Microeconomics Answers

In Nyeri town there are only two milk processors. The local inverse demand for milk is given by: Q = 120− P, where P denotes price, Q denotes the total quantity measured in cartons. Both milk processors have the same cost function given by C = 30Q, where C is total cost and Q is output measured in cartons. Calculate the profit for each firm

Catalina Films produces video shorts using digital editing equipment (K) and editors (L).

 The firm has the production function Q=10L^0.5K^{0 .5}where Q is the hours of edited footage. The wage is $20, and the rental rate of capital is $5. The firm wants to produce 1000 units of output at the lowest possible cost. What is the optimal combination of editing equipment(K) and editors(L) that will minimize cost for Catalina Films?

1.     Suppose that under the United States-Canada Air Quality Agreement, both countries agree to a combined 30 percent SO₂ abatement standard. Further assume that the following SO₂ abatement cost functions have been estimated by each country:

                                              TAC_US = 500 + 1.5(A_US)²

                                              MAC_US = 3 A_US

                                              TAC_CAN = 1000 + 3(A_CAN)²

                                              MAC_CAN = 6 A_CAN

where A_US and A_CAN represent the percent of SO₂ abatement achieved by the United States and Canada, respectively, and each TAC and MAC is measured in millions of dollars.

A.     If the countries implement a uniform abatement standard, find the resulting values of TAC and MAC for each nation. Based on these values, is there an economic incentive the two nations to participate in an emissions trading program? Explain. (10 marks)

B.     

With fixed cost of $450, a firm has average costs of $5 and average variable costs of $3. Its output is __

Increase in net capital inflow will increase interest rates in the domestic loanable funds 

market” – do you agree with this statement? Explain by drawing a diagram and

comment how you think investment will change if there is an increase in capital inflow. 

What do you understand by the term “closed economy”? For a closed economy show, 

National savings = National Investment

“Natural resources are the most important determinant of long-term economic growth” 

– do you agree with this statement. Briefly explain your views.

You are looking at cost curves. The value associated with the marginal cost

(MC) on the graph is higher than the value associated with the corresponding

average variable cost. (AVC). In other words MC is above AVC. This means:

Select one:

O a. average variable cost (AVC) is increasing

O b. average variable cost (AVC) is falling

O c. average variable cost (AVC) is remaining constant

O

d. none of the above

Cold drinks and pizza are complements because they are often enjoyed together. When the price of cold drinks rises, what happens to the supply, demand, quantity supplied, quantity demanded, and the price in the market for pizza?

Assume that a competitive firm sells it’s output for a price of 16 dollars per unit and

producing q units of output costs the firm 1/3 q3 dollars. The firm’s production process

pollutes a nearby river and total environmental damage caused is e = 3q − a where

a is the amount of pollution abatement effort. The firm’s cost of abating a units of

pollution is 1/3a3.

(a) Find the firm’s profit maximizing output quantity and the resulting amount of

environmental damage in the absence of any regulation.

(b) If the firm must pay a tax of $7 per unit of output produced, find the new profit

maximizing output quantity and amount of environmental damage.

(c) Assume there is public backlash to the tax on output, so the government needs

to determine what subsidy per-unit of abatement effort would replace the tax

and yield the same environmental damage. What subsidy on abatement effort

should the government set?