would cost $2 million to build. The following table shows the
company’s anticipated demand over the lifetime of the bridge:
Price per
Crossing ($)
No. of Crossings
in Thousand
8
7
100
6
200
5
300
4
400
3
500
2
600
1
700
800
i. If the company builds the flyover bridge, what would be its profit maximizing price?
Would that be the efficient output? Give reason.
3. (25 points) Consider two firms out of a competitive industry. They have the following technologies: C1(y) = y^2+2y; C2(y) = 1.5y^2 + 3y. Show these firms’ individual supply functions on a clearly-labelled graph. Construct an aggregate supply function for these two firms on your graph.
