Microeconomics Answers

The population in Country C decrease due to a lower birth rate. At the same time, there is an increase in the cost of fertilizer, which is used to grow vegetables. Explain how the market for vegetables will be affected by these changes. Clearly indicate how the equilibrium price and equilibrium quantity will be affected by these changes. Make use of a combination of diagrams and verbal explanation to explain your answer.

In recent years, especially around big cities, there is the problem of air pollution

and the likelihood of poisoning is high. Given this scenario, do you think that air is

free resource? Justify your answer.

Sailright Inc. manufactures and sell sailboards. Management believes that the price elasticity of demand is -3.0. Currently, boards are priced at $500 and the quantity demanded is 10000 per year. If the price is increased to $600, how many sailboards will the company be able to sell each year? How much will total revenue change as a result of the price increase?

Two drivers – Itchy and Scratchy – each drive up to a petrol station. Before looking at the

price and starting to pump petrol, Itchy says: ‘I will buy 20 litres of petrol’. Scratchy says: ‘I

will buy $30 of petrol’. What is each driver’s price elasticity of demand?

The first principle of economics discussed in Chapter 1 of Mankiw's book is that people face trade-offs. Use a production possibilities frontier to illustrate society's trade off between two "goods"-a clean environment and the quantity of industrial output. What do you suppose determines the shape and position of the frontier? Show what happens to the frontier if engineers develop a new way of producing electricity that emits fewer pollutants.

Suppose the cross-price elasticity of demand between goods X and Y is -5. How much would the price of good  have to change in order to change the consumption of good by 50 percent?

Explain the water-diamond paradox using 

the basic principles of Economics.

A locomotive producer’s demand function is P1 = 18 – 0.6Q for price increases and

P2 = 20 - 0.8Q for price decreases. The marginal cost is constant and equal to 5.

a. What price is the firm now charging and how much output is being produced?

b. If marginal cost increase to 6, how much would the firm produce?

c. If marginal cost decreases to 3, how much would the firm produce?

EnviroWest can produce recycle paper at a constant marginal cost of $1.5 per pound. Currently, the firm is selling 500,000 pounds each year at $2.00 per pound. This is the price charged by all other firms in the industry. Managers of EnviroWest are considering increasing the price to $2.5 per pound. Demand elasticity is constant and equals –0.6 if the price increase is matched by competitors and –4.0 if it is not matched. Management believes there is a 60 percent chance that other firms will follow EnviroWest's lead and increase their prices.

a/ If managers are risk neutral, should the proposed price change be implemented? Explain

b/ Write equation for the expected profit as a function of the probability that the price increase will be matched by the other firms.

Unique Motor Inc. manufactures motorcycles that are sold in a monopolistically competitive market. The firm’s demand curve is                      

                               P = 5,000 – 2Q

               Where P is price and Q is quantity and the average cost (AC) function is

                               AC = 6,000 – 4Q + 0.001Q²

               All firms in the industry have the same demand and average cost functions. If the entry or exit of firms in the industry results in the demand curve shifting in a parallel manner, what is the long-run equilibrium price and quantity produced for Unique( and, of course, for each of the other firms in the industry)?