problem 1:

a) State the advantages and drawbacks of economic growth

b) In Zambia, is the demand for fuel elastic or inelastic? describe why? State an illustration to support your answer.

c) Describe the benefits and drawbacks of i) sole proprietor, ii) partnership and Incorporating.

problem 2: The XYZ drug company is considering investing in research that would lead to a cost-saving innovation in its production of a special rabies vaccine. Supposing the firm can keep this innovation solely for its own use, will the raised profits from the lower marginal costs be bigger if the firm is in a competitive market or if it is a monopoly?

Describe your answer in a graph (avoid AC curves) and with words.

problem 3: Mulenga and Kasanga are rival bakers. The table shown below illustrates how many brownies and toffee bars each can bake in 1 hour.

A)  If each baker works a typical 40 hour work week, draw the production possibility frontier for each baker. Put ‘Brownies’ on the horizontal (x-axis) and ‘Toffee bars’ on the vertical (y-axis). Be sure to recognize the intercept values on your graphs.

B) Assume that each baker decides to split their workweek evenly between baking brownies and baking toffee bars. That is each worker will spend 20 hours baking brownies and 20 hours baking toffee bars. Fill the table below to show each baker’s output of the two products and the total output between them.

C) Assume that the two bakers decide to specialize (by spending every hour of the work week baking either brownies or toffee bars). Who must bake only brownies and who must bake only toffee bars? To receive credit, you should show your work justifying your answer.

problem 4: The market demand and supply curves for Tulenwa Beer are given by the following equations:

Qd = 60 - 3P (market demand curve)
Qs = 3P (market supply curve)

a) Graph the demand and supply curves altogether in one graph. In your graph be sure to label the axes and the curves. Clearly point out where the demand curve crosses the axes (find out the X and Y intercepts).

b) Compute the equilibrium price and quantity algebraically.

c) Compute the consumer surplus, producer surplus and total surplus for Tulenwa Beer.

d) Assume that the equation for the supply curve changes to Qs = 3P - 30. Does this new supply curve point out an increase or decrease in the supply curve? Recommend two possible descriptions for the indicated change in the supply curve.

problem 5: One firm has the whole market for Halloween masks that look like Richard Nixon.  It generates at average and marginal costs of AC = MC = 10. Originally, the firm faces a market demand curve of Q = 60 - P.

a) Compute the profit-maximizing price and quantity combination for the firm. What are the firm’s profits?

b) Suppose that the market demand curve becomes steeper and is given by Q = 45 - 0.5 P. Determine the firm’s profit-maximizing price and quantity now? Determine the firm’s profits?

c) State the market demand curve becomes flatter and is given by Q =100 - 2P. Determine the firm’s profit-maximizing price-quantity now?

d) Graph the three different situations and describe why there is no supply curve for a monopoly.