Microeconomics Answers

Consider the following payoff of a penalty shooting.

Goalie LR

 L (50, -50) (20, -20) R (40, -40) (90, -90)

Kicker

With which probability should the goalie defend left?

Suppose the total-cost function for a firm is given by .C=qw^2/3 v^1/3

a. Use Shephard’s lemma to compute the (constant output) demand functions for inputs l and k.

b. Use your results from part (a) to calculate the underlying production function for q (q as a function of “k” and “l”).

Andrew has decided to open an online store that sells home and garden products. After searching around, he chooses the software company Initech to provide the software for his website since their product required the least amount of specialized investments for him to use it. They agreed upon price of $7,000. To use Initech’s software, Andrew makes $3,000 in sunk capital investments and spends 70 hours learning how to use Initech’s software, which is very different from other software packages. Both Andrew and Initech view Andrew’s time as worth $25 per hour and Initech is fully aware of the investments Andrew must make to use their product. After Andrew’s investments were made, Initech came to Andrew and asked for more money. 

What do you think is the new price Initech requested Andrew to pay?

If a firm manager has a base salary of $100,000 and also receives 6 percent of all profits, what percentage of his/her final income will be from a profit-sharing plan when profit equals $1,500,000?

An economist estimated that the cost function of a single-product firm is:

C(Q) = 80 + 20Q + 25Q² + 5Q³.

Based on this information, determine the following:

a. The fixed cost of producing 10 units of output.

$ 

b. The variable cost of producing 10 units of output.

$ 

c. The total cost of producing 10 units of output.

$ 

d. The average fixed cost of producing 10 units of output.

$ 

e. The average variable cost of producing 10 units of output.

$ 

f. The average total cost of producing 10 units of output.

$ 

g. The marginal cost when Q = 10.

$ 

In the aftermath of a hurricane, an entrepreneur took a one-month leave of absence (without pay) from her $6,000 per month job in order to operate a kiosk that sold fresh drinking water. During the month she operated this venture the entrepreneur paid the government $3,000 in kiosk rent and purchased water from a local wholesaler at a price of $1.40 per gallon. If consumers were willing to pay $2.30 to purchase each gallon of fresh drinking water, how many units did she have to sell in order to turn an economic profit?

Explain the following concepts.

a. Explain the substitution and income effects of a price change for a normal good and an inferior good.

b. List and explain three reasons why the demand for a good or service may be elastic. List and explain three reasons why the demand for a good may be inelastic.

c. Describe quantity and revenue responses to price changes when the price elasticity of demand (ϵ) takes on the following values:

(i) ϵ = 0,

(ii) 0 > ϵ > -1,

(iii) ϵ = -1,

(iv) ϵ < -1

The estimated equation for the Japanese Densuke Watermelon supply curve is Q = 100 + 0.8 p

where p is the price in dollars per kilogram and Q is the quantity supplied in tons per year. What is the price elasticity of supply at the points on the supply curve where the prices are p = $10 , p = $20, p = $200, and p = $500 and p → $∞ per kg? Draw the supply curve and show these elasticities on the diagram.

Suppose demand for inkjet printers is estimated to be Q = 500 – 0.6 p -5 px + 4 pz + 0.2 Y. where p is the price of inkjet printers, Y is income, and px and pz are the prices of related goods, X and Z. Suppose that p = 40, px = 25 , pz = 100 , and Y = $50, 000. Answer the following questions: 

a. What is the price elasticity of demand? Interpret and explain your results.

b. What is the cross price elasticity with respect to commodity X? Interpret and explain your result and give an example of what commodity X might be.

c. What is the coss price elasticity with respect to commodity Z? Interpret and explain your result and give an example of what commodity Z might be.

d. What is the income elasticity? Interpret and explain your result.

The demand for boxes of nails is estimated to be Q = 185 – 10 p + 3 Y, where income is measured in thousands of dollars. If p = 5, and Y = 30,

a. What is the income elasticity? Interpret and explain your result. What type of good is this?

b. How would the income elasticity change if the price were increased to $9.50? Interpret and explain your result.