Microeconomics Answers

You are the manager of a monopolistically competitive firm and your demand and cost functions are given by Q=20-2P and C(Q)=104-14Q+Q*2

i)find the inverse demand function

ii) determine the fixed cost and the variable cost of the total cost function above

iii)determine the profit maximizing price and level of production

iv) calculate the firms maximum profits

v)estimate the elasticity of the monopolist`s product

c) Consider John who consumes two goods, (X and Y), with prices 𝑃𝑥 = 𝑁$35, 𝑃𝑦 = 𝑁$25 and income I =N$1500 i) Construct budget constraint [3 marks] ii) Draw John’s budget line with good X on the horizontal axis. [3 marks] iii) Use a graph to show the effect of an increase in income from N$1500 to N$2000. [3 marks] iv) What will happen to the slope of the budget line if the price of good X decreases to N$18? [5 marks]

Define marginal utility. Provide an argument why to maximize total utility of good x and good y, the consumer should consume until the ratio of marginal utilities over price is the same across both goods. [6 marks]

Given the following demand function for beef (kg), P = 200 – 5Q i) By how much would the price have to fall for consumers to be willing to buy 1 more kg of beef per day? [5 marks] ii) If the price decreases by N$0.9, by how much will the demand changed?

b) What is the marginal rate of technical substitution (MRTS)? Simplify fully [13 marks] Does the above function exhibit increasing, decreasing or constant returns to scale? Illustrate why and explain what this means

You are given the production function: 𝑄(𝐾, 𝐿) = 10𝐾 𝛼𝐿 𝛽 a) What is the average product of labour, holding capital fixed at K? Simplify fully [6 marks] b) What is the marginal rate of technical substitution (MRTS)? Simplify fully [13 marks] Does the above function exhibit increasing, decreasing or constant returns to scale? Illustrate why and explain what this means [6 marks

Ernie owns a water pump. Because pumping large amounts of water is harder than pumping small amounts, the cost of producing a bottle of water rises as he pumps more. Here is the cost he incurs to produce each bottle of water:

No. of bottles Costof bottles ($)

first 1

Second 3

Third 5

Fourth 7

a. If the price of a bottle of water is $4, how many bottles does Ernie produce and sell? How much producer surplus does Ernie get from these sales? Show Ernie’s producer surplus in your graph.

b. If the price rises to $6, how does quantity supplied change? How does Ernie’s

Illustrate when a government intervenes in a competitive labor market to change the unfair outcome of the market determined wages by taking the policy of price Floor under binding constraint. Also evaluate the adverse effects for labor market of this policy.

Calculate the price elasticity of demand from point A to B by using the given data below. If the price elasticity of demand│εP│> 1 OR │εP│< 1 (demand curve is elastic/inelastic), discuss why an increase in Price will increase/decrease the total revenue? 

Point Quantity Price

A 500 24

B 400 16

The current world production of oil is 350 million barrels per day and the current world price of oil is N$850 per barrel. The price elasticity of demand (ε) is -0.3 and the elasticity of supply (η) is 0.1. Shiwa Investment is planning to enter the world oil market with a daily production of 13 million barrels of oil per day. For simplicity, assume that the supply and demand curves are linear Calculate market price and total supply of oil after Shiwa investment has enter the world oil market and explain why the total supply of oil increases with less than 13 million.