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Consider a consumer who buys two good x and y with utility function u (x,y)=2 under root x+y. The consumer's income is 20 and price of y= 4. Compute the optimal consumption bundle when the price of x =1 and if the price of x rises to 4 what is the new optimal bundle
The following tables show a small firm’s long-run average cost of manufacturing a good at two different plants:
Plant 1:
Quantity: 1 2 3 4 5 6 7 8 9
T.C.: 50 106 164 224 287 355 430 520 618
A.C. ? ? ? ? ? ? ? ? ?
M.C. ? ? ? ? ? ? ? ? ?
Plant 2:
Quantity: 1 2 3 4 5 6 7 8 9
T.C.: 20 52 90 130 175 227 285 345 407
A.C. ? ? ? ? ? ? ? ? ?
M.C. ? ? ? ? ? ? ? ? ?
T.C.=Total Cost
A.C.=Average Cost
M.C.=Marginal Cost
a) Complete the third and fourth columns of each table.
b) Suppose the price of the good is $60. How much should the firm produce in each plant in order to maximize the firm’s profit? Find the firm’s profit.
Problem 1:
A perfectly competitive firm has total revenue and total cost curves given by:
TR = 100Q
TC = 5,000 + 2Q + 0.2Q 2
a. Find the profit-maximizing output for this firm. Show the solution. (5 points)
b. Find the profit the firm makes. Show the solution. (5 points)
Problem 2:
A perfectly competitive firm has the cost function TC=1,000 + 2Q + 0.1Q 2 .
a. What is the marginal cost (MC) of the firm? (3 points)
b. What is the average cost (AC) of the firm? (3 points)
c. What is the lowest price at which this firm can break even? Show the solution. (5 points)
Problem 3:
Market price is $50. The firm’s marginal cost curve is given by MC = 10 + 2Q. Find the profit-
maximizing output for the firm. Show the solution. (5 points)
Problem 4:
What does it mean to say that a perfectly competitive firm is a price taker? Can’t a firm set any
price it chooses? Explain. (5 points)
Directions: Provide your top 3 strategic alliances which you can possibly adopt for your future business.
A. Choose a product with which you are familiar (i.e. Starbuck’s Frappuccinos) that will be
affected by the dynamics of the market economy.
B. Make up two different headlines for two graphs relating to factors causing a shift in demand,
then show how each will impact the product related to either surpluses or shortages and
ultimately a change in the equilibrium price. One must be an increase in demand, the other a
decrease in demand. You may only use each cause of a shift once!!! such as population.
C. Do the same for two factors causing a shift in supply. You must draw a separate graph for
each factor. You may only use each cause of a shift once!!! such as technology.
D. Type a paragraph about each of your graphs (four total) to predict whether the product will
demonstrate an increase or decrease in demand or supply and what will have to happen
economically (i.e., shortage, surplus, price increase, price decrease).
In a competitive industry consisting of 5,000 firms, the short-run marginal cost curve for each
firm is given by MC = 100 + 20Q. The demand curve faced by the industry is given as P = 500 –
0.002Q. P and MC are in $/tonne and Q is in tones.
a. Find the equilibrium price and quantity sold, for the industry and for each firm.
b. Find the producer and consumer surpluses at the equilibrium price.
Q.1 The model of income determination is called Keynesian. What makes it Keynesian as apposed to classical?
Sketch the AC, AR, MR and MC curve without a scale
Sanjana loves to read books(B) and likes to watch movies (M) as well. She derives double the satisfaction from reading a book than watching a movie. Her utility function is as follows
U(B, M) = 2B + M
Where B and M are the number of books and movies respectively.
a. Explain the shape of the indifference curve using diagrams. [3 MARKS, Word limit: 200] b. The income available with her is INR60. And price of movie ticket is INR 10 and that of a book is INR 15. Will she spend her entire budget and why? What will be her consumption, explain why?
Suppose that Palestinian government raises the price of bread from NIS 4 to NIS 5 and thus
quantity demanded falls from 5,800 per week to 5,500. Calculate total revenue both before
and after the price change. Compute the price elasticity of demand for bread. What can we
tell about the price elasticity of demand for bread?
