Microeconomics Assignment | Microeconomics

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QUESTION1

a) Consider the following price and quantity demanded data for Good X.

Price(Kwacha)

Quantity Demanded(units per week)

2

100

4

80

6

60

8

40

10

20

12

0


i. Plot the demand curve on a well-labelled graph. [2]
ii. Using your graph in (i), distinguish between movements along and shifts in the demand curve. [2]
iii. Mention the factors that are likely to cause shifts in the demand curve. [3]
iv. Calculate the price elasticity of demand at price = $4 and at price = $10. [3]
v. Estimate the elasticity between price of $6 and $8. [3]
vi. Suppose now that a rise in real income causes quantity demanded to increase by
50units at every possible price, on the same graph in (i) plot the new demand curve. Is
this a leftward or rightward shift in the demand curve? Explain your answer. [4]

b) Suppose all of Chanda’s weekly income is spent on two goods, X and Y. Draw Chanda’s
budget line if his income is $150 per week, the price of X is $10 per unit and the price of Y is
$15 per unit. Draw the new budget line when either the following happens;
i. If the price of X doubles
ii. If the price of Y halves
iii. If Chanda’s income rises to $300 [7]
c) The demand function for books in Pick n Pay is given by P = 50 – 0.5Q, where Q is the
quantity demanded and P is the price per book.
i. Find the number of books that will be bought when the price is K2. [2]
ii. Find the price elasticity of the demand when the number of books bought is 30. [3]
iii. Calculate the percentage change in quantity demanded when the price increases by
10% (use the coefficient price elasticity of demand in ii) above). [3]

QUESTION 2 [25 Marks]


a) Mr. Musokotwane, a lawyer working for a large law firm and earning $60,000 per year, is contemplating setting up his own law practice. He estimates that renting an office would cost $10,000 per year, hiring a legal secretary would cost $20,000 per year, renting the required office equipment would cost $15,000 per year, and purchasing the required supplies, paying
for electricity, telephone and so forth would cost another $5,000. The lawyer estimated that his total revenues for the year would be $100,000, and he is indifferent between keeping his present occupation with the large law firm and opening his own office.
i. How much would be the explicit costs of the lawyer for running his own law office forthe year? [2]
ii. How much would be the accounting costs? [1]
iii. Calculate the implicit costs. [2]
iv. Find the economic costs. [2]
v. How much will the accounting profit be? [3]
vi. Calculate the economic profit. [3]
vii. Should the lawyer go ahead and start his own law firm? [2]
b) Chiza is the owner of a fast food restaurant in Ndola. The average variable cost is $10 andthe average fixed cost is $6. Assume that Chiza’s shop is under perfectly competitive market.
The price faced in the market is $8.
i. Calculate the average total cost. [2]
ii. How much profit/loss per unit is Chiza able to make in this business? [2]
iii. Would you advice Chiza to quit the business in the short run? [2]
iv. If he decides to quit, how much will he lose in the short run per unit of output. How
does this compare to the loss per unit if he continues in the business short run? [2]
v. When does the firm working under perfect competition decide to shut down its short run? [2]


QUESTION 3 [25 Marks]

a)    The marginal utilities of two goods X and Y that Tinta Inza consumes and the required units (quantity consumed) are given the following table;

Units

MUx(Utils)

MUy(Utils)

1

20

24

2

18

21

3

16

18

4

14

15

5

12

12

6

10

2

Where MUx  and MUy are marginal utilities of good X and Y respectively. Let the price of good X and Y be K2 and K3 respectively and Tinta has K24 to spend on two goods;

i. Find the amount of the two goods that Tinta should consume for him to maximize utility.[7]
ii. State and explain the law of diminishing marginal utility. [2]
b) Good Y has a cross elasticity of demand with respect to Good X of 0.5 and 100 units of Good Y are demanded when Good X costs 50 Ngwee. Suppose the price of Good X rises to 75 Ngwee.
i. How will the demand for Good Y change? [2]
ii. How are the two goods related? [2]
iii. Describe the demand curve for a good whose price elasticity of demand is minus one throughout. [2]
c) The production possibility frontier is an important too in explaining the concept of the scarcity and opportunity cost in economics. Consider the production possibility curve for an hypothetical good called Good X;

Production Possibilities

Cloth in 000’ metres

Wheat in 000’ units

A

0

15

B

1

14

C

2

12

D

3

9

E

4

5

F

5

0


i. Draw the production possibility curve with the wheat on vertical axis. [2]
ii. Calculate the opportunity cost of producing at point A. What is the opportunity cost of
moving the production from point D to C? [2]
iii. Is the production of 1,000 metres cloth and 15,000 units of wheat possible? [2]
iv. What can cause a shift in the production possibility curve? [2]
v. Draw a new ppf on the same diagram if technology change causes the production of both
goods to be halved. [2]

QUESTION 4 [25 Marks]

The head of economics research department of Africa Development Bank tried to determine the marginal cost of one of the company’s client. It was revealed that the client’s firm operates under the market defined as the monopolistic competition. The following demand and cost functions were determined;

Demand: P = 140 – 4Q
Cost: TC = 120 Q – 12Q2+ 2Q3

Where P and Q are price in kwacha and quantity demanded in thousand units respectively. TC is the total cost. Further analysis revealed the following:
MR = 140 – 8Q
MC = 120 – 24Q + 6Q2
a) Outline the main conditions/features of the market structure under consideration. [6]
b) Calculate the output that the firm will produce. (Hint: any firm under the monopolistic competition is a profit maximizer). [5]
c) Find the exact amount of maximum profit. [4]
d) Using a well-labelled diagram explain both the short run and long run equilibrium for this firm. [10]
QUESTION 5 [25 Marks]
Consider the table below:

Units of Labour(L)

Total Output(TP)(Q)

0

1

2

3

4

5

6

7

8

9

0

9

24

42

60

75

87

96

101


a) Generate the figures in separate columns for the average physical product (AP) and the
marginal physical product (MP) of the variable factor (which is labour in this case). [4]
b) State and explain the law of diminishing marginal return. [2]
c) What are the three stages of the short run production and why doesn’t it make economic sense
for the firm to produce in either stage 1 or 3? Use a diagram to explain. [9]
d) Explain why the average cost curve is U shaped. [3]
e) Using a well labelled diagram, outline the conditions of a perfectly competitive firm in the short run. [7]

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