Microeconomics Answers

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 firm 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? (3marks) iii) What is the outcome of game if KBL gets to decide first? Explain you answer (5 marks)

Suppose a t-shirt shop decides to decrease the price of their most popular shirt by 10%. Their sales increase from 200 shirts per day to 220 shirts per day as a result. 

Calculate PED and determine if demand for their shirt is elastic, inelastic or unit elastic.

In the world of electronics overtime people realized the immense use of having a personal laptop. And at the same time the technology has improved significantly in last decade. In fact the technological improvement has surpassed the increase in willingness and ability to purchase a laptop. Given this piece of information, what in your opinion happened to the equilibrium price and quantity in market for personal laptop? Draw a diagram and explain your answer.  

Suppose the demand for cigarettes is Q = 15 - 0.5P and the supply of cigarettes is Q = P - 3, where P is the price per pack of cigarettes. Suppose the government imposes a cigarette tax of $3 per pack.

(a) What is the price paid by producers?

(b) What is the price faced by consumers?

(c) What is the government revenue from the tax?

(d) What is the total dollar amount of tax revenue that is ultimately paid by consumers (i.e. consumers' tax burden)?

(e) What is the excess burden of the tax?

Eve insures her car with flood damage. The probability of a flood is 5%. The car is valued 𝐿 = $20,000 and her income is 𝑚 = $100,000. Let 𝑐𝑦 denote her consumption in case of a flood, where she must buy a new car for the same price, and 𝑐𝑛 her consumption if there is no flood. Her utility function for both states 𝑐 = 𝑐𝑛,𝑐𝑦 is 𝑈(𝑐) = √𝑐. [25%]

a. From the simple utility function, construct the von Neumann-Morgenstern utility function (𝑐𝑛,𝑐𝑦) for the two states with their given probabilities.

b. How much insurance Eve would buy if the insurance price is unfair? Briefly explain without solving the consumption problem.

c. If the insurance price is fair, what is Eve’s rational consumption under uncertainty? Make appropriate assumptions and explain your answer.

d. Assume that the probability of a flood is now 2%. Explain the change in Eve’s budget constraint and her consumption in both states if the insurance industry is perfectly competitive.

Question 3

Claire consumes 𝑐1 and 𝑐2 in period 1 and period 2 respectively, and her

intertemporal utility function is 𝑈(𝑐 , 𝑐 ) = 2𝑐2𝑐2. Her income in period 1 is 𝑚 = 1212 1

$1,500 and period 2 is 𝑚2 = $2,000. Assume that the interest rate is 10% for both borrowing and saving. [25%]

a. Find the intertemporal budget constraint for Claire.

b. Find the optimal consumption.

c. Assume now that the interest rate for saving is only 5%. Find the new

intertemporal budget constraint.

d. Would Claire be better off at the new interest rate in (c)? Discuss.

 If Veronica Vaughn spends all of her daily income on cigarettes

and Yoo-Hoo, she can afford 10 packs of cigarettes and 10 bottles of Yoo-Hoo.

She can also afford 6 packs of cigarettes and 22 bottles of Yoo-Hoo.

(a)  What is the relative price of cigarettes in terms of bottles of Yoo-Hoo (what is the ratio of prices)?

(B)      Exactly how much income does Veronica earn in one week if the price if

cigarettes are $6? Write a budget equation for Veronica that is a function

of the packs of cigarettes, C, and the number of bottles of Yoo-Hoo, Y.

(c) Draw Veronica’s daily budget set with packs of cigarettes on the x-axis

and bottles of Yoo-Hoo on the y-axis.

(d) Now suppose the price of cigarettes falls by $1 and the price of Yoo-Hoo

rises by $1. If Veronica was consuming 5 packs of cigarettes and 30

bottles of Yoo-Hoo prior to the price changes, how much must her income

rise under the new prices in order for her to just afford the old bundle,

(5,30)? Draw this new budget line.

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

SRTC = 8 + 1/2Q^2 and therefore MC = q.

1. (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).
2. (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 betweenq=0andq=8.

If income elasticity of demand of good X is 0.89, what will happen to equilibrium price if there is an increase in income of consumers? Draw a diagram to support your answer. 

If income elasticity of demand of good X is 0.89, what will happen to equilibrium price if there is an increase in income of consumers? Draw a diagram to support your answer.