Question 1:
(a) What is the significance of an income elasticity of demand that is equal to 2?
(b) What is the significance of an income elasticity of demand that is equal to -0.25?
(c) Last year, 50,000 units of a product were purchased when its price was $2 per unit. This year, incomes have increased by 3% and as a result, 60,000 units of the product are purchased at a price of $3 per unit.
i. What is the price elasticity of demand for this product?
ii. What is the income elasticity of demand for this product?
iii. What is the price elasticity of supply for this product?
Question 2:
Complete the table below to show how much of A the consumer will buy each week at each of the two possible prices of A. Also, show how much B will be demanded when the price of A changes.
(a) Describe the law of diminishing marginal utility. On what assumptions is this law based?
(b) Assume that a consumer purchases a combination of products A and B. The MUA is 5 and the PA is $5. The MUB is 6 and the PB is $6. What should this consumer do to maximize utility?
(c) A consumer has an income of $24 to spend each day. The only two goods the consumer is inte in purchasing are goods A and B. The marginal-utility schedules for these two goods are shown in the table below. The price of B does not change and is $2. The marginal utility per dollar from B is also shown in the table. But the price of A varies as shown in the table. The marginal utility per dollar from when the price of A is $8 and $4 is shown in the following table.
|
Quantity
|
Good A
|
MU/$8
|
MU/$4
|
Good B
|
MU/$2
|
|
MU
|
MU
|
|
1
|
48
|
6
|
12
|
24
|
12
|
|
2
|
32
|
4
|
8
|
15
|
8
|
|
3
|
24
|
3
|
6
|
12
|
6
|
|
4
|
16
|
2
|
4
|
8
|
4
|
|
5
|
8
|
1
|
2
|
6
|
3
|
|
6
|
4
|
0.5
|
1
|
4
|
2
|
Quantity of A Quantity of B
Price of A demanded Price of B demanded
$8.00 $2.00
4.00 2.00
Question 3:
(a) What is the real cost of putting an unemployed labourer to work raking leaves or digging holes and refilling them during a serious depression? Explain.
(b) Explain what happens to AFC, AVC, ATC, and MC curves in these two situations:
(i) fixed cost increase;
(ii) variable cost increase.
(c) Jane quit her job at Telus where she earned $36,000 a year. She cashed in $40,000 in corporate bonds that earned 10% interest annually to buy a mini-bus. Jane has decided to buy the mini-bus and set up a commuter service between Maple Ridge and Vancouver. There are 300 people who will pay $800 a year each for the commuter service; $650 from each person goes for gas, maintenance, insurance, depreciation, etc.
i. What are Jane's total revenues?
ii. What are Jane's explicit costs?
iii. What is Jane's accounting profit?
iv. List two important implicit costs that Jane has not included.
v. What is Jane's pure economic profit (loss)? What actions should Jane take based on her pure economic profit (loss)?
Question 4
The market demand for a type of carpet produced by a monopolist known as KP-7 has been estimated as:
P = 40 - 0.25Q,
where P is price ($/yard) and Q is sales (hundreds of yards per month).
The firm's total cost function given as:
C = 100 - 20.0q + 2.0Q2
(i) Determine the equilibrium market output level and price.
(ii) Determine the profit (or loss) earned by the monopolist.
Question 5
(a) How does the "invisible hand" work in a competitive market system?
(b) Why does a perfectly competitive firm not charge a price above the market price? Why does it not charge a price below the market price?
(c) Suppose a bridge for automobiles was constructed across a river and all the costs associated with its construction have been paid. The amount of traffic is such that there are no foreseeable problems of overcrowding in the use of the bridge. Assume, also, that the extra cost associated with traffic crossing the bridge is for all practical purposes equal to zero. What toll should be charged to achieve the most efficient use of the bridge?
(d) Each of the following describes the situation currently faced by a perfectly competitive firm. In each situation, determine the firm's profit and whether the firm is maximizing profit. If the firm is not maximizing profit, determine how the firm must respond to increase its profit.