Microeconomics Answers

The utility-maximizing rule is to choose the basket of goods that has the highest marginal utility of each good in the basket.

a.

False.

b.

True.

Given the production function:

 Y = 10 + 5X₁ – 0.2 X₁²

a)  Define the functions for average product and marginal product.

b)  Compute the maximum level of production of Y and the corresponding    level of input X_1.

c)        Given the price of Y = R3.75/unit and that of X₁ = R1.50/unit, algebraically compute the maximum profit level of input and output.      

Suppose that the demand and supply functions for good X are

 P=6.25 -1/8 Qd

 P=1.75 + 1/10 Qs

a. What are the equilibrium price and quantity?

b. What is the market outcome if price is 2.75? What do you expect to happen? Why?

c. What is the market outcome if price is 4.25? What do you expect to happen? Why?

d. What is the effect of a price ceiling of 3?

e. What happens to equilibrium price and quantity if the demand function becomes P=7.375 -1/8 Qd

f. What happens to equilibrium price and quantity if the supply function becomes

 P=4 +1/10 Qs

(demand is P=6.25 -1/8 Qd)

With the aid of a diagram analyze the income, substitution and total effect of a price

change on the following type of goods.

a. Normal goods

b. Inferior goods

c. Giffen goods

Suppose demand and supply are given by

𝑄 = 500-2P and 𝑄 =-100+3P

a) Which function is the demand function andwhy?

b) Compute the equilibrium price and quantity in thismarket?

c) Compute the consumer surplus and producersurplus.

d) Suppose a GHC 1 exercise tax is imposed on the good. Determine the new

equilibrium price and quantity.

e) Compute the tax revenue to the government.

f) Compute the deadweight loss resulting from the tax.

MOH Enterprise is a firm that specializes in the production of canned tomatoes. The first two 

columns in the following table give the firm’s short-run production function when the only variable 

input is labor, and capital (the fixed input) is held constant at 5 units. The price of capital is Ghc 

2,000 per unit, and the price of labor is Ghc 500 per unit.

L Q APL MPL

Cost Average cost

TFC TVC TC AFC AVC ATC MC

0 0

20 4000

40 10000

60 15000

80 19400

100 23000

i. Complete the table by calculating the two measures of productivity (APL and MPL) and the 

various categories of cost corresponding to each number of workers.

ii. Using the answer in (i) above, what is the relation between average variable cost and 

marginal cost of the firm? 

iii. Using the answer in (i) above, what is the relation between average product and average 

variable cost of the firm?

David’s utility function for good X and Y is given by 𝑈(𝑥, 𝑦) = 𝑥

2𝑦

3

. Where 𝑃𝑥 , 𝑃𝑦 and 

I are the price of good X, price of good Y and consumer income respectively. 

a. Write the budget Constraint of the consumer.

b. Drive the demand functions for good X and Y

c. What combination of X and Y maximizes the consumer’s at I=100, 𝑃𝑥 =

4, 𝑎𝑛𝑑 𝑃𝑦 = 5

d. Calculate the marginal rate of substitution between X and Y at equilibrium and 

interpret your results.

e. Suppose David faces a new utility function such as 𝑈(𝑥, 𝑦) = 25𝑥

0.25𝑦

0.75 for 

consuming commodity X and Y, redo question b. and c. 

f. Suppose David faces another new utility function such as 𝑈(𝑥, 𝑦) = 15𝑥𝑦

2

for 

consuming commodity X and Y, redo question b. and c. 

a. What is monopolistic competitive market?

b Explain why the fast food industry in Ghana is a better fit for a monopolistic competitive

industry?

c Using a diagram, explain why firms in monopolistic competition always produced with excess

capacity

David’s utility function for good X and Y is given by ( , )= 

2 

3

. Where , and I are the price of 

good X, price of good Y and consumer income respectively. 

a. Write the budget Constraint of the consumer. 

b. Drive the demand functions for good X and Y 

c. What combination of X and Y maximizes the consumer’s at I=100, = 4, =5 

d. Calculate the marginal rate of substitution between X and Y at equilibrium and interpret your 

results.

Categorise the following statements into normative and positive statements:

a)    GDP declined by 2% in the second quarter of 2020. 

b)    South Africa hosted the World Cup in 2010.

c)     Interest rates are too low to support savings in South Africa.        

d)    The weakening of the rand will cause an increase in petrol prices. 

e)   Jane is a better dancer than Kelly.