Microeconomics Answers

Herald, a barista, earned 260,000 in 2019. But in 2021, he was retrenched and decided to open his own coffee shop. After a year, he submitted the following data :

•   He spent 45,000 on equipment.
•   He leased a small space for P70,000 a year.
•   He paid P 100,000 in wages.
•   He sold worth P950,000 of coffee a year.
•   He used P150,000 from his saving account, which pays 3% interest a year. 
•   He borrowed P250,000 at 10% a year from the bank.
•   Normal profit is P350,000 a year.

Compute for the following :

•    Herald's explicit costs (10 points)
•    Herald's implicit cost (10 points)
•    Herald's economic profit ( 10 points)

Explain the effects of rent control in the short and the long run. Why and

how do the effects vary over the period of time?

CASE STUDY: “Industry-level Dynamics of COVID-19 Economic Crisis

and its Implications”

In the current pandemic-related GDP growth slowdown across the world,

which industries or sectors in the Indian economy do you consider to have

most benefited from the Covid-19 crisis and why? Explain and highlight in

detail using the Demand-Supply analysis to substantiate your argument.

Justify your analysis by supporting it with facts-cum-online data and

substantiate your argument by extensively using graphs to highlight your

answer.

[The objective of this case study is to enable you to apply microeconomic

skills to real world economic scenarios. Accordingly, you are required to be

careful while writing your argument. You are required to refer to both the

Mankiw textbook and the online/offline material to substantiate your answer.]

(5 Marks)

Explain in detail the process by which the consumer arrives at an equilibrium

point. Illustrate this process through the concepts of budget line and

indifference curves. Using this framework, explain the income and

substitution effects for an inferior good when its price rises.

Given the following utility function for two goods X and Y

U(X, Y) =

Where 0<α<1

i)            Establish the Mashallian demand functions for X and Y                                                                                                      [8 Marks]

ii)           From (i) above, derive the indirect utility function        [3 Marks]

iii)         Using the indirect utility function, derive the expenditure function                                                                                      [4 Marks]

iv)         Estimate the Hicksian demand function for X and Y by Shephard’s lemma                                                                          [ 5 Marks]

Using (i) and (iv) above for X, establish the Slutsky equation for good X.                                                                              [8 Marks

Graph the following budget lines:

a) 10 F + 20 C = 400

b) 5 F + 10 C = 400

c) 10 F + 10 C = 400

d) 20 F + 20 C = 400

Compare a) to b), a) to c), and a) to d). Which comparisons represent income changes and which represent price changes

1) For the case of perfect complements, draw a budget line and a family of ICs. What is the

consumer’s most preferred market basket?

2) For the case of perfect substitutes, draw a budget line and a family of ICs. What is the

consumer’s most preferred market basket?(Hint: The ICs, which are straight lines in this

case, can have a different slope than the budget line)

I = 1000 PM = 20 PP = 5 • Where: I: income; PM: price of meat; PP: price of potato

1) Budget equation? Graph?

2) TU = ( M – 2 ) PM: quantity of meat, P: quantity of potato Which consumption possibility to maximize TU?

3) Write new budget equation when PP = 10. Which consumption possibility to maximize TU?

Digicel Threats of suppliers taking over the firm market

Suggest a relevant government policy that would yield the efficient outcome and carefully explain the process through which the implementation of the government policy will lead to the optimal outcome. (Maximum 30 words)