Microeconomics Answers

Consider the two period Repeated Prisoner's Dilemma Game where each player is interested in the SUM of the payoffs she gets in each period. Players see the outcome after the play in each period. (The period payoffs are 10,5,1,0.)

(i) Write out this game in its strategic form.

(ii) Find all Nash equilibria and all Subgame Perfect Nash Equilibria.

State the decision for each case to supply positive amounts of output in a competitive market in both the short - run and the long run.

Solve it mathematically.

What is an example of a "how" question? (In terms of the 3 economic question?)

Consider the production function Q = 2(KL)^0.5

a)     What is the marginal product of labour and capital

b)     What is the marginal rate of technical substitution of labor for capital

 c)     What is the elasticity of substitution at a point K = 1, L = 1 if we increase K by one unit?

Terry’s utility function over leisure (L) and other goods (Y ) is U(L, Y ) = Y + LY. The associated marginal utilities are MU_Y = 1 + L and MU_L = Y. He purchases other goods at a price of $1, out of the income he earns from working. Show that, no matter what Terry’s wage rate, the optimal number of hours of leisure that he consumes is always the same.

(a)   What is the number of hours he would like to have for leisure?

(b)  Determine the MRS of leisure for labour

Draw a leisure-influenced labor curve

Justin has the utility function U = xy, with the marginal utilities MUx = y and MUy = x. The price of x is $2, the price of y is p_y, and his income is 40. When he maximizes utility subject to his budget constraint, he purchases 5 units of y.

(a)   What must be the price of y and the amount of x consumed?

(b)  Prove that this allocation follows the equi-marginal principle

What would be the new bundles of x, y if Px was $3

The demand for beer in Japan is given by the following equation: Q^d = 700 − 2P − P_N + 0.1I, where P is the price of beer, P_N is the price of nuts, and I is average consumer income.

a) What happens to the demand for beer when the price of nuts goes up? Are beer and nuts substitutes or complements? - prove

b) What happens to the demand for beer when average consumer’s income rises?

c) Graph the demand curve for beer when P_N = 100 and I = 10,000.

Suppose that the quantity of corn supplied depends on the price of corn (P) and the amount of rainfall (R). The demand for corn depends on the price of corn and the level of disposable income (I). The equations describing the supply and demand relationships are Q^s = 20R + 100P and Q^d = 4000 − 100P + 10I.

a)     Sketch a graph of demand and supply curves

b)     Sketch a graph that shows the effect of an increase in rainfall on the equilibrium price and quantity of corn.

c)     Sketch a graph of demand and supply curves that shows the effect of a decrease in disposable income on the equilibrium price and quantity of corn.

A special shoe manufacturer ABC Co. has costs of production as follows :

Quantity                           0     1      2      3     4       5       6           

Total Variable Cost ($)     0     50    70    90   140   200   360

a. ABC Co.’s fixed costs are $100. Calculate average fixed costs, average variable costs, average total costs and marginal costs at each level of production.

The equilibrium price of teaset rose sharply last month, but the equilibrium quantity was the same as ever. Three people tried to explain the situation. Which explanations could be right? Explain your logic.

Amena: Demand increased, but supply was totally inelastic.

Shumaila: Supply increased, but so did demand.

Farrukh: Supply decreased, but demand was totally inelastic.