Microeconomics Answers

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

(c)  Draw a leisure-influenced labor curve

define a supply curve

An increase in supply: (2)

(a) Indicates that more is supplied at higher prices.

(b) Indicates that more is supplied at lower prices.

(c) Indicates that more is supplied at all prices.

(d) The demand curve will become more inelastic.

Calculate the market equilibrium level of price and quantity for a housing unit.

  There are few standard assumptions about what an indifference map can and cannot look like. Which are these assumptions, and what reasoning lies behind them?

Explain how microeconomics differs from macroeconomics. Which of the following

headlines, taken from the various issues of The Daily Graphic, deal with microeconomics:

a. “Nestle Ghana posted a 18% increase in sales”

b. “GRIDCO plans to slash more jobs”

c. “Ghana’s Output Grew by 5.8%”

d. “Housing starts soared 10% in September”

e. “Ghana to Breach key Deficit Target it helped to create”

Explain each issue why it is a microeconomic issue

5.B

Justina owns the Just’s Sobolo Store. She charges GHS10 per bottle for her

handmade

sobolo. You, the economist calculated the elasticity of demand for

sobolo in her town to be 2.5. If she wants to increase her total revenue, what advice will

you give her and why?

Be able to explain your answer.

Explain how microeconomics differs from macroeconomics. Which of the following

headlines, taken from the various issues of The Daily Graphic, deal with microeconomics:

a. “Nestle Ghana posted a 18% increase in sales”

b. “GRIDCO plans to slash more jobs”

c. “Ghana’s Output Grew by 5.8%”

d. “Housing starts soared 10% in September”

e. “Ghana to Breach key Deficit Target it helped to create”

Explain each issue why it is a microeconomic issue

5.B Justina owns the Just’s Sobolo Store. She charges GHS10 per bottle for herhandmade sobolo. You, the economist calculated the elasticity of demand forsobolo in her town to be 2.5. If she wants to increase her total revenue, what advice willyou give her and why? Be able to explain your answer.

DBS Farms is a producer and retailer of farm products. DBS main products are Mangoes,

Pawpaw and Pineapples. The current price of the Mangoes per Kilogram is GHS 50, the

Pawpaw/Kg is GHS 80 and the Pineapple is GHS 40. This year the DBS Farms sold 10,000

kgs of Mangoes, 20,000 kgs of Pawpaw and 1 million kgs of Pineapples. In an attempt to

improve revenue, the managers of the firm have decided to increase all prices by 10%.

Market research has suggested that the price elasticity of demand for each product is:

Mangoes: - 1.5; Pawpaw: -2.5; Pineapples: - 0.6. You have been asked to evaluate the

planned price increases.

a. Comment on the planned price changes.

b. Would a 10% price reduction have been better for some or all of the products?

4. DBS Farms is a producer and retailer of farm products. DBS main products are Mangoes, Pawpaw and Pineapples. The current price of the Mangoes per Kilogram is GHS 50, the Pawpaw/Kg is GHS 80 and the Pineapple is GHS 40. This year the DBS Farms sold 10,000 kgs of Mangoes, 20,000 kgs of Pawpaw and 1 million kgs of Pineapples. In an attempt to improve revenue, the managers of the firm have decided to increase all prices by 10%. Market research has suggested that the price elasticity of demand for each product is: Mangoes: - 1.5; Pawpaw: -2.5; Pineapples: - 0.6. You have been asked to evaluate the planned price increases.

a. Comment on the planned price changes.

b. Would a 10% price reduction have been better for some or all of the products?