Microeconomics Answers

Suppose the cost function is C(Q) = 50 + Q − 10Q² + 2Q³. At 10 units of output, the average cost curve is

a. at the maximum level.

b. in the declining stage.

c. in the increasing stage.

d. at the minimum level

Suppose the cost function is C(Q) = 50 + Q − 10Q² + 2Q³. What is the marginal cost of producing 10 units?

a. $560

b. $1,010

c. $401

d. $1,060

If the price of good X is $10 and the price of good Y is $5, how much of good X can the consumer purchase if her income is $15 and she spends it entirely on purchasing good X?

a. 1.5

b. 0

c. 3

d. 2

True, False, or Uncertain. To have any credit you should justify your answer and support

it with the proper graph.

a. Consumers pay more of a per bottle tax on beer, the more elastic is the demand curve for beer. [8 points]

b. Effective rent control makes everyone who is affected better off. [7 points]

Suppose the supply and demand curves for apples are given by: Qs = -25 + 2P; Qd = 500 - 3P

(a) Calculate the equilibrium price and quantity in

(b) Calculate the consumer surplus given the equilibrium price. Clearly identify the area of consumer surplus on the graph.

(c) Calculate the elasticity of demand and of supply at the equilibrium point.

(d) Given the elasticities you calculated above, could you tell whether a leftward shift of the supply curve would lead to more or less spending on apples? 

(e) Suppose the government introduces a price floor of $130. What is the new equilibrium quantity traded? What is the consumer surplus? Calculate and indicate on the same graph. Are consumers better or worse off by this policy?

(f) If the government decides to buy all excess surplus (resulting from introduction of price floor) of apples in the market how much money it has to spend to clear the market? Explain.

Explain each of the following statements using supply-and-demand diagrams.

a) “When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the

country.” (2.5 Marks)

b) “When the weather turns warm in New England every summer, the price of hotel rooms in

Caribbean resorts plummets.” (2.5 Marks)

c) “A strike by steelworkers raises steel prices.” (2.5 Marks)

d) “The price of station wagons rises.” (2.5 Marks)

QUESTION EIGHT

a) What are the main features of the perfectly competitive market? (6 marks)

b) With the help of well-labeled diagrams, compare the long run equilibrium of a firm under a

perfectly competitive market structure and a monopoly market structure. (14 marks

Explain the term “opportunity cost”. (4 Marks)

ii) Illustrate with examples the practical importance of this concept with reference to

the individual, the firm and the state (6 Marks)

(b) Define the following with examples,

i.Economics

ii.microeconomics

iii.macroeconomics

Table 2.1 contains information on three techniques for producing $15 worth of bar soap. Assume that we specified “$15 worth of bar soap” because soap costs $3 per bar and all three techniques produce 5 bars of soap ($15 = $3 per bar × 5 bars). So you know each technique produces 5 bars of soap.

a. What technique will you want to use if the price of a bar of soap falls to $2.75? Which technique will you use if the price of a bar of soap rises to $4? To $5?

b. How many bars of soap will you want to produce if the price of a bar of soap falls to $2.00?

c. Suppose that the price of soap is again $3 per bar but that the prices of all four resources are now $1 per unit. Which is now the least-profitable technique?

d. If the resource prices return to their original levels (those shown in the table) but a new technique is invented that can produce 3 bars of soap (yes, 3 bars, not 5 bars!) using 1 unit of each of the four resources, will firms prefer the new

Suppose Natasha currently makes $50,000 per year working as a manager at a cable TV company. She then develops two possible entrepreneurial business opportunities. In one, she will quit her job to start an organic soap company. In the other, she will try to develop an Internet-based competitor to the local cable company. For the soap-making opportunity, she anticipates annual revenue of $465,000. She estimates the costs for the necessary land, labor, and capital to be $395,000 per year. For the Internet opportunity, she anticipates costs for land, labor, and capital of $3,250,000 per year and revenues of $3,275,000 per year. (a) Should she quit her current job to become an entrepreneur? (b) If she does quit her current job, which opportunity would she pursue

Q3.

Suppose the market for clean water was initially at equilibrium in Japan. However, the Japanese earthquake and resulting tsunami destroy stores of bottled water and bottled water plants as well as severely damage infrastructure that delivers clean water to Japanese households. How will the market of clean water in Japan respond to this change?