Microeconomics Answers

Suppose, there is a rise in money demand for every level of income and interest rate. How will this affect the LM and the aggregate demand curve, if at all? Explain.

Explain the effects of increase in Govt. budget deficit on output, the interest rate, and the price level in short-run and in medium run model. in AD-AS

Following information shows that a firm offering a good at different prices to groups of consumers with different levels of willingness to pay. Inverse Demand for movies:

P₁ = 20 – 4Q₁ Inverse Demand for students:

P₂ = 10 – Q₂

MC = 4 LKR /ticket

(a) What price and quantity and maximizes profits if the firm charges each market?

(b) Demonstrate that charging different prices for the two groups results in higher profits than charging the same price for everyone.

(c) Graph the demand curves, the marginal revenue curves, the marginal cost curve and highlight the equilibrium. 

the fundamental purpose of production is

A person’s utility function is of the form U(x,y) = 5xy. The prices of good x and y are P_x = $4 and P_y = $2, respectively. The person’s income is $1200.

(a) Show that these preferences are homothetic?

(b) What quantities of x and y should the consumer purchase to maximize his

utility?

(c) Determine the person’s income offer curve (IOC). Draw it.

(d) Explain whether each of the two goods is normal or inferior.

(e) Derive the Engel curve for x. Draw it.

The fundamental problem in economics is

4. A college student has two options for meals: eating at the dining hall for BDT 6 per

meal, or eating a Star Kabab for BDT 1.50 per meal. Her weekly food budget is BDT

60.

a. Draw the budget constraint showing the trade-off between dining hall meals and Star

Kabab. Assuming that she spends equal amounts on both goods, draw an indifference

curve showing the optimum choice. Label the optimum as point A.

b. Suppose the price of a Star Kabab now rises to BDT 2. Using your diagram from part

(a), show the consequences of this change in price. Assume that our student now spends

only 30 percent of her income on dining hall meals. Label the new optimum as point B.

c. What happened to the quantity of Star Kabab consumed as a result of this price change?

What does this result say about the income and substitution effects? Explain.

d. Use points A and B to draw a demand curve for Star Kabab. What is this type of good

called?

Maximize:

U = alog(X) + (1 − a)log(Y )

subject to:

I = P_X X + P_Y Y

1. Find X* and Y* using the method of Lagrange multipliers.

2. Can we derive the demand function of X and Y in a general form, e.g:

X = f (P_X , I)andY = f (P_Y , I).

3. Please make some conclusions about the demand derived from the

utility function.

4. Note: a special case, please solve the same problem if U=XY.

Plot price on y axis and Quantity on x axis an determine what is the slope (positive or negative)

Price 1 2 3 4 5

Quantity 12 28 42 52 60

classify the following statements as positive or normative

a. Firms are showing positive response to increase in demand of product.

b. Decision of a worker to work lessdue to lower wages.

c. Government legislation is targeting firms charging too high prices.