Microeconomics Answers

TR=150Q- 4Q2

TC= 40+10Q+3Q2

Qa) Calculate the profit maximizing level of output for a price making firm?

b)Calculate the amount of profit earned by the firm at profit maximizing level of output calculated in part 1.

c)Mathematically prove the slope of MR is twice the slope of AR.

A firm has the following revenue and cost functions.

TR = 60 Q - Q2

TC = 12 Q2 +30 Q + 30

Determine the quantity level at which the firm maximizes its total profit.

(Hint: use marginal revenue = marginal cost rule)

Question 02                                        05 Marks   

Inayah is a rational consumer who consumes milk and cookies only from her monthly income of Rs. 1,500. If the price of milk is Rs. 500 per liter and the price of one pack of cookie is Rs. 300, answer the following questions:   

1. Given the information above write the equation of the budget line and illustrate the same through the two-dimensional labeled diagram.                        (1 Mark)
2. If Inayah spends all of her income on consuming one good, find:                (1 Mark)
3. how much cookies she could afford?
4. how much milk she could consume?
5. Identify the impact of an increase in the income from Rs. 1,500 to Rs. 1,800 on Inayah’s consumption level. Also illustrate it using the two-dimensional labeled diagram. (1 Mark)  
6. Assume that Inayah’s consumption of milk and cookies give her following level of utility: 

(2 Marks)

Quantity. MU(milk). MU(cookies)

1. 400. 450

2. 350. 200

3. 200. 150

4. 100. 100

5. 70. 60

6. 30. 30

7. 0. 0

1. Find the optimal level of consumption.
2. Find the consumer equilibrium using the two-dimensional labeled diagram.

Question 01                                         05 Marks                                                                 

The investors of Smith Autos have put up $500,000 to construct a building and purchase all equipment required to wash cars. The investors expect to earn a minimum return of 10% on their investment.  If the money to set up the business had been borrowed from a bank instead, the car wash owners would have paid a 10% interest rate. The car wash is open 50 weeks per year and washes 800 cars per week. Whether operative or not, the company must pay $1,000 per week return to investors and $1,000 per week as insurance. The variable costs for the 800 weekly washes includes $1,000 labour cost and $600 materials cost. There are many car washes of equal quality and service in the area and they charge $5 per car wash.

1. Based on your knowledge of the different forms of market structure, do you think Smith Autos should stay in business? Show calculations.              (2 Marks)
2. Graphically represent the company's performance, showing profit or loss. (1 Mark)
3. Another car wash company operates inside a gated community in the vicinity and offers its services at $6 per wash under a licensed agreement. Highlight how is it possible for this company to charge a higher price than the market and still stay in business.                                         (1 Mark)

After a few mouths, due to the forces of demand and supply, the market price is pushed down to $1.5 per car wash. What course of action will you suggest to Smith Autos?            

As the Disney and Warner brothers are the examples of Oligopolistic industry so they must use game theory. As given in matrix below:

Disney

Warner Brothers

Star Wars

Pirates of the Caribbean

The Matrix

$100

$300

$80

$200

Superman 

$500

$50

$800

$300

Either of the company can one action movie or the other. Each value in dollars shows profits for respective movie version. 

1. If Warner brother wants to make the movie about the matrix and Disney about the Pirates of the Caribbean how much profit will Disney get?                 (1 Mark)
2. If Disney wants to make Star Wars than Warner Brothers can make The Matrix or Superman, which one is the best choice?                     (1 Mark)
3. If Disney choose Pirates of the Caribbean than which movie Warner Brothers will choose to dominate the market?                             (1 Mark)
4. If Warner Brother chooses to make Superman, which movie version will Disney choose?                                            (1 Mark)
5. With this perfect information which movie will respective company make? (1 Mark)

how is the ricardian model relevant to a market that imports all the products in that market? large economy with a government tariff

When a flower shop raised the price of a floral arrangement from $20 to $28, the number of the arrangements sold decreased from 30 a week to 20. What is the price elasticity of demand for the flowers in this case?  

3. A consumer spend all his income on Coke and Biscuits. At the current prices of Px =Rs.100 and Py =Rs.50, he maximizes his utility by purchasing 20 units of Coke and 50 Units of 

Biscuits 

a) What is consumer’s Income? 

b) What is consumer’s marginal rate of substitution of Coke for Biscuits at the equilibrium position? 

1. Consider the market for ponche, a alcoholic wine. the demand is characterized by the following equation. Pd = 100 - Qd the supply is given by Ps = 0.25Qs

• determine the equilibrium quantity and price?
• Suppose the ad valorem tax of 10% is imposed on buyers of the wine, graphically sketch the behavior of the demand and supply curves.
• what is the new equilibrium price and quantity?
• what is the price that buyers pay and supplies get ?
• Also determine the tax revenue and tax incidence on the buyers and sellers

How is the reduction in benifit associated

with higher earnings affects peoples incentive to work past age 65