Question 1: Assume you own and operate a small coffee shop located in a busy shopping complex. You sell a range of hot and cold coffees, muffins and sandwiches.

a. Using the concepts of demand and supply substitutability, discuss and attempt to define the market in which your business operates

b. Product differentiation is seen to be an important part of your competitive strategy. Explain what is meant by the term product differentiation, giving examples that could apply to your market.

c. Provide and explain two factors that will affect the demand and supply for the hot coffee. Do these factors make a change in demand and supply? Give reasons for your answer.Question 2

Question 2:  Suppose the same firm's cost function is C(q) = 4q2 + 16.

a. Find variable cost, fixed cost, average cost, average variable cost, and average fixed cost. (Hint: Marginal cost is given by MC = 8q).

b. Show AC, MC, AVC on a graph.

c. Find the output that minimizes AC.

d. At what range of prices will the firm produce a positive output.

e. At what range of prices will the firm earn a negative profit?

f. At what range of prices will the firm earn a positive profit?

Question 3: Suppose you are given the following information about a particular industry: 

Q^D = 6500 – 100P             Market demand

Q^S = 1200P                        Market supply

C(q) = 722 + q²/200           Firm total cost function

MC(q) = 2q/200                 Firm marginal cost function 

Assume that all firms are identical and that the market is characterized by the pure competition. 

1. Find the equilibrium price, the equilibrium quantity, the output supplied by the firm, and the profit of each firm. 

1. Would you expect to see entry into or exit from the industry in the long run? Explain. What effect will entry or exit have on market equilibrium? 

1. What is the lowest price at which each firm would sell its output in the long run? Is profit positive, negative, or zero at this price? Explain. 

1. What is the lowest price at which each firm would sell its output in the short run? Is profit positive, negative, or zero at this price? Explain.

Question 4:  

Suppose the demand and supply curves for good M are as follows: 

QD = 70 - 2P

QS = -10 + 2P where P is price per kg measured in dollars and Q is quantity measured in ‘000kgs 

a.   Sketch the demand and supply curves. 

b.   Determine the equilibrium price and quantity. 

c.   Calculate the value of the consumer and producer surplus at the equilibrium price. 

d.   Explain why governments may introduce a price ceiling. 

e.   Suppose a price ceiling of $15 were to be introduced. Calculate the consumer and producer surplus after its introduction. 

f.    Who has benefited from the introduction of the price ceiling?

Question 5: 

Firm 1 and firm 2 are automobile producers. Each has the option of producing either a big or a small car. The payoffs to each of the four possible combinations of choices are as given the following payoffs matrix. Each firm must make its choice without knowing what the other has chosen.

 a.       Does  either firm have a dominant strategy? 

b.      There are two Nash equilibrium for this game. Identify them.

Question 6 

Two major networks are competing for viewer ratings in the 8:00 -9:00pm and 9:00-10:00pm slots on a given weeknight. Each has two shows to fill this time period and is juggling its lineup. Each can choose to put its “bigger” show first or to place it second in the 9:00-10:00pm slot. The combination of decisions leads to the following “rating points” results: 

a.       Find the Nash equilibria for this game, assuming that both networks make their decisions at the same time. 

b.      If each network is risk - averse and uses a maximin strategy, what will be the resulting equilibrium? 

c.       What will be the equilibrium if Network 1 makes its selection first? If Network 2 goes first? 

d.      Suppose the network managers meet to coordinate schedules and Network 1 promises to schedule its big show first. Is this promise credible? What would be the likely outcome?

Question 7 

Bookworm and Easyread are both publishers of popular novels. 

a.   Assume that demand for Bookworm novels is elastic. 

-  Explain the meaning of the underlined term. 

- Outline one important factor that you feel has helped to determine the size of this own price elasticity. 

-  How would a fall in Bookworm’s price affect their total revenue? 

b.   When the price of Easyread novels increased from $20 to $23, Bookworm’s sales increased from 105,000 to 120,000 novels. Calculate the arc cross price elasticity. Are the two brands of novels close substitutes? Explain. 

c.   An increase in average weekly earnings from $290 to $310 caused Bookworm’s sales to increase from 120,000 to 130,000 novels. Calculate and interpret the income elasticity.

Question 8 

The following production function relates to a small firm that incurs fixed costs of $100 and labour costs of $10 per hour. 

Labour Hours (L)        Total Product (Q)

1                                  8

2                                  24

3                                  39

4                                  50

5                                  56

6                                  59

7                                  61

8                                  62

a.   For each of the output levels shown above calculate: 

• average and marginal product 

• total variable and total cost 

• average variable, average total and marginal cost 

b.   For the above data, over which output range do we observe diminishing returns?