Microeconomics Answers

Use a model of internal economies of scale, but now allow for firms to have different marginal costs (c ).

a) Explain why opening up to trade results in the lowest cost firms expanding and the highest cost firms shutting down. Draw one or more diagrams to help you explain your points. Is this consistent with empirical evidence on how firms react to trade openness? Assume that there are no trade costs for part a.

b) Now assume that some trade cost (t) exists in order for a firm to export, per unit. How will increasing the trade cost t affect which types of firms export and which do not? From your answer, how would you conclude Canadian firms and consumers might be affected by a potential collapse of the North American Free Trade Agreement (NAFTA)? You may want to draw a diagram to help make your points in the first part of the question, although it is not absolutely necessary.

Each of the normal students will demand courses in the amount:
QN= 100 – 0.25 P where Q is the number of course-hours per academic year and P is the price per course-hour. Each of the workaholics, on the other hand, has a demand of:
QW= 200 – 0.5 P The school will admit 180 students from each group. (Students may choose not to enroll.) The marginal cost to the School is constant at $100 per student course-hour. Sloan’s fixed cost is $2.0 million per year. For each of the following pricing schemes, please derive the optimal price structure and the total profit, on the assumption that the School’s objective is to maximize profit from the MBA program. a. A single fixed tuition per academic year (with a zero price per course-hour), with no limit on the number of course hours. Hint: Sloan may decide to induce both types of students to enroll or just the workaholics

A manufacturer sells his product at (49-2x) per unit and it costs him 2 shillings per unit to manufacture. if his fixed costs are 30 shillings
a)determine the break even point in terms of cost and quantity
b) determine the level output that will maximize profits

Using well labelled diagrams, explain how the equilibrium price and equilibrium quantity of apples will change as a result of the following;
2.2.1 A change in the wages of farm workers from R150 per day to R200 per day. (10)
2.2.2 A decrease in the price of fertilizers and a concurrent increase in the demand for apple juice. (10)

Explain SEVEN (7) conditions necessary for a perfectly competitive market to exist.

Explain using properly labelled diagrams, why a perfectly competitive firm will earn only normal profit in the long-run.

Lonewolf Ltd is the sole manufacturer and supplier of solar panels in the country. As a result of this the CEO claimed in a recent meeting that he can set any price he wishes and sell as many units of his product as he wants at that price. Is this correct? Motivate your answer.

QUESTION 3 (20)
3.1 Briefly explain price elasticity of demand and how it is measured. (5)
3.2 Explain with diagrams and relevant examples, THREE (3) categories of price elasticity of demand. (9)
3.3 Explain any THREE (3) determinants of price elasticity of demand. (6)

2.2 Using well labelled diagrams, explain how the equilibrium price and equilibrium quantity of apples will change as a result of the following;
2.2.1 A change in the wages of farm workers from R150 per day to R200 per day. (10)
2.2.2 A decrease in the price of fertilizers and a concurrent increase in the demand for apple juice. (10)

2.1 A community in Northern Namibia produces only two goods, TVs and CDs. With the aid of properly labelled production possibilities curves illustrate each of the following (putting TVs on the vertical axis).
2.1.1 A shift in production from CDs (services) towards TVs (goods). (5)
2.1.2 An increase in the potential output of the community due to a greater availability of the factors of production. (5)