You are the chief financial officer for a firm that sells digital music players

Home assignment

Microeconomics (ECNO- 101)

Name:

Student’s ID:

Section No.:

Instructions:

 Write down the answer of the following questions in your own handwriting and submit it to your Instructor.

 Typing materials will not be accepted.

 Choose any 30 questions and write down there answer/ solution and send the scanned copy to me by email.

 You can take help from the text books, study materials, practice sets or internet. __________________________________________________________________________________

1. Define the following: Microeconomics & Macroeconomics; Positive Economics &

Normative Economics; Geffen goods, normal goods, substitute goods and complementary

goods; price elasticity of demand; income elasticity of demand and cross price.

2. Explain the difference between microeconomics and macroeconomics.

3. Explain law of demand with suitable example. Mention the factors that affect individual demand?

4. What do you understand by the term change in demand and change in quantity demanded?

5. Market research has revealed the following information about the market for chocolate bars: The demand schedule can be represented by the equation QD = 1,600 – 300P, where

QD is the quantity demanded and P is the price. The supply schedule can be represented by

the equation QS = 1,400 + 700P, where QS is the quantity supplied. Calculate the

equilibrium price and quantity in the market for chocolate bars.

6. The market for pizza has the following demand and supply schedules:

Price Quantity

Demanded

Quantity

Supplied

4 135 pizzas 26 pizzas

5 104 53

6 81 81

7 68 98

8 53 110

9 39 121

a) Graph the demand and supply curves. What is the equilibrium price and quantity in this market?

b) If the actual price in this market were above the equilibrium price, what would drive the market toward the equilibrium?

c) If the actual price in this market were below the equilibrium price, what would drive the market toward the equilibrium?

7. Diagrammatically explain the meaning of elastic demand, inelastic demand, perfectly elastic demand, perfectly inelastic and unitary elastic demand curve with examples.

8. Price of good rises from SR 4 to SR 5 / unit. As a result its demand falls from 200 units to 100 units. Calculate Ep.

9. A 7% fall in the price of a good leads to 40% increase in demand of that good. Find out Ep.

10. The co-efficient of price elasticity of demand of a commodity is (-) 0.5. When its price is SR 10 per unit, its quantity demanded is 40 units. If the price falls to SR 5 per unit, how

much will be the quantity demanded.

11. Find arc elasticity of supply if price of rice rises from SR 5 to SR 10 per kg and supply increases from 10 kg to 15 kg in a month.

12. Suppose that business travellers and vacationers have the following demand for airline

tickets from New York to Boston:

Price Quantity Demanded

(business travellers)

Quantity Demanded

(vacationers)

150 2100 1000

200 2000 800

250 1900 600

300 1800 400

As the price of tickets rises from $200 to $250, what is the price elasticity of demand for

(i) business travellers and (ii) vacationers? (Use the midpoint method in your calculations.)

13. What are the relationships between total utility and marginal utility?

14. What is law of diminishing marginal utility?

15. What is indifference curve? What are the main features/properties of indifference curves?

16. What do you mean by marginal rate of substitution (MRS)?

17. What are the conditions for consumer’s equilibrium in indifference curve analysis?

18. Define- price effect, substitution effect and income effect.

19. Draw diagram for budget line when budget (income) of the consumer increases keeping in

mind that there is no change in the prices of two goods X and Y.

20. Draw diagram for budget line when budget (income) of the consumer decreases keeping in

mind that there is no change in the prices of two goods X and Y.

21. Draw a budget line when price of good X changes and price of good Y remains constant

(no change) assuming that there is no any change in the income of the consumer

(consumer’s income is fixed).

22. What do you mean by production function? Discuss the types of production function.

23. What is Cobb- Douglas production function? Write down its main features.

24. What are the conditions of producers’ equilibrium?

25. What are laws of variable proportions?

26. What do you understand by the term returns to scale? How many types of returns to scale

are there?

27. Define- increasing returns to scale, diminishing returns to scale and constant return to scale.

28. Fill in the type of cost that best completes each sentence by using opportunity cost, total cost, fixed cost, variable cost, average total cost, and marginal cost:

a) What you give up for taking some action is called the ______. b) _____ is falling when marginal cost is below it and rising when marginal cost is

above it.

c) A cost that does not depend on the quantity produced is a ______. d) In the ice-cream industry in the short run, ______ includes the cost of cream and

sugar but not the cost of the factory.

e) Profits equal total revenue less ______. f) The cost of producing an extra unit of output is the ______.

29. Your brother is thinking about opening a hardware store. He estimates that it would cost $500,000 per year to rent the location and buy the stock. In addition, he would have to quit

his $50,000 per year job as an accountant.

a) Define opportunity cost. b) What is your brother’s opportunity cost of running a hardware store for a year? If

your brother thought he could sell $510,000 worth of merchandise in a year, should

he open the store? Explain. 30. If, by increasing the quantity of labor used by one unit, the firm can give up 2 units of

capital and still produce the same output, then what will be the MRTSLK?

