Microeconomics Answers

Although not explicitly mentioned in Chapter 20, John Maynard Keynes is considered a foundational source in the understanding of macroeconomics. After performing research outside the textbook, please explain in three well-structured paragraphs the basic principles of the New Keynesian Economics and how it addresses perceived limitations to classical Keynesian theory.

Suppose that a typical firm in a monopolistically competitive industry faces a demand curve given by:

q = 60 − (1/2) p, where q is quantity sold per week.

The firm’s marginal cost curve is given by: MC = 60.

1. How much will the firm produce in the short run? 2. What price will it charge?

In addition to providing the quantitative answers for the question, please also describe the approach you used to arrive at your conclusions.

c) What will happen to the equilibrium quantity and equilibrium price of renewable energy resources if energy sector improves the technology? (Graph is not required)

a) What is the opportunity cost of increasing the production of trucks

from 4,000 to 7,000 (from A to B)? 2,000 boats; 9,000-7,000

Do each of a-d, both geometrically (you need not be precise) and using calculus. There are only two goods; x is the quantity of one good and y of the other. Your income is I and u(x,y) = xy + x + y.

(a) Px = $2; Py = $1; I = $15. Suppose Py rises to $2. By how much must I increase in order that you be as well off as before?

(b) In the case described in part (a), assuming that I does not change, what quantities of each good are consumed before and after the price change? How much of each change is a substitution effect? How much is an income effect?

(c) Px = $2; I =$15. Graph the amount of Y you consume as a function of Py , for values of Py ranging from $0 to $10 (your ordinary demand curve for Y).

(d) With both prices equal to $1, show how consumption of each good varies as I changes from $0 to $100.

Barbados currently uses a fixed exchange rate regime. If the central bank

were to increase the money supply, what impacts would it have on the

economy? Use a diagram to explain your answer.

5. The city government is considering two tax proposals:

• A lump-sum tax of $300 on each producer of hamburgers.

• A tax of $1 per burger, paid by producers of hamburgers.

a) Which of the following curves -average fixed cost, average variable cost, average total cost, and marginal cost- would shift as a result of the lump-sum tax? Why? Show this in a graph. Label the graph as precisely as possible.

b) Which of these same four curves would shift as a result of the per-burger tax? Why? Show this in a new graph. Label the graph as precisely as possible.

4. Henry Potter owns the only well in town that produces clean drinking water. He faces the following demand, marginal revenue, and marginal cost curves:

Demand: 𝑃=70−𝑄

Marginal Revenue: 𝑀𝑅=70−2𝑄

Marginal Cost: 𝑀𝐶=10−𝑄

a) Graph these three curves. Assuming that Mr. Potter maximizes profit, what quantity does he produce? What price does he charge? Show these results on your graph.

b) Mayor George Bailey, concerned about water consumers, is considering a price ceiling that is 10 percent below the monopoly price derived in part (a). What quantity would be demanded at this new price? Would the profit-maximizing Mr. Potter produce that amount? Explain. (Hint: Think about marginal cost.)

c) George’s Uncle Billy says that a price ceiling is a bad idea because price ceilings cause shortages. Is he right in this case? What size shortage would the price ceiling create? Explain.

3. The residents of the town Ectenia all love economics, and the mayor proposes building an economics museum. The museum has a fixed cost of $2,400,000 and no variable costs. There are 100,000 town residents, and each has the same demand for museum visits: 𝑄𝐷=10−𝑃 where P is the price of admission.

d) For the break-even price you found in part (c), calculate each resident’s consumer surplus. Compared with the mayor’s plan, who is better off with this admission fee, and who is worse off? Explain.

e) What real-world considerations absent in the problem above might provide reasons to favor an admission fee?

3. The residents of the town Ectenia all love economics, and the mayor proposes building an economics museum. The museum has a fixed cost of $2,400,000 and no variable costs. There are 100,000 town residents, and each has the same demand for museum visits: 𝑄𝐷=10−𝑃 where P is the price of admission.

a) Graph the museum’s average-total-cost curve and its marginal-cost curve. What kind of market would describe the museum?

b) The mayor proposes financing the museum with a lump-sum tax of $24 and then opening the museum to the public for free. How many times would each person visit? Calculate the benefit each person would get from the museum, measured as consumer surplus minus the new tax.

c) The mayor’s anti-tax opponent says the museum should finance itself by charging an admission fee. What is the lowest price the museum can charge without incurring losses? (Hint: Find the number of visits and museum profits for prices of $2, $3, $4, and $5.)