Microeconomics Answers

Two dairy farmers produce milk for a local town with local milk demand given by P = 300 - 3Q (P denotes price measured in Rands, Q denotes the quantity measured in liters). Both farmers have the same cost function given by TC = 150 + 2Q (where denotes output).

(a) Suppose that both farmers decide to form a cartel, determine profits for each farmer under the cartel     

(b) What output should farmer 1 produce if he/she expects their rival to produce 20 units?  

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(ii) Given the following Cobb Douglas Utility function u(x₁, x₂) = x₁^cx₂^d.What is Marginal Rate of Substitution MRS x₁, x₂ ?

(a)   Suppose that the government puts a tax of 10cents on a liter of diesel and then later decides to put a subsidy at a rate of 5 cents a liter. What net tax is this combination equivalent to?

(a)   With an illustration describe the term; numeraire good?

(ii)The consumer faces the budget line P₁X₁ + P₂X₂= M where P₁ and P₂ are price for good 1 and 2 and X₁and X₂ are quantity demanded for good 1 and good 2 respectively , Mis consumer income. If the price of good 1 doubles, the price of good 2 becomes 5 times larger, and income becomes 3 times larger, write down an equation for the new budget line in terms of the original prices and income.

(i) With your own practical example describe the relationship between the following terms as used in resource allocation-Pareto efficiency, Pareto inefficiency, Pareto improvement

(ii)  Suppose the demand equation for good Y is given as Q = 50–2.5P where Q is the quantity demanded and P is the price. What price would the monopolist set if he had 50 units? How many would he sell? What price would he set if he had 100units? How many would he sell?

Does monopoly make economic profit in the long run?

Use a diagram to distinguish clearly between a change in demand and a change in the quantity demanded. Mention a possible cause of each.