Microeconomics Answers

6. A) Derived the equation of the aggregate supply curve from the wage setting and the price setting relations. 

B) Explain clearly how this curve is affected by a decline in each of the

following:

i)Oil price,

ii) Unemployment benefits, and

iii)Expected price level.

3. Given an economy with fixed prices, discuss the impacts of the following factors on the effectiveness of fiscal policy and monetary policy: i) degree of sensitivity of money demand to income (k), and

ii) degree of the sensitivity of interest to rate of interest (b).

MC = 10-2Q+2Q2

P = 8

Find the output and profit.

Kali lives on mangoes and avocados, Pm = $5, Pa = $10, and her income is $200.

A. Identify her budget constraint equation and illustrate Kali’s budget line on a graph

with mangoes on the horizontal axis and avocados on the vertical axis. (6 marks)

B. Identify and illustrate on a new graph Kali’s new budget constraint if her income

doubled, the price of mangoes doubled, and the price of avocados remained constant.

(7 marks)

C. Explain the impact on her real income when the price changed in the scenario in B

assuming income had remained constant.

consider an agent whose preference cover any couple (x1,x2) , where x1 E R+ and x2E R+.e.g ..apples and oranges , is such that she prefers the bundle that is close to having the same number of apples and oranges . write a utility function

A consumer has a demand function for rice of the form:

X = 3 + m/2p

Assume that his/her income per month that is allocated to consumption of rice in a month is kshs 600/-The price of one kg of rice is kshs 100/-. During harvesting, the price of rice falls by shs 25 per kg.

Compute the consumption of rice by the consumer in a month before and after the fall in price.

Compute the Substitution Effect on the consumer

Compute the Income Effect

What is the total effect of the price change?

A consumer is faced with the Utility function of the form:

U(x,y) = αLogx + βLogy

If this Utility function is represented by a map of indifference curves, find the slope of a particular indifference curve at any point.

The market for commodity X is described by the following demand and supply curves.

                                         2

                  Q(p) = 25 – P   ………………(1)

                  Q(p) = -3 + 3P ………………(2)

(a)   Which of the two curves is the demand curve and which is the supply curve? How did you know?

(b)  Graph both curves (on the same graph)and find the equilibrium price and the equilibrium quantity transacted.

(c)   Solve algebraically for the equilibrium values in part (b).

(d)  Find the price elasticity of demand at equilibrium and interpret your result.

A monopoly firm faces a demand curve given by the following equation: P = $500 − 10Q, where Q

equals quantity sold per day. Its marginal cost curve is MC = $100 per day. Assume that the firm faces

no fixed cost. You may wish to arrive at the answers mathematically, or by using a graph (the graph is

not required to be presented), either way, please provide a brief description of how you arrived at your

results.

A firm’s production can be described with the following production function q = 6L2 -L3 + 20L, the amount of capital is fixed at 3 units and the total revenues are given by TR = 5q. Labour supply that the firm faces is given by the function w = 100.

• Decide whether the company is a perfect or imperfect competitor in the output market.

• Decide whether the company is a perfect or imperfect competitor in the labour market.

• Express the function MRPL , ARPL , MFCL , and AFCL .

• Determine how employees the firm is willing to employ. Next, determine the wage rate that the firm will pay for each unit of labour.

Many governments directly regulate monopolies, especially those created by the government, such as public utilities (for example, water, natural gas, or electricity distribution), to reduce monopolies' mar ket power. If the marginal cost of production for a monopoly is constant, there are no fixed costs and the market demand curve is linear, draw a graph indicating the socially optimal amount of regulation. Now suppose the government sets a price ceiling that is above the socially optimal level, but below the monopoly's profit-maximizing price. How do the price, quantity, and welfare under this regulation compare to those under optimal regulation?