31. Given the following TPL, find the APL and MPL.

L 1 2 3 4 5 6 7

TPL 2 6 12 16 18 18 16

32. Given the following TVC schedule and TFC = SR 12, (a) find TC, AFC, AVC, AC, and MC for the various levels of output.

Q 1 2 3 4 5 6

TVC 6 8 9 10.5 14 21

33. Fill up the blanks box with appropriate number-

Output

Q

TFC TVC TC MC AFC AVC ATC

0 20 70 - - - -

1 30

2 35

3 150 30

4 50

34. Nimbus, Inc., makes brooms and then sells them door-to-door. Here is the relationship

between the number of workers and Nimbus’s output in a given day:

Workers Output Marginal

Product

Total

Cost

Average

Total Cost

Marginal

Cost

0 0

1 20

2 50

3 90

4 120

5 140

6 150

7 155

a) Fill in the column of marginal products. What pattern do you see? How might you explain it?

b) A worker costs $100 a day, and the firm has fixed costs of $200. Use this information to fill in the column for total cost.

c) Fill in the column for average total cost. (Recall that ATC = TC/Q.) What pattern do you see?

d) Now fill in the column for marginal cost. (Recall that MC = ΔTC/ΔQ.) What pattern do you see?

e) Compare the column for marginal product and the column for marginal cost. Explain the relationship.

f) Compare the column for average total cost and the column for marginal cost. Explain the relationship.

35. Diagrammatically show the relationships between ATC, AVC, AFC and MC.

36. Identify (write the name of) different cost curves given below:

37. You are the Chief Financial Officer for a firm that sells digital music players. Your firm

has the following average total cost schedule:

Quantity Average

Total Cost

600 players $300

601 $301

Your current level of production is 600 devices, all of which have been sold. Someone

calls, desperate to buy one of your music players. The caller offers you $550 for it. Should

you accept the offer? Why or why not?

38. A profit-maximizing firm in a competitive market is currently producing 100 units of output. It has average revenue of $10, average total cost of $8, and fixed costs of $200.

a) What is profit? b) What is marginal cost? c) What is average variable cost? d) Is the efficient scale of the firm more than, less than, or exactly 100 units?

39. Ball Bearings Inc. faces costs of production as follows:

Quantity, Q Total Fixed

Costs (TFC)

Total Variable

costs (TVC)

0 $100 $0

1 50

2 70

3 90

4 140

5 200

6 360

a) Calculate the company’s average fixed costs (AFC), average variable costs (AVC), average total costs (ATC), and marginal costs (MC).

b) The price of a case of ball bearings is $50. Seeing that she can’t make a profit, the Chief Executive Officer (CEO) decides to shut down operations. What are the

firm’s profits/ losses? Was this a wise decision? Explain.

c) Vaguely remembering his introductory economics course, the Chief Financial Officer tells the CEO it is better to produce 1 case of ball bearings, because marginal

revenue equals marginal cost at that quantity. What are the firm’s profits/losses at

that level of production? Was this the best decision? Explain.

40. What are the main characteristics/ features of perfect competition? Diagrammatically show how price is determined in perfect competitive market?

41. Analyze the two following situations for firms in competitive markets: a) Suppose that TC = 100 + 15q, where TC is total cost and q is the quantity produced.

What is the minimum price necessary for this firm to produce any output in the

short run?

b) Suppose that MC = 4q, where MC is marginal cost. The perfectly competitive firm maximizes profits by producing 10 units of output. At what price does it sell these

units?

42. What are the main characteristics/ features of monopoly market? Diagrammatically show how price is determined in monopoly market?

43. Based on market research, a recording company obtains the following information about the demand and production costs of its new CD:

Price = 1,000 – 10Q

Total Revenue = 1,000Q – 10𝑄2 Marginal Revenue = 1,000 – 20Q

Marginal Cost = 100 + 10Q

Where Q indicates the number of copies sold and P is the price in cents.

a) Find the price and quantity that maximizes the company’s profit.

b) Find the price and quantity that would maximize social welfare. c) Calculate the deadweight loss from monopoly.

44. How can you make difference between perfect competition and monopoly market?

45. 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 minimum of average total cost in the long run e) Equates marginal revenue and marginal cost f) Charges a price above marginal cost

46. For each of the following characteristics, say whether it describes a monopoly firm, a monopolistically competitive firm, both, or neither.

a) Faces a downward-sloping demand curve b) Has marginal revenue less than price c) Faces the entry of new firms selling similar products d) Earns economic profit in the long run e) Equates marginal revenue and marginal cost f) Produces the socially efficient quantity of output.