Microeconomics Answers

1.With well illustrated diagrams, show and clearly explain:

a)How a firm maximizes profits given cost constraints

b)Minimizes costs given level of output

c)How relative factor prices and factor productivity determine optimal input combination. Show clearly how the maximizing output and optimal inputs combinations are achieved in the two cases.

Donald derives utility from only two goods, carrots (Qc) and donuts (Qd). His utility function is as follows: U(Qc,Qd) = (Qc)(Qd) The marginal utility that Donald receives from carrots (MUc) and donuts (MUd) are given as follows: MUc = Qd MUd = Qc Donald has an income (I) of $120 and the price of carrots (Pc) and donuts (Pd) are both $1.
a . What is Donald's budget line? b. What is Donald's income-consumption curve? c. What quantities of Qc and Qd will maximize Donald's utility? d. Holding Donald's income and Pd constant at $120 and $1 respectively, what is Donald's demand curve for carrots?
e. Suppose that a tax of $1 per unit is levied on donuts. How will this alter Donald's utility maximizing market basket of goods?

Mr. Z consumes hot drinks and blue trouser. At prices of Rs. 2 for a pair of hot drinks and Rs. 2 for
blue trouser, his marginal utility of consuming another unit of blue trouser is 4, and his marginal
utility of another pair of hot drinks is 2. (hint: picture hot drinks on the y-axis and blue trouser on
the x-axis):

Mr. Y is BBA graduate student and consumes 2 goods: textbooks and cup of Tea. Mr. Y also earns
a typical grad student income, Rs. 40 a month. He can either spend it all on textbooks and get 5,
or he can spend it all on Tea and get 20 cups.
a. Construct the budget line.
b. Given this information, construct the equation for Mr. Y budget line (put Textbooks on
the x-axis and Tea on the y-axis).
c. Mr. Y gets a research grant and his income increase to Rs. 80 a month. What is the new
equation of his budget lie? Assume that prices are the same as used in part a. If the
marginal utility of a textbook is 20, what is the marginal utility of Tea if he is maximizing
his utility?
d. Now assume that textbooks and Tea are complements for Mr. Y. For him to consume one
textbook, he needs 1 cup of Tea. How many textbooks does he consume given his income
of Rs. 40, and the prices used in part a? What if course (subject) is so boring that Mr. Y
needs 2 cups of Tea for every book that he consume

Firm break even when?

An increase in consumer incomes would result in:
a. a decrease in demand for bread
b. a decrease in demand for diamonds
c. a decrease in demand for low-quality cars
d. an increase in demand for inter-city bus travel (compared to flying or taking the train).

Mr. X buys two goods: Pizza and chickenburgers. The price of a Pizza is Rs. 1, and the price of a chickenburgers is Rs. 2. Each month, Mr. X spends all of her income and buys 30 Pizza and 5 chickenburgers. Next month, the price of magnet will fall to Rs. 0.50 and the price of a chickenburger will rise to Rs. 5.
a) Draw the budget line.
b) Will Mr. X able to buy 30 pizza and 5 chicken burgers next month?
c) Will Mr. X want to buy 30 pizza and 5 chicken burgers at new prices?
d) If at the new prices, Mr. X marginal utility of another pizza is 40, and the marginal utility of another chickenburger is 80. Is Mr. X maximize the utility? If not, how can he maximize his utility?

Assuming that labor is the only variable input and the wage rate is constant, explain the reason for the U-shape of the MC curve.