Demo Lecture Questions Vm081vn

MICROECONOMICS

Topic Two:Demand,Supply and Elasticity

1.(a) Supposethedemandand supplycurvesforgoodXareasfollows:QD = 200-5P

QS = -25+4PwhereP isindollarsperunitofX.

(i)Sketchthedemandandsupplycurves.

(ii)Whatdoes"ceterisparibus"meaninrelationtothedemandcurve above?

(iii)Inthisexample,whatistheequilibriumpriceofX,quantitysuppliedand demanded,totalpurchasers'expenditureonXandtotal revenuereceivedbysellers?

(b) Atalaterperiodit is foundthatthesupplyfunctionforXis:QS = -7+4P

(i)Whatisthenewequilibriumpriceandwhatquantitiesareboughtand

soldin equilibrium?

(ii)Doesthefallintheequilibriumprice,whichfollowsthisshiftofthesupplycurve, shiftthedemandcurveandhenceraisethe consumptionofX?

2.Supposethedemandand supplycurvesforgoodYareasfollows:QD =600 -7.5P

QS =-100 +10PwhereP ispriceperkgmeasuredindollars

andQisquantitymeasuredin ‘000kgs

(a) SketchthedemandandsupplycurvesforgoodY.(b) Determinetheequilibriumpriceandquantity.

(c) If thepriceofasubstitutegoodforYweretoincrease,outlinetheeffectthatthiswould haveonthedemandandsupplycurvesyouhavedrawn.What effectwouldit haveon theequilibriumpriceandquantity?

(d) Assumethat at thesame time as (c)thepriceoflabourusedtoproducegoodY increased.Outlinethecombinedeffectthatthesewouldhaveonthedemandandsupplycurvesyouhavedrawn.What effectwouldthishaveontheequilibriumprice andquantity?

3.Supposethedemandand supplycurvesforgoodZ areasfollows:QD =15-1.5P

QS = 0+1.0PwhereP isthepriceperlitremeasuredindollars

andQisthequantitymeasuredin ‘00litres

(a)Sketchthedemandandsupplycurves.

(b)Determinetheequilibriumpriceandquantity.

(c)Explainthemeaningofaconsumersurplus,and calculatethevalueat the equilibrium price.

(d)Explainthemeaningofaproducersurplus,andcalculatethevalue at the equilibrium price.

4.AssumethenumberofbicyclesdemandedandsuppliedinVictoria,at variousprices,is as follows:

Priceof BicycleQuantityDemandedQuantitySupplied

($) peryear(‘000) peryear(‘000)

(a) Sketchthedemandandsupplycurves.Fromyoursketchdeterminethe equilibrium priceandquantity.

(b) Calculatethearcelasticityofdemandbetweenthepricesof$160and$200,andinterpretyouranswer.Isthedemand forbicycleselasticorinelasticoverthispricerange?

(c) Calculatethearcelasticityofsupplybetweenthesesametwopricesandinterpretyour answer.

5.Explainpreciselywhyitisnotpossibleto estimatethemagnitudeofanownprice elasticityofdemand,simplybylookingat theslopeofthedemandcurve.

6.ThelocalmovierentalstorehadbeenhiringoutDVDsat $4each.On average,

1800DVDswerehiredperweek.Inresponsetoanincreasein runningcosts,thestoreincreasedtheir DVDhireto$5,resultinginthetypicalnumberofDVDs hiredperweek fallingto1250.

(a)Calculateandinterpretthearcownpriceelasticityofdemandforthisstore’sDVD hire.

(b)Explainwhythestore’srevenuefromDVDrentalshasfallendespiteincreasingtheirprice.

7.“Demand curvesarealwaysnegativelysloped.”Discuss.

8.Statewhether youwouldexpectdemandforthefollowingproductstobe relativelyelasticorinelastic.Ineachcaseoutlinethefactorslikelytobeimportantindetermining theproduct'spriceelasticity.

(a)cigarettes

(b) awell-knownbrandofsoap

9.Explainthelikelycrosselasticityofdemandbetweenthefollowingproducts:(a) riceand noodles

(b) electricityand electricstoves

(c) paperbags, aluminiumfoil,plasticwrap

10.Bookwormand Easyread arebothpublishersofpopularnovels.(a) AssumethatdemandforBookwormnovelsiselastic.

