Microeconomics Answers

 The following table shows the potential output combinations of oranges and jars of prickly pear jelly (from the flower of the prickly pear cactus) for Florida and Arizona. a) Compute the opportunity cost of oranges in Florida in terms of jars of prickly pear jelly. Do the same for prickly pear jelly in terms of oranges. b) Compute the opportunity cost of oranges in Arizona in terms of jars of prickly pear jelly. Do the same for prickly pear jelly in terms of oranges. c) Would it make sense for Florida to specialize in producing oranges and for Arizona to specialize in producing prickly pear jelly and then trade? Why or why not? Florida Arizona Oranges Prickly Pear Jelly Oranges Prickly Pear Jelly 0 10 0 500 50 8 20 400 100 6 40 300 150 4 60 200 200 2 80 100 250 0 100 0

1.      Which of the following statements is true?*

a.      To an economist, demand is different from quantity demanded.

b.      A demand schedule is the numerical tabulation of the law of demand.

c.      A demand curve is the graphical representation of the direct relationship between price and quantity demanded.

d.      a and b

e.      a, b, and c

9. The table below illustrates the interaction of demand and supply in the market for gasoline.

Supply and Demand Schedule of Gasoline

Price (cents) Quantity Demanded Quantity Supplied

1.00 800 500

1.20 700 550

1.40 600 600

1.60 550 640

1.80 500 680

2.00 460 700

2.20 420 720

Suppose the price of gasoline is $1.60 per gallon.  

a. Is the quantity demanded higher or lower than at the equilibrium price?  ___________

b. What about the quantity supplies?  ___________

c. Is there a shortage in the market?  ___________

d. If so, how much? ___________

Suppose two firms are the sole producers of widget in West Africa, and they are faced with a market demand function given as P = 40 - 20Q While Dally Limited is located in Nigeria, Joy Manufacturing operates from Ghana. The firms' total cost function is given as TC = 12 + Q

a.) Determine the output and profit for each firm under Cournot's assumptions. [3 marks] b.) To aid Joy Manufacturing increase its output to the Stackelberg leader's output level, the Ghanaian government plans to support the firm with subsidies. In monetary terms what should be the value of the subsidy that will make Joy Manufacturing the leading firm in the market? [3 marks]

c.) Assume the fims now operates under Stackelberg' s assumptions, with Joy Manufacturing as the leader, determine output and profit for each firm. [4 marks]

In a one-shot and simultaneous game, Perfume Shop (PS) and Fragrance Shop (FS) are engaged in an advertising war aimed at earning a larger profit from the sales of perfumes in the Onaapo Kingdom. If Perfume Shop advertise and FS advertises, both firms will earn a sum of 15 million cedis (¢ 15 M) in profits. If neither firm advertises, FS will make 12 million cedis (¢ 12 M) and PS will make 6 million cedis (¢ 6 M). However, if PS advertises and FS does not, PS will make 30 million (¢ 30M) and Fs will earn a sum of 9 million cedis (¢ 9 M) in profit. Also, if FS decides to advertise and PS fails to do same PS will earn a profit of 3 million cedis with FS making a profit of 9 million cedis.

i. Write the above game in normal form (2 marks)

ii. Does Perfume Shop "PS" has a dominant strategy ? Provide a comprehensive explanation for your answer. (4 marks)

iii. Does the Fragrance Shop "FS" has a dominant strategy ? Explain your answer in detail. (4 marks)

c.) Suppose a monopoly producer is also a monopsonist in the labour market. Demand for the output is P=100 - Q. The production function is Q= L, and the labour supply curve is w= 10 + L. How much labour does the firm hire? What wage is paid? [10 marks]

d.) Suppose the labour market is competitive, the supply curve of labour is upward sloping and the amount of capital is fixed. If the output market changes from a competitive market to a monopoly, what is the effect on its demand for labour? Explain briefly (in not more than 50 words). [7 marks]

a.) EASTEK Co. operates in a competitive market. Its production function is q=L (to the power alpha) * K (to the power beta). The exponents alpha and beta are both less than 1. If the firm's capital is fixed, and it takes the wage and price as given, what is the firm's short-run demand for labour ? [13 marks]

b.) Pipi Co Ltd. operates in a competitive market. Its marginal product of labour is 1 over L (1÷L), and it takes the wage and prices as given. Derive the firm's short-run demand for labour as a function of "w" and "p".

How much labour will the firm hire if w = 2 and p = 10? [10 marks]

a.) Explain Pareto efficiency. [6 marks]

b.) Use appropriate illustrations, endowments and assumptions to show and explain that a competitive equilibrium achieves an efficient product mix.[8 marks]

c.) Using appropriate examples, explain the difference between efficiency and equity. [8 marks]

d) Use suitable or applicable examples with which goods are produced and distributed by individuals, society or government. [8 marks]

Ebony Reigns owns a studio that would cost ¢ 120,000 to replace should it ever be destroyed by fire. There is a 25% chance that the studio could be destroyed by fire during the course of the year. If the fire occurs, Ebony Reign's studio will be worth only ¢ 60,000. An insurance company has offered Ebony a false insurance policy that requires her to pay a yearly premium of ¢ 15,000 in the good state of nature (no fire) Ebony has fully insured her studio to eliminate the risk. Assuming that Ebony Reigns is risk averse has another wealth answer the following questions:

e) Calculate the variance of the value of Ebony's studio with fair insurance. [4marks]

f) Is Ebony better off with the fair insurance ? Why ? [4marks]

Ebony Reigns owns a studio that would cost ¢ 120,000 to replace should it ever be destroyed by fire. There is a 25% chance that the studio could be destroyed by fire during the course of the year. If the fire occurs, Ebony Reign's studio will be worth only ¢ 60,000. An insurance company has offered Ebony a false insurance policy that requires her to pay a yearly premium of ¢ 15,000 in the good state of nature (no fire) Ebony has fully insured her studio to eliminate the risk. Assuming that Ebony Reigns is risk averse has another wealth answer the following questions: a) What is the expected value of Ebony's studio with no insurance. b) Estimate the amount of risk (use standard deviation) Ebony faces for her property with no insurance. c) Under the fair insurance how much should Ebony be paid in the bad state of nature (fire) for her studio? d) Show that Ebony has the same amount of wealth in either state of nature with and without fair insurance.