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Assignment 2
Marks 10
Due Date: 29th May,2021
Q. What will happen to the equilibrium price and quantity of French fries in each of the following cases? You should state whether demand or supply (or both) have shifted and in which direction. (In each case assume ceteris paribus.) (a) A rise in the price of oil ; (b) A rise in the demand for burgers; (c) A rise in the price of potatoes; (d) An expected rise in the price of potatoes in the near future; (e) A tax on fries’ production; (f) The invention of a new, but expensive, process for removing all cholesterol from fries plus the passing of a law which states that all fries producers (like fast food chains) must use this process.
- Knitting Mills sells a line of women’s knit underwear. The firm now sells about 20,000 pairs a year at an average price of $10 each. Fixed costs $60,000, and total variable costs equal $120,000. The production department has estimated that a 10 percent increase in output would not affect fixed costs but would reduce average variable cost by 40 cents. The marketing department advocates a price reduction of 5 percent to increase sales, total revenues, and profits. The arc elasticity of demand is estimated at -2.
- Evaluate the impact of the proposal to cut prices on (1) total revenue, (2) total cost, and (3) total profits.
- If average variable costs are assumed to remain constant over a 10 percent increase in output, evaluate the effects of the proposed price cut on total profits.
- The Five Forces model of business strategy identifies threat of substitutes, threat of entry, power of buyers, power of suppliers, and the intensity of rivalry as the determinants of sustainable incumbent profitability in a particular industry. Discuss each of the Five Forces and provide relevant examples to support your answers.
A brief explanation of the public sector wage in SA with trend graphs
n economics, the cost of production is defined as the expenditures incurred to obtain the factors of production such as labor, land, and capital that are needed in the production process of a product. Explain the following in relation the total cost in economics
i. A firm pays its accountant an annual allowance of $10,000. Is this an economic cost? Explain AN, 5MARKS
ii. The owner of a small retail store does her own accounting work. How would you measure the opportunity cost of her work?
EV,5MARKS
20 Marks
Question 2
The following are two distinct demand functions: 𝑞1=24−0.2𝑃1 and 𝑞2=10−0.05𝑃2. The average cost AC=40+35/q. What price the firm will change with discrimination?
Dhorkas owns a small restaurant. She has labourer who she pays GHC 12,000 per year, pays annual rent of GHC 5,000 for her shop, and spends GHC 20,000 per year on the materials she uses for the preparation of her meals. She has GHC 40,000 of her own money which she used to purchase gas cylinder and stove, refrigerator, microwave, and blender and so forth. If she had invested the money in a treasury bill she would earn GHC 4,000 per year. She has been offered GHC 15,000 per year to work as a cook in AIT. She said her entrepreneurial abilities are worth GHC 3,000 per year. Total annual revenue from pottery sales is $72,000. Calculate Dhorkas’ explicit and implicit costs and
3 the find her accounting and economic profits. Explain why the implicit cost will constitute Dhorkas’ normal profit
Suppose marginal cost and thus market supply, for an industry is given by the equation P = 4Q S + 20. Also suppose the market demand curve is given by the equation Q D = 40 – 0.5P
i. Determine the equilibrium price and quantity for this industry assuming it is competitive market. 2marks
ii. Assuming government considers the current equilibrium price too high for the market and decides to set the new equilibrium price at 45, describe what the state of the market will look like 2marks CR,4marks
c) The short run production assumes there is at least one fixed factor input. The production function relates the quantity of factor inputs used by a business to the amount of output that result. Using an appropriate diagram explain the short run production and stages of production.
A brief explanation of the public sector wage bill in South Africa
monopolistic competition face short run demand and cost functions as Q = 20-0.5P and TC= 4Q2 -8Q+15, respectively. Having this information (5 marks) a) Determine the optimal level of output and price in the short run. b) Calculate the economic profit (loss) the firm will obtain (incur). c) Show the economic profit (loss) of the firm in a graphic representation.
