Economics Answers

3. For each of the following characteristics, say

whether it describes a perfectly competitive firm, a

monopolistically competitive firm, both, or neither.

a. sells a product differentiated from that of its

competitors

b. has marginal revenue less than price

c. earns economic profit in the long run

d. produces at the minimum of average total cost in

the long run

e. equates marginal revenue and marginal cost

f. charges a price above marginal cost

(a) firms face a download sloping demand curve?

economies of scale

Suppose that people derive utility from two goods—housing (H) and all other consumption goods (C).

a. Show a typical consumer’s allocation of his or her income between H and C.

b. Suppose that the government decides that the level of housing shown in part a (say, H*) is ‘‘substandard’’ and requires that all people buy H** > H* instead. Show that this law would reduce this person’s utility.

c. One way to return this person to the initial level of utility would be to give him or her extra income. On your graph, show how much extra income this would require.

d. Another way to return this person to his or her initial level of utility would be to provide a housing subsidy that reduces the price of hous- ing. On your graph, show this solution as well.

Suppose that people derive utility from two goods—housing (H) and all other consumption goods (C).

a. Show a typical consumer’s allocation of his or her income between H and C.

b. Suppose that the government decides that the level of housing shown in part a (say, H*) is ‘‘substandard’’ and requires that all people buy H** > H* instead. Show that this law would reduce this person’s utility.

c. One way to return this person to the initial level of utility would be to give him or her extra income. On your graph, show how much extra income this would require.

d. Another way to return this person to his or her initial level of utility would be to provide a housing subsidy that reduces the price of hous- ing. On your graph, show this solution as well.

6. The owner of a car wash is trying to decide on the number of people to employ based on

the following short-run production function:

Q 5 6L 2 0.5L2

where Q 5 Number of car washes per hour

L 5 Number of workers

a. Generate a schedule showing total product, average product, and marginal product.

Plot this schedule on a graph.

b. Suppose the price of a basic car wash (no undercoating, no wax treatment, etc.)

in his area of business is $5. How many people should he hire if he pays each

worker $6/hour?

c. Suppose he considers hiring students on a part-time basis for $4/hour. Do you think

he should hire more workers at this lower rate? Explain

3. What are the key points in a short-run production function that delineate the three stages

of production? Explain the relationship between the law of diminishing returns and the

three stages of production.

2. Define the law of diminishing returns. Why is this law considered a short-run phenomenon?

A. Critically evaluate whether DBN is fulfilling

its mandate?

B. In responding to global socioeconomic

development trends, what role in your view

should the DBN be playing?