(i)Explainthemeaningoftheunderlinedterm.

(ii)Outlineoneimportantfactorthatyoufeelhashelpedtodeterminethesizeofthis ownpriceelasticity.

(iii)HowwouldafallinBookworm’spriceaffecttheirtotal revenue?

(b) WhenthepriceofEasyreadnovelsincreasedfrom$20to$23,Bookworm’ssalesincreased from105,000to120,000novels.Calculatethearccrossprice elasticity.Arethetwobrands ofnovelsclosesubstitutes?Explain.

(c) Anincreasein averageweeklyearningsfrom$290to$310causedBookworm’s salestoincrease from120,000to130,000novels.Calculateandinterprettheincomeelasticity.

(d) Whentheaveragepriceofwomen’smagazinesincreasedby6%,thedemandfornovels increasedby2%permonth.Dothesefiguressuggestthatnovelsandwomen’smagazinesbelongtothesamemarket? Explain.

TopicThree:Applicationsof Demandand Supply

1.Supposethedemandand supplycurvesforgoodMareasfollows:QD = 70 - 2P

QS =-10 + 2PwhereP ispriceperkgmeasuredindollars

andQisquantitymeasuredin ‘000kgs

(a)Sketchthedemandandsupplycurves.

(b)Determinetheequilibriumpriceandquantity.

(c)Calculatethevalueoftheconsumerandproducer surplusat the equilibrium price.

(d)Explainwhygovernmentsmayintroduceapriceceiling

(e)Supposeapriceceilingof$15weretobeintroduced.Calculatethe consumerand producersurplusafteritsintroduction.

(f)Whohasbenefitedfromtheintroductionofthepriceceiling?

2.Supposethedemandand supplycurvesforgoodWareas follows:QD =100 - 2P

QS =-20 + 4Pwhere P ispriceperkgmeasuredindollars

andQisquantitymeasuredin ‘00kgs

(a)Sketchthedemandandsupplycurves.

(b)Determinetheequilibriumpriceandquantity.

(c)Calculatethevalueoftheconsumerandproducer surplusat the equilibrium price.

(d)Explainwhygovernmentsmayintroduceapricefloor.

(e)Supposeapricefloorof $30weretobeintroduced.Calculatethe consumer andproducersurplusafteritsintroduction.

(f)Whohasbenefitedfromtheintroductionofthepricefloor?

3.Withtheintroductionofaunittax,tobepaidbyproducers,thesupplycurveshiftsupwards. Explainwhy,whenthesametaxislevieddirectlyonconsumers,thedemandcurveshifts downwards.

4.Supposethe government is consideringtheimpositionofaunittax tobeleviedon beerproducers. Theviewofcompaniesisthatthisisjustonemorecostforthemtobear. Consumers disagreesayingthatthecompaniespassthetaxesontothemintermsofhigherprices.

(a)Giventhatthedemandforbeerisinelastic, whichviewpointis correct?(b) Wouldtheburdenofthe taxbeanydifferentifthegovernmentleviedthe

taxonconsumers(overthecounter)ratherthanonbeerproducers?

Explain youranswersfullyandusediagramsinyouranalysis.

TopicFour: Productionand Costs

1.Explainthedifferencebetweenexplicit andimplicit costs,givingexamples.

2.“Economicprofitcanneverbegreaterthanaccountingprofit.”

Discussthisstatement,makingsureyouranswerincludesan explanationofhowthetwo measuresofprofit arecalculated.

3.Bill ownandrunsacomputershop.Thefollowingdataareabouthisfinancialmattersinhis firstyearofbusiness:

$

190,000Total revenue

65,000SalarythatBill couldhaveearnedifhehadworkedforanotherfirm

90,000Loan fromabank

9,000Interestpaidtothebank

70,000Purchaseofdurable assetswithhisownmoney

4,200Dividendthathecouldhaveearnedbyinvestinghis$70,000inshares

14,000Depreciationofthedurableassets

30,000Salaryforanassistant

67,000Rawmaterialspurchasedandused

Usingtherelevantfigures(somefigure/sis/areirrelevant),calculateBill’s accountingprofit and economicprofit forhisfirstyearofbusiness.Showyour calculations.

