Questions

1 Use graphs to explain the following concepts:

1.1 Ben allocates his lunch budget between two goods, pizza and burritos. Illustrate Ben's optimal bundle on a graph with pizza on the horizontal axis. Suppose now that pizza is taxed by 20%, illustrate Ben's new optimal bundle on the same graph.

1.2 Income and substitution effects of an inferior good.

1.3 a fixed-proportion production function.

1.4 The long-run supply in an increasing-cost industry.

Prices

1.5 Why does an import tariff create a deadweight loss? Show it on a graph?

2. Good Y has a cross-price elasticity of demand with respect to good X of 0.5. 100 units of good Y are demanded when good X cost R50. A rise in the price of good X to R75 will lead to a change in demand for good Y of? (3)

3. The price of DVD's is R20 and CD's is R10. Philip has a budget of R100 to spend on the two goods. Suppose he has already bought one DVD and one CD. In addition there are 3 more DVD's and 5 more CD's that he really would like to buy: (5)

a. Given the above prices and income, draw his budget line with CD/s on the horizontal axis.

b. Considering what he already purchased, identify different bundles that he could choose (assume he cannot purchase fractional units).

4. Suppose Bill views butter and margarine as perfectly substitutable for each other. (3)

4.1 Draw a set of indifference curves that describe Bill's preferences for butter and margarine.

4.2 If butter costs R2 per package and margarine only R1, and Bill has a R20 budget to spend for the month, which butter-margarine market basket will be choose? Can you show your answer graphically?

5. Using the demand curve for bicycles, P = 400 - Q/250. Find the total revenue function and the level of output that maximises total revenue. (3)

6. A firm's output is 80 units, its marginal cost is R42, its average variable cost is also R42 and its average fixed cost is R10. The slope of its average variable cost at 80 units is a) positive, b) negative or c) zero. Motivate.(2)

7. The ACME Corporation determines that at current prices, demand for its computer chips has a price elasticity of -2 in the short run. The price elasticity for its disk drives is -1. (4)

7.1 If ACME decides to raise the price of both products by 10%, what will happen to its sales? To its sales revenue?

7.2 Can you tell from the available information which product will generate more revenue? If yes, which one? If not which additional information is necessary?

8. Does the following production functions exhibit decreasing, constant or increasing returns to scale? (4)
8.1 Q = 2K + 3L

8.2 Q = 0,5KL

8.3 Q = 3K2L

9. How does a change in the price of one input change a firm's long run expansion path? (3)

10. Suppose that a competitive firm's marginal cost of producing q is given by MC(q) = 3 + 2q. Assume market price of the product is R15: (6)

10.1 What level of output will the firm produce?

10.2 What is the firm's producer surplus?

10.3 If AVC = q + 3 and the firm's fixed cost is 12, determine the firm's profit or loss.

11. Suppose you are in charge of a toll bridge that costs essentially nothing to operate. The demand for bridge crossings Q is given by Q = 30 - 2P. (5)

11.1 Draw the demand curve for bridge crossings.

11.2 How many people would cross the bridge if there were no toll?

11.3 What is the loss of consumer surplus associated with a bridge toll of R5?

11.4 Find the loss in consumer surplus associated with the increase in the price of toll from R5 to R7.