Microeconomics Answers

Two small airlines provide shuttle service between Las Vegas and Reno.  The services are alike in every respect except that Fly Right bought its airplane for $500,000, while Fly by Night rents its plane for $30,000 a year.  If Fly Right were to go out of business, it would be able to rent its plane to another airline for $30,000.  Which airline has the lower costs

Suppose a firm finds that the marginal product of capital is 60 and the marginal product of labor is 20. If the price of capital is $6 and the price of labor is $2.50, describe how the firm should adjust its mix of capital and labor? What will be the result?

1.     Find the price elasticity of supply at price of Birr 8 if the supply function is:

Q = 25 – 4P + P²

What is elasticity at Birr 4 and at Birr 5? Interpret the result.

1.     A consumer has 280 to spend on two commodities, the first of which costs 2 per unit and the second 5 per unit. Suppose that the utility derived by the consumer from x units of the first commodity and y units of the second commodity is given by the  Cobb-Douglas utility functions as: U(x,y)=100 x^0.25 y^0.75

a)   How many units of each commodity should the consumer buy to maximize utility?

b)   Compute the Lagrange multiplier  and interpret in economic terms?

1. Find the MU_x , MU_y , and MRS equations for each of the following utility functions. Which of the below utility functions exhibit diminishing MRS? (That is, which of the below yield convex indifference curves?).

a.      U = x^0.6y^0.4.

b.     U = x² + y²       x,y>0.

c.      U = 2x + 4y.

d.     U = x²y².

e.      U = x^ay^b

A consumer is in equilibrium at point A in the accompanying figure. The price 

of good X is $5. a. What is the price of good Y? b. What is the consumer's income? c. At point A, how many units of good X does the consumer purchase? d. Suppose the budget line changes so that the consumer achieves a new equilibrium at point B. What change in the economic environment led to this new equilibrium? Is the consumer better off or worse off as a result of the price change? 

Why is it important for a country to be apprised of its national income?

What is the law of diminishing returns? Use the following data to demonstrate the three stage production function :

Inputs of variable resource 1 2 3 4 5 6 7 8 9 Total Output 10 25 37 47 55 60 63 63 62

a. Calculate Average Product and Marginal Product. b. Using above information draw a two panel diagram to illustrate the stages of production. c. Which stage would represent optimum production?

L Q AP MP

0 0 - -

1 8 8 8

2 22 11 14

3 60 20 38

4 96 24 36

5 132 26.4 26.4

6 132 22 0

The variable cost (VC) of the business consists of labor costs and raw material costs. The wage of labor is w = 3.000 monetary units and is fixed for each worker.

The cost of raw materials (c) is fixed and equal for each unit of product produced.

Find the fixed cost (FC) of the business if at the level of production of the 5th worker the marginal cost (MC) is 525 monetary units and the average total cost (ATC) is 700 monetary units.

The variable cost (VC) of the business consists of labor costs and raw material costs. The wage of labor is w = 3.000 monetary units and is fixed for each worker.

The cost of raw materials (c) is fixed and equal for each unit of product produced.

Find the fixed cost (FC) of the business if at the level of production of the 5th worker the marginal cost (MC) is 525 monetary units and the average total cost (ATC) is 700 monetary units.