4.Thetablebelowshowsthetotalproductionofa firm asthequantityoflabour employed increases,with all otherfactorsofproductionremainingconstant.

(a)Calculatethemarginalproduct (MPL)andtheaverageproductoflabour

(APL).

(b)Definethelawofdiminishingreturns. Isthemarginalproduct calculatedinpart(a)consistentwiththelawofdiminishingreturns?

(c)Drawasketchgraphshowingtherelationshipbetweenthethreecurves:

totalproduct,marginalproduct, andaverageproduct.

5.Giventhefollowingdatafora firm:

QTFC ($)TVC ($)

(a)Foreachofthelevelsof outputshownabove,calculatethefollowing:

• total cost(TC)

• averagefixedcost(AFC)

• averagevariablecost(AVC)

• averagetotal cost(ATC)

• marginalcost(MC).

(b)WhyisMCthesamewhencomputedfromeither TVC orfromTC? (c) SketchagraphshowingAVC,ATC andMC.

(d)Explainhowwecandeterminethevalueof AFC fromthis graph,withoutsketchingtheAFC curve.

(e)ExplainwhytheMC curvecutsAVCandATC attheirminimumpoints.(f) IfTFC were$300rather than$200,explainhowthiswouldaffectthe

AFC,AVC,ATC,andMC curves.

6.Thefollowingproductionfunctionrelatestoasmall firmthatincursfixedcostsof$100and labourcostsof$10perhour.

LabourHours (L)TotalProduct(Q)

18

224

339

450

556

659

761

862

(a)Foreachoftheoutputlevelsshownabovecalculate:

•averageandmarginalproduct

•totalvariableandtotal cost

•averagevariable,averagetotal andmarginalcost

(b)Explaintherelationshipbetween

•averageproduct andaveragevariablecost

•marginalproduct andmarginalcost

(c)Fortheabovedata,over whichoutputrangedoweobservediminishingreturns?

7.Asa firm expandsitsscaleofoutput,it enjoyseconomiesofscale.Hencethelargerisafirm’s scaleof output,thelowerwillbeitslongrun average cost.Discuss.

8.Thelongrun costfunctionfora firmisgivenbelow.

Output(Q) Total Cost (LRTC)

(a)Usingthecostandoutputfiguresgivenabove,calculatethelongrun averagecost (LRAC).

(b)Overwhat rangeofoutputwouldthefirm experienceeconomiesofscale?(c) Which output(s)representminimumefficientscale (MES)forthisfirm?

(Makesureyouranswerincludesadefinitionoftheunderlinedterm.)

9.Whyisit thatinsomemarketslargeandsmall firmscan coexistandareequallyviable? Discuss withreferencetotheconceptof minimumefficientscale.

10.Discusshoweconomiesofscalearerelatedtothestructureof amarket.

TopicFive: PerfectCompetition

1.Usethefigure below,representingaperfectlycompetitivefirm,to completethe followingstatements.

(a)Ifpriceis$7,thefirmshouldproduce _units.

(b)Since averagetotal cost ofthisprofit maximisingoutput is$

total costis$ .

(c)Thereforethefirmmakesatotalprofitof$ . (d)Pricethenfallsto$3.Thefirmwillproduceapproximately

units.

(e)Sinceaveragetotal costat thisoutputis$ , total revenueless total costis$ .

(f)Totalvariablecostis$_; thusthefirm’stotal revenuecoversall variablecost,leavingapproximately$ to applyto fixedcosts.

(g)Ifpricefallsto$2thefirmwillproduce units. Why?

$

MC

8ATC

7•

AVC

6

5

••

4

•

3•

••

2•

1

100300500700900

output

2.Asmallscalegrowersuppliestomatoestolocal fruitshops.Fixedcostsfacingthe grower are$100, and thevariable costdataisgiveninthetablebelow:

Output(Q)TotalVariableCost(TVC)

50100

60110

70130

80160

90200

100250

110310

120380

(a)Fortheoutputandcostfiguresgivenabove,calculatetheaveragevariablecost(AVC) andmarginalcost(MC).

