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The following tables show a small firm’s long-run average cost of manufacturing a good at two different plants:
Plant1:
Quantity: 1 2 3 4 5 6 7 8 9
T.C.= 50 106 164 224 287 355 430 520 618
A.C.= ? ? ? ? ? ? ? ? ?
M.C.= ? ? ? ? ? ? ? ? ?
Plant2:
Quantity: 1 2 3 4 5 6 7 8 9
T.C= 20 52 90 130 175 227 285 345 407
A.C = ? ? ? ? ? ? ? ? ?
M.C= ? ? ? ? ? ? ? ? ?
T.C=Total Cost
A.C=Average Cost
M.C=Marginal Cost
c) A new manager is assigned to the production department. He thinks that the firm can profitably move all production to Plant 2 since the average cost of production is lower in Plant 2 than in Plant 1. If the firm only uses Plant 2, how much should it produce in order to maximize profits? Find the firm’s profit. Assume zero fixed cost.
Consider a consumer who buys two good x and y with utility function u (x,y)=2 under root x+y. The consumer's income is 20 and price of y= 4. Compute the optimal consumption bundle when the price of x =1 and if the price of x rises to 4 what is the new optimal bundle
The following tables show a small firm’s long-run average cost of manufacturing a good at two different plants:
Plant 1:
Quantity: 1 2 3 4 5 6 7 8 9
T.C.: 50 106 164 224 287 355 430 520 618
A.C. ? ? ? ? ? ? ? ? ?
M.C. ? ? ? ? ? ? ? ? ?
Plant 2:
Quantity: 1 2 3 4 5 6 7 8 9
T.C.: 20 52 90 130 175 227 285 345 407
A.C. ? ? ? ? ? ? ? ? ?
M.C. ? ? ? ? ? ? ? ? ?
T.C.=Total Cost
A.C.=Average Cost
M.C.=Marginal Cost
a) Complete the third and fourth columns of each table.
b) Suppose the price of the good is $60. How much should the firm produce in each plant in order to maximize the firm’s profit? Find the firm’s profit.
A. Choose a product with which you are familiar (i.e. Starbuck’s Frappuccinos) that will be
affected by the dynamics of the market economy.
B. Make up two different headlines for two graphs relating to factors causing a shift in demand,
then show how each will impact the product related to either surpluses or shortages and
ultimately a change in the equilibrium price. One must be an increase in demand, the other a
decrease in demand. You may only use each cause of a shift once!!! such as population.
C. Do the same for two factors causing a shift in supply. You must draw a separate graph for
each factor. You may only use each cause of a shift once!!! such as technology.
D. Type a paragraph about each of your graphs (four total) to predict whether the product will
demonstrate an increase or decrease in demand or supply and what will have to happen
economically (i.e., shortage, surplus, price increase, price decrease).
Sanjana loves to read books(B) and likes to watch movies (M) as well. She derives double the satisfaction from reading a book than watching a movie. Her utility function is as follows
U(B, M) = 2B + M
Where B and M are the number of books and movies respectively.
a. Explain the shape of the indifference curve using diagrams. [3 MARKS, Word limit: 200] b. The income available with her is INR60. And price of movie ticket is INR 10 and that of a book is INR 15. Will she spend her entire budget and why? What will be her consumption, explain why?
Suppose that Palestinian government raises the price of bread from NIS 4 to NIS 5 and thus
quantity demanded falls from 5,800 per week to 5,500. Calculate total revenue both before
and after the price change. Compute the price elasticity of demand for bread. What can we
tell about the price elasticity of demand for bread?
2) Assume that the price elasticity of demand is 1.5 and supply is perfectly inelastic. And
suppose that the supply of the Palestinian olive oil has increased by 30%. What is the new
price if the old price is $10/KG? Explain.
1) Assume that for olive oil in Palestine, the price elasticity of demand is 0.8 and the price
elasticity of supply is 0.7. And suppose that the demand for the Palestinian olive oil has
increased by 20%. Do you think the price of Palestinian olive oil would increase or decrease?
By how much? Explain and show calculations.
Assume that the equilibrium price of Building Stone in West Bank is $20/m, and the
equilibrium quantity is 1000m. Suppose that the Government sets a maximum quantity
800m on the building stone market. How this policy would affect consumer surplus,
producer surplus, and total surplus. (Explain your answer by drawing a complete graph)
Assume that the equilibrium price of rice in West Bank is $ 1.5 /KG. Suppose that the
government decided to set a maximum price of rice equal to $1 /KG:
Use the demand and supply curves to show the effects of the new price on the quantity
consumed of rice.
Who is benefiting from fixing the price of rice at $1/KG? The consumer or producer.
Explain your answer using demand and supply curves.
