1. Greg has a salary of $100. He spends his entire budget on milk and cookies. The cost of a quart of milk is $2.00 and the cost of a box of cookies is $4.00.
(a) Construct Greg's budget constraint (place milk on the y axis).
(b) Suppose Greg's salary rises by 10%. Also suppose that the price of milk and cookies each rise by 10%. Construct Greg's new budget constraint. What is the difference between the new and old budget constraints?
(c) Suppose that the price of cookies fell from $4.00 per box to $2.50 per box. Show the substitution and income effects as a result of this price change, assuming that cookies are a normal good. Assume that Greg's salary is $100.
(d) Suppose that cookies were a Giffen good. Describe what Greg would do if his income effect were greater than his substitution effect.
2. Captain Jack Sparrow rents a fishing rod for $10. He has no boat of his own so he has to rent one for $5 an hour. The number of fish which he caught over five hours is shown in the table below:
|
Hours
|
Fish
|
|
0
|
0
|
|
1
|
10
|
|
2
|
18
|
|
3
|
24
|
|
4
|
28
|
|
5
|
30
|
(a) Calculate fixed cost, variable cost, total cost, average product and marginal product.
(b) Graph this production function, and describe and explain its shape.
(c) Graph his total cost curve, and explain its shape.
3. The following table shows quantity (Q) and total cost (TC) for three firms:
|
|
A
|
B
|
C
|
|
Q
|
TC
|
TC
|
TC
|
|
1
|
60
|
11
|
21
|
|
2
|
70
|
24
|
34
|
|
3
|
80
|
39
|
49
|
|
4
|
90
|
56
|
66
|
|
5
|
100
|
75
|
85
|
|
6
7
|
110
120
|
96
119
|
106
129
|
Determine whether each firm exhibits decreasing, increasing or constant returns to scale.
4. The following presents the costs and revenues for a firm.
|
Quantity
|
Total Cost
|
Total Revenue
|
|
0
|
$8
|
$0
|
|
1
|
9
|
8
|
|
2
|
10
|
16
|
|
3
|
11
|
24
|
|
4
|
13
|
32
|
|
5
|
20
|
40
|
|
6
7
|
28
38
|
48
56
|
(a) Calculate the marginal cost, marginal revenue and profit for each level of production.
(b) How many units should the firm produce to maximize profit?
(c) Plot the marginal revenue and marginal cost curves.
(d) Is the industry the firm operates in competitive? Is the industry in long-run equilibrium?
5. The government is planning to build a bridge which connects the north and south of the country. The cost of building the bridge is $2, 000,000. The marginal cost of building the bridge is zero. The government must decide if it will build the bridge or contract the sole construction company in the country to build the bridge. If the company builds the bridge, it will recover costs and possibly earn a profit from charging residents to use the bridge. The schedule is shown in the table below:
|
Price
|
Quantity
|
|
$8
|
0
|
|
7
|
100
|
|
6
|
200
|
|
5
|
300
|
|
4
|
400
|
|
3
|
500
|
|
2
1
0
|
600
700
800
|
(a) Determine (i) the profit maximizing price and quantity and (ii) socially efficient price and quantity.
(b) If the company is offered the contract, should it build the bridge? Why or why not?
(c) If the government were to build the bridge, what economic rule should it adopt in order to be efficient? What price should it charge residents?
(d) Should the government build the bridge? Why or why not?
6. Jack and Jill are trying to keep the sale of water low in order to keep the price high. After reaching an agreement, each person must decide whether to follow the agreement. Suppose that they are faced with the following decision:
|
|
Jack's Decision
|
|
|
|
High Production
|
Low Production
|
|
|
|
$1,600 profit for Jack
|
$1, 500 profit for Jack
|
|
|
|
$1, 600 profit for Jill
|
$2, 000 for Jill
|
|
|
|
|
Jill's Decision
|
|
|
|
High Production
$1,600 for Jack
$1, 600 for Jill
|
Low Production
$2,000 profit for Jack
$1, 500 profit for Jill
|
|
|
(a) Determine the dominant strategies for Jack and Jill.
(b) If Jack and Jill decided to collude, what would be the outcome?