(b)Assumethegroweroperatesunderperfectlycompetitiveconditions,andthepricehereceivesiscurrently$6perkilogram.Determinetheoutputlevelthatwouldmaximisethegrower’sprofits.What areprofitsat thisoutputlevel?

(c)If,dueto aninfluxofnewcompetition,thepriceoftomatoesfallsto$3perkilogram, explainwhetherthegrowershouldcontinuetoproduceintheshortrun andinthelongrun.

3.Usingaperfectlycompetitivefirmoperatingintheshortrun asabasisforyourdiagram,show and explainthepricesassociatedwiththebreakevenandshutdownpoints,andexplaintheoutputrangesoverwhichthefirmproducestomakeapositiveeconomicprofit andtominimise economiclosses.

4.Aperfectlycompetitivefirmhasthefollowingcostdata:

10289

(a)Fortheoutputandcostfiguresgivenabove,calculatetheaveragetotal cost(ATC), averagevariablecost(AVC)andmarginalcost(MC).

(b)Foreachofthefollowingpricesdeterminethisfirm’sprofit-maximising(orloss-minimising)outputperday,intheshortrun, andcalculatethedailyprofitorloss.

(i)$13.20 (ii)$16.50 (iii)$39.00

(c)Drawthisfirm’sshortrunsupplycurve,indicatingtherelevantnumericalvaluesforprice andoutput.

(d)Supposethisfirm’scostsarethesameasthoseof otherfirmsintheperfectlycompetitivemarket. Indicate,togetherwithabriefexplanation,thenumericalvalueofthecriticalpricelevelbelowwhichthisfirmwillleavethemarketinthelongrun,and abovewhichnewfirmswill enterthatmarketinthelongrun.

5.AperfectlycompetitivefirmproducingXhasthefollowingmonthlycostdata

(Q=totaloutput,MC=marginalcost):

(a)Foreachofthefollowingpricesdeterminethisfirm’soptimaloutputpermonthintheshortrun.Showyourcalculations.

(i)$30.50 (ii)$32.40 (iii)$42.00

(b)SupposethemarketpriceofXis$49.00.Calculatethetotal fixedcostthatwould resultinzero economicprofit forthisfirm.Showyour calculations.

(c)Supposethereare400firmsintheperfectlycompetitivemarket forX,eachwiththesamemonthlycostdataastheabovefirm.Drawthismarket’sshortrunsupplycurve, indicatingthespecificpricesandquantitiesofoutput,ontheassumptionthatthecost dataarenotaffectedbythesummationofthefirms’outputs.

(d)SupposethemarketpriceofXis$60.00andthetotal fixedcostofthe abovefirmis $140permonth.

(i)Initially,howwouldthisfirm reacttothesituationinthelongrun?

Explainwiththeaidof yourcalculations.

(ii)Withtheaidofdiagrams(sketcheswillbesufficient–thereisnoneedtoplot theexactdata)showingboththefirmandthemarket, explainhowthismarket adjuststolongrun equilibrium.

6.Inlong-run equilibrium,P =AC =MC.Ofwhatsignificancefortheallocationof resourcesis theequalityofMC and AC? Ofwhatsignificance forthe allocationofresourcesistheequalityofP andMC?

TopicSix:Monopoly

1.Discussthemajorbarriersto entryintoamarket. Explainhoweachbarrier can fostermonopoly. Which barriers,ifany,doyoufeelgiverisetomonopolypowerthatissociallyjustifiable? (FromJacksonReviewquestion1,page 339)

2.A firmhasthefollowingdemandscheduleforitsproduct:Price ($)Quantity

550

501

452

403

354

305

256

207

Derivethemarginalrevenueschedule.Whydoes marginalrevenuefall fasterthanprice?

3.Amonopolyhasthefollowingdemandandcostdataasshownbelow

Assumefixedcostsof$300.

P($)Q (units)TVC ($)

5000

4501230

4002440

3503690

3004990

25051410

20061960

15072710

10083710

(a)Fortheoutputandcostfiguresgivenabove,calculatetheaveragevariablecost

(AVC), averagetotal cost (ATC)andmarginalcost (MC).

