Microeconomics Answers

Q: 03: Suppose that when everyone wakes up tomorrow, they discover that the government has given them an additional amount of money equal to the amount they already had. Explain what effect this doubling of the money supply will likely have on the following:

a. the total amount spent on goods and services

b. the quantity of goods and services purchased if prices are sticky

c. the prices of goods and services if prices can adjust

.     Suppose that you and your roommate have started a Bread delivery service on campus.

a.     List some of your fixed costs and describe why they are fixed. (5 Marks)

b.     List some of your variable costs and describe why they are variable.

The dean of a college faces the following costs: graders, faculty, classroom space, and chalk. Of these costs, which are likely to be variable in the long run

Suppose Honda’s total cost of producing 4 cars is $225,000 and its total cost of producing 5 cars is $250,000. What is the average total cost of producing 5 cars? What is the marginal cost of the fifth car?  Draw the marginal-cost curve and the average-total-cost curve for a typical firm, and explain why these curves cross where they do.

FarFlung make computer keyboards. They use both labour, L, and materials, M, in their production of keyboards. The production method they use requires that at least one labour and one material is always employed. FarFlung have a Cobb-Douglas technology which means that their production function is: 𝑄(𝐿, 𝐾) = 𝐿𝑀.

(a) If fixed costs are £1000000 then what is the short run total cost of production and the short run average cost of production?

(b) FarFlung could move to a new factory, where they will be able to manufacture 360000 computer keyboards. They are confident they can sell all the keyboards, but they will need to reduce price from £20 to £10. Whilst they will be able to use the same technology, the fixed costs will increase to £2000000.

i. What is the new level of short run average costs? What does this imply about the shape of the long run average cost curve?

ii. Should FarFlung move to the new plant? Explain. (c) What could FarFlung do to decrease their costs?

state if the statement is true, false or uncertain.

1. If a firm uses 10 units of labour and 20 units of capital to produce 10 units of output. The marginal product of labour is 0.5. If there are constant returns to scale the marginal product must be 0.25.
2. If a firm uses 10 units of labour and 30 units of capital to produce 10 units of output. The marginal product of labour is 0.5. If there are constant returns to scale the marginal product must be 0.25.
3.     Consider the elastcitiy of output with respect to labour input is dQ/Q/dL/L  . The elasticity of output is equal to 1 when marginal product of labour is equal to the average product of labour.
4.     As the price of coffee rises, I drink less tea. Hence my income elasticity for tea is negative.
5.    If we observe an individual to demand less of a good as its price falls, we may conclude that the good is inferior for him.  
6. An individuals demand curve cannot be upward sloping at all prices.

QUESTION ONE: (25 MARKS)

From a cross-sectional data of 41 countries, you want to test the hypotheses that trade taxes are positively related to trade volume but negatively related to per capita income. You estimate the following regression model:

𝑙𝑛𝑌=𝛽 +𝛽 𝑋 +𝛽 𝑋 +𝑢 (𝑖=1,2,...n) 𝐼 1 2 2𝑖 3 3𝑖 𝑖

Where;

Y = Ratio of trade taxes (import and export taxes) to government revenue; X2 = ratio of exports plus Imports to GNP;

X3 =GNP per (R'OOOs)

𝑖 =𝑖𝑡h country

1.1 If a cross section sample of large and small countries is used for the estimation of this model, explain why heteroscedasticity is almost certain to exist. (2)

1.2 Outline the problems one is likely to encounter when applying OLS in the presence of heteroscedasticity. (3)

1.3 How would you test the claim that the data suffers from heteroscedasticity using the general White test? (4)

1.4 Which remedy would you adopt if heteroscedasticity is indeed present? (2)

The market demand and supply for renting apartments in the Rosebank areas are given as: Demand:P=12 000-5Q. Supply: P=800+3Q

Calculate the equilibrium quantity and price

Answer the following questions which relate to aggregate expenditure models. a. If C is D100, I is D50, Xn is D-10, G is D30, what is the economy’s equilibrium GDP? b. If real GDP in an economy is currently D200, C is D100, I is D50, Xn is D-10, G is D30. Will the economy’s real GDP rise, fall or stay the same c. Suppose that full employment output in an economy is D200, C is D150, I is D50, Xn is D-10, G is D30. What will be the macroeconomics result? 6

David's utility function for good X and Y is given by U(x,y)=x^2×y^3, wher Px, Py and I are the price of good X, price of good Y and the consumer income respectively.

Write the budget constraint of the consumer.