Microeconomics Answers

The price elasticity of supply measures how?

A2-5. Suppose a firm operating in a perfectly competitive industry has costs in the short run given by:

SRTC = 8 + ½q2 and therefore MC = q.

(a) Derive expressions for fixed costs (FC), those that do not vary with output, variable costs (VC), those that do vary with output, average variable cost (AVC), and average total cost (ATC). [4]

(b) At what quantity is AVC at its minimum (at what AVC level)? At what quantity is ATC at its minimum (at what ATC level)? Calculate ATC at q = 2 and q = 8 and sketch MC, AVC and ATC between q = 0 and q = 8. [6]

(d) If the minimum point of the short-run ATC curve for all firms (existing and potential) is also the minimum point of the long-run average cost curve (LRAC), calculate the long-run equilibrium price, market quantity, and firm quantity. What is the long-run equilibrium number of firms in the industry? [4]

a) Assume KBL Limited and Richet International are multinational firms that are weighing-in the option of simultaneously entering the Ghanaian market for the first time. If neither enters, both earn a payoff of zero. If both enter, they both lose 300. If one fim enters, it gains 150 while the other earns zero. i.) Set up the payoff matrix for this game and determine if any Nash equilibria exist. [5 marks] ii.) Can you predict the outcome of this game ? [3 marks] iii.) What is the outcome of game if KBL gets to decide first? Explain you answer. [5 marks]

b.) Suppose that market demand can be represented as P = 100 - 2Q. There are 10 identical firms producing an undifferentiated product, each with the total cost function TC = 50 + q2 (q square). i. Compare the competitive outcome with the cartel outcome in terms of price, output and profit [8marks]. ii. What is the individual firm's incentive to cheat on the cartel ?[4 marks]

Anna is thinking about making an improvement to her home. This modification will cost $10,000, but it will also increase the value of the home by $10,000 when Anna plans to sell it in 10 years. The market interest rate is 10%. 

What is the minimum amount at which Anna must personally value the improvement to be willing to go through with it? 

a.) Suppose the demand for Pepsi-Cola is Qn = 54 - 2 Pn + Pc. The demand for Coca-Cola is Qc = 54 - 2 Pc + 1Pp. Each firm faces a constant marginal cost of zero. Determine the Bertrand equilibrium prices, output and profit for each firm.[10 marks] b.) What happens to the Bertrand equilibrium prices and profits if increased differentiation causes the demand for Pepsi-Cola to become Qn = 104 - 2 Pn + 1Pc while the demand for Coca-Cola remains unchanged ? c.) Suppose the demand for Pepsi-Cola is Qn = 50 - 2 Pp + 1 Pc. The firm faces a constant marginal cost of "m", and "pc" denotes the price of Coca-Cola. Assuming Bertrand behavior, derive Pepsi-Cola's best-response function and explain how the firm changes price in response to changes in its own marginal cost and changes in Coca-Cola's price. [5 marks]

Suppose you have two options when investing money in the stock market: stock A and stock B. The returns on both are dependent on the state of the economy, which fluctuates with the business cycle. During periods of strong economic growth, the rates of return for stock A and stock B are 26.00 and 9.00, respectively. Periods of weak growth during recessions cause the rates of return for stock A and stock B to fall to 3.00 and 1.00, respectively. Additionally, assume that an economic boom is twice as likely as an economic downturn.

Calculate the expected return for stock A:     (Round to two decimals, if necessary.)

Calculate the expected return for stock B:     (Round to two decimals, if necessary.)

Assume the expected return rate (answer from Part 1) is fixed and will not change for the next week. You wake up tomorrow and find out that open market operations by the the Federal Reserve chairperson push the (fictional) weekly Treasury bill fixed rate of return to 17.50%. Considering your investment options, how do you react to this news?

Choose one:

A. Continue investing in the asset portfolio because the Treasury bill return rate is lower.

B. Shift investment to Treasury bills because the asset portfolio return rate is higher.

C. Continue investing in the asset portfolio because the Treasury bill return rate is higher.

D. Shift investment to Treasury bills because the asset portfolio return rate is lower.

The rate of return for a market portfolio of risky assets is 7.00%, and its corresponding beta is 2.50. In addition, a risk-free option has a return rate of 2.00%. According to the Capital Asset Pricing Model (CAPM), what expected rate of return (in percentage terms) should any risky asset offer?     (Round to two decimals, if necessary.)

Consider an alternative investment choice: a mutual fund whose beta is 0.6 and expected return is 2.50 percentage points higher than the market line. What is the expected return of this mutual fund? 

Suppose you purchase asset A intending to keep it for 10 years (receiving 10 total dividend payments), at which time you will sell it for the same price you purchased it for. What is the present value of the returns from that purchase?

Suppose you receive asset B for free and plan to keep it for 10 years and then sell it, at which point its value will have risen to $1,000.00. What is the present value of the return from that asset?