(b)Forthepriceandquantityfiguresgivenabove,calculatetotal revenue(TR)andmarginal revenue(MR).

(c)Basedonthefiguresabove,determinetheshortrunprofitmaximising(lossminimising)outputandtotalprofitorlossforthismonopoly.

(d)Supposethe government weretoimposeapriceceilingat theallocativeefficientprice. Whatisthevalueofthispriceand resultinglevelofoutput?

(e)Wouldthemonopolistremaininbusinessinthelongrunifthepriceceiling remainedin place? Explain youranswer.

(f)Defineproductiveefficiency.Atwhichoutputlevelwouldthisfirm achieveproductive efficiency?

4.Tiger’sMineralSprings, amonopoly,facesthefollowingdemandscheduleforbottledmineral water:

QD =20-2P

whereP isthepriceperbottle measuredindollars, and

Qisthequantitymeasuredin ‘000bottles

Tiger’smarginalcostis$4abottle-ie, marginalcostis constantforthisfirm.Assume fixed costsof$4000.

(a)Sketchthedemand,marginalrevenue(MR), averagevariable cost(AVC)

andmarginalcost(MC)curvesforthefirm.

(b)Basedonyourdiagram,determineTiger’sprofit-maximisingoutputandprice, andtheassociatedlevelofprofitorloss.

5.Amonopolyhasthefollowingmonthlydemandand costdata.

(Q=outputorquantitydemanded,P =price,MC=marginalcost):

P($)Q (units)MC ($)

(a)Whatisthismonopoly’sprofitmaximisingoutputandpriceintheshortrun? Explain withtheaidof yourcalculations.

(b)Supposethetotal fixedcostofthismonopolywas$500permonth.Whatwouldbethemonthlyprofitorlossofthismonopolyat theoutputdeterminedat (a)? Showyourcalculations.

(c)Supposethe government weretoimposeaprice ceilingonthismonopolyat the allocativelyefficientprice.Determinethevalueofthispriceandtheassociatedlevelofoutputandprofit (orloss)forthefirm.

6.Withtheaidofadiagram,explainhowthemisallocationofresourcesthat resultsfrom monopolycanbeeliminatedbymeansofpriceregulation.

TopicSeven:MonopolisticCompetitionand Oligopoly

1.Whatis (are)themaindifference(s)betweenamonopolisticallycompetitivemarket andamonopolymarket?

2.Explainhowthepresenceofproductdifferentiationinfluencesthewayinwhichfirmsinamonopolisticallycompetitivemarketsettheirprices,ascomparedto firmsoperatinginaperfectlycompetitivemarket.

3.Explainwhyfirmsinbothperfectlycompetitiveandmonopolisticallycompetitivemarkets earnzero economicprofitsin thelongrun.Contrastthelongrunadjustmentprocessforthetwomarketstructures.

4.Firmsinmonopolisticallycompetitivemarketsprovideconsumerswiththebenefitofproductvariety.Discuss.

5.What roledoesadvertisingplayinoligopolisticandmonopolisticallycompetitivemarkets? Isadvertisingsociallydesirable? Discuss.

6.Mutualinterdependenceisa characteristicoftheoligopolymarketstructure,butnottheotherthreemarketstructures.Explain.

7.SupposeChill andFreezearetheonlytwo firmsintheairconditioningmarket.

Each firmis consideringtwopossiblepricingstrategies– eitherP =$700orP=$1500–fortheir goods.Thefollowingpayoff matrix givestheprofitoutcomes(in$m).

Freeze

Chill

(a)Whatpricewill eachofthefirmschooseiftheymaketheirdecisions independently,followingamaximinstrategy? Explainhowyoudeterminedyouranswer.

(b)Whatismeantbythetermcollusion? Ingeneral,whatistheincentivefor firmsin an oligopolymarketto collude? Explain.

(c)Basedonthepayoffsfor Chill andFreeze(shownabove)andyoursolutionin (a), couldthesefirmsbenefitbycolluding?Explain.

(d)Discussfactorsthatdeter firmsoperatingin anoligopolymarketstructurefrom colluding,andexplainhowtheyactasadeterrent.

