Economics Answers

In a one-shot and simultaneous game, Perfume Shop (PS) and Fragrance Shop (FS) are engaged in an advertising war aimed at earning a larger profit from the sales of perfumes in the Onaapo Kingdom. If Perfume Shop advertise and FS advertises, both firms will earn a sum of 15 million cedis (¢ 15 M) in profits. If neither firm advertises, FS will make 12 million cedis (¢ 12 M) and PS will make 6 million cedis (¢ 6 M). However, if PS advertises and FS does not, PS will make 30 million (¢ 30M) and Fs will earn a sum of 9 million cedis (¢ 9 M) in profit. Also, if FS decides to advertise and PS fails to do same PS will earn a profit of 3 million cedis with FS making a profit of 9 million cedis.

i. Write the above game in normal form (2 marks)

ii. Does Perfume Shop "PS" has a dominant strategy ? Provide a comprehensive explanation for your answer. (4 marks)

iii. Does the Fragrance Shop "FS" has a dominant strategy ? Explain your answer in detail. (4 marks)

c.) Suppose a monopoly producer is also a monopsonist in the labour market. Demand for the output is P=100 - Q. The production function is Q= L, and the labour supply curve is w= 10 + L. How much labour does the firm hire? What wage is paid? [10 marks]

d.) Suppose the labour market is competitive, the supply curve of labour is upward sloping and the amount of capital is fixed. If the output market changes from a competitive market to a monopoly, what is the effect on its demand for labour? Explain briefly (in not more than 50 words). [7 marks]

a.) EASTEK Co. operates in a competitive market. Its production function is q=L (to the power alpha) * K (to the power beta). The exponents alpha and beta are both less than 1. If the firm's capital is fixed, and it takes the wage and price as given, what is the firm's short-run demand for labour ? [13 marks]

b.) Pipi Co Ltd. operates in a competitive market. Its marginal product of labour is 1 over L (1÷L), and it takes the wage and prices as given. Derive the firm's short-run demand for labour as a function of "w" and "p".

How much labour will the firm hire if w = 2 and p = 10? [10 marks]

a.) Explain Pareto efficiency. [6 marks]

b.) Use appropriate illustrations, endowments and assumptions to show and explain that a competitive equilibrium achieves an efficient product mix.[8 marks]

c.) Using appropriate examples, explain the difference between efficiency and equity. [8 marks]

d) Use suitable or applicable examples with which goods are produced and distributed by individuals, society or government. [8 marks]

Ebony Reigns owns a studio that would cost ¢ 120,000 to replace should it ever be destroyed by fire. There is a 25% chance that the studio could be destroyed by fire during the course of the year. If the fire occurs, Ebony Reign's studio will be worth only ¢ 60,000. An insurance company has offered Ebony a false insurance policy that requires her to pay a yearly premium of ¢ 15,000 in the good state of nature (no fire) Ebony has fully insured her studio to eliminate the risk. Assuming that Ebony Reigns is risk averse has another wealth answer the following questions:

e) Calculate the variance of the value of Ebony's studio with fair insurance. [4marks]

f) Is Ebony better off with the fair insurance ? Why ? [4marks]

Ebony Reigns owns a studio that would cost ¢ 120,000 to replace should it ever be destroyed by fire. There is a 25% chance that the studio could be destroyed by fire during the course of the year. If the fire occurs, Ebony Reign's studio will be worth only ¢ 60,000. An insurance company has offered Ebony a false insurance policy that requires her to pay a yearly premium of ¢ 15,000 in the good state of nature (no fire) Ebony has fully insured her studio to eliminate the risk. Assuming that Ebony Reigns is risk averse has another wealth answer the following questions: a) What is the expected value of Ebony's studio with no insurance. b) Estimate the amount of risk (use standard deviation) Ebony faces for her property with no insurance. c) Under the fair insurance how much should Ebony be paid in the bad state of nature (fire) for her studio? d) Show that Ebony has the same amount of wealth in either state of nature with and without fair insurance.

The price elasticity of supply measures how?

1.     Below is the weekly output of a production process, with data for workers and material inputs. The standard inventory value of the output is GH ₵125 per unit. Overhead is charged weekly at the rate of GH ₵1500 plus 0.5 times direct labor cost. Assume a 40-hour week and an hourly wage of $16. Material cost is $10 per running foot. What is the average multi-factor productivity for this process?

WEEK OUTPUT #WORKERS MATERIALS (ft)

1 412 6 2840

2 364 5 2550

3 392 5 2720

4 408 6 2790

A2-5. Suppose a firm operating in a perfectly competitive industry has costs in the short run given by:

SRTC = 8 + ½q2 and therefore MC = q.

(a) Derive expressions for fixed costs (FC), those that do not vary with output, variable costs (VC), those that do vary with output, average variable cost (AVC), and average total cost (ATC). [4]

(b) At what quantity is AVC at its minimum (at what AVC level)? At what quantity is ATC at its minimum (at what ATC level)? Calculate ATC at q = 2 and q = 8 and sketch MC, AVC and ATC between q = 0 and q = 8. [6]

(d) If the minimum point of the short-run ATC curve for all firms (existing and potential) is also the minimum point of the long-run average cost curve (LRAC), calculate the long-run equilibrium price, market quantity, and firm quantity. What is the long-run equilibrium number of firms in the industry? [4]

a) Assume KBL Limited and Richet International are multinational firms that are weighing-in the option of simultaneously entering the Ghanaian market for the first time. If neither enters, both earn a payoff of zero. If both enter, they both lose 300. If one fim enters, it gains 150 while the other earns zero. i.) Set up the payoff matrix for this game and determine if any Nash equilibria exist. [5 marks] ii.) Can you predict the outcome of this game ? [3 marks] iii.) What is the outcome of game if KBL gets to decide first? Explain you answer. [5 marks]

b.) Suppose that market demand can be represented as P = 100 - 2Q. There are 10 identical firms producing an undifferentiated product, each with the total cost function TC = 50 + q2 (q square). i. Compare the competitive outcome with the cartel outcome in terms of price, output and profit [8marks]. ii. What is the individual firm's incentive to cheat on the cartel ?[4 marks]