8.SupposeAlphaandDeltaaretheonlytwofirmsin thespeedboatmarket.Each firmplanstoput onlyonemodelontothemarket. Theyareconsideringtwopossiblechoices–astandard modelat P =$50,000oraluxurymodelat

P=$80,000.Thefollowingpayoffmatrix givestheprofitoutcomes(in$m).

Delta

Alpha

(a)Whatpricewill eachofthefirmschooseiftheymaketheirdecisions independently,followingamaximinstrategy? Explainhowyoudeterminedyouranswer.

(b)BasedonthepayoffsforAlphaandDelta(shownabove)andyoursolutionin (a), couldthesefirmsbenefitbycolluding?Explain.

9Explainwhyfirmsmayprefernon-pricecompetitiontopricecompetition.

10. Inthediagrambelow,bothdemandcurvesarerelevanttooneparticularfirmin anoligopolistocmarketstructure.Onecurveindicatesthequantityofitsproduct demandedat eachpricelevel whenrivalfirmsdonotrespondtoprice changesinitiatedbythisfirm.Theother curverepresentsthefirm’sdemandcurvedrawnupontheassumptionthat rivaloligopolistsdo respondtoprice changesinitiatedbythisfirm.

price

D2

D1quantity

(a) Explainwhichcurveiswhichandjustifyyourchoice.

(b) Underwhat assumptionswoulda “kinked”demandcurveresultfromthediagram above?

(c) Usingthekinkeddemandcurve, explainhowa firm’sprofitmaximisingprice and outputmaynotchange evenwhenthefirm experiencesanincreasein costs.

TopicEight:MarketFailure

1.(a) Explainthemeaningofexternaleconomies(orbenefits)andexternaldiseconomies (orcosts),givingan exampleofeach.

(b) Whydoesthepresenceofan externaleconomyordiseconomyleadtomarket failure? Explain.

(c) Thefollowingdiagramshowsthedemandandsupplycurvesforagood.

DemandcurveDisbasedonmarginalprivatebenefitonly,whiledemandcurveDais basedonmarginalsocialbenefit.

P

S

Da

D

Q

Onthebasisofthediagramandinformationabove,draw adiagramtoindicate

(i)thesociallyoptimaloutputandpriceofthegood,and

(ii) society’slossifthereisnogovernmentinterventioninthedemandorsupplyofthisgood.

(d)ThefollowingdiagramshowsthedemandandsupplycurvesforgoodZ. Thesupplycurveis basedonlyonmarginalprivate costs.But eachunitof Z producedincursan externalcostof$4intheformofpollution.

P($)

12

11

10

9

8

7

6

5

4

3

45678910

MillionunitsofZpermonth

(d) Onthebasisofthediagramandinformationabove,draw asketchdiagramtoindicate

(i) thesociallyoptimaloutputandpriceof Z whenthemarginalsocialcostsaretakenintoaccountbysuppliers;and

(ii) society’slossduetotheexternalcostsifproductionofZisentirelydeterminedbytheprivatemarket.Alsocalculate theamountofthisloss;showyourcalculations.

(e) Discussmeasuresthegovernmentcouldtaketoeliminatethelosstosocietyshown inpart (d).

2.Supposethedemandand supplycurvesforleather shoesareas follows:QD = 60– 5P

QS =0+10P

whereP ispricemeasuredindollars,and

Qisquantitymeasuredin'000s ofpairs

(a) Drawthedemandandsupplycurvesforleathershoesanddeterminethe equilibrium priceandquantity.

(b) Supposetheproductionoftheleathershoesgeneratesanexternal cost (or external diseconomy)dueto chemicalpollution.Withtheaidofademandandsupplydiagram, explainhowsocietysuffersalossduetothisexternalcost.

(c) Withtheaidofadiagram,explainhowtheimpositionofataxonproducerscouldbring aboutthesociallyoptimallevelofoutputinthemarket.Will producersbearthefull burden ofthistax? Explain.

3.“Educationisnotapublicgood.” Discuss.

4.Explainwhythereislittleincentiveforfirmstobecomeinvolvedinthesupplyofpublicgoods.