QUESTION-5: PART (a): The marginal cost (MC) of producing delux paints is given as MC = XXXXXXXXXX004Q The demand for delux paints is given as P = 50 – 0.006Q In the above equations, Q is the...

QUESTION-5:

PART (a):The marginal cost (MC) of producing delux paints is given as

MC = XXXXXXXXXX004Q

The demand for delux paints is given as

P = 50 – 0.006Q

In the above equations, Q is the quantity in terms of units of delux paints.

How much quantity of delux paints will be produced and at what price will it be sold?Show all your calculations.[2.5 Marks].

ANSWER:

PART (b):The marginal cost of educating a university graduate in computer science is $3,600 a year. Table below shows the marginal private benefits schedule for education. The marginal external benefits are 80 per cent of the marginal private benefits.The governmentsubsidisesthe universities so that theefficient number of students will enroll. The burden ofgovernment subsidies falls on the taxpayers.

Assume that the government subsidises universities, and sets the subsidy so that the efficient number of students enrol. What would be the efficient number of students that will enrol? What would be the subsidy per student? Discuss andshow all yourcalculations/workings.[2.5 Marks].

ANSWER:

QUESTION-6:The distribution of income among households in an economy is given in the table below.The government redistributes income by imposing a 20 per cent tax on 40 per cent of households with the highest market incomes, then distributing the revenues collected from the tax to the remaining 60 per cent of households as follows: 60% of the revenues collected is allocated to thelowest quintile, 30% of the revenues collected is allocated to thesecond quintile, and 10% of the revenues collected is allocated to thethird quintile.

For simplicity, assume that the total income is $100 so that the percentages given in the problem table above are the same as the dollars of income. Then the total income for all five percentile groups is $100.

Use above the table and information to answer the following questions.

PART (a):Calculate the distribution of income after taxes and benefits.[2.5 Marks].

ANSWER:In answering this question, justcomplete the table given below.

PART (b):If the cost of administering the redistribution scheme takes 40 per cent of the taxes collected, what is the distribution of income after taxes and benefits?[2.5 Marks].

ANSWER:In answering this question, justcomplete the table given below.

QUESTION-7:

PART (a):The costs incurred at Sharon’s Pizza Hut are given in the table below. Some of the values are not printed due to computer error. These missing values are denoted asA, B, C, DandEin the table below. Calculate these missing values. Show your calculations/workings.[3 Marks].

ANSWER:In answering this question,write the missing values forA, B, C, DandEcells in the spaces provided below. Show all your calculations/workings.

A =

B =

C =

D =

E =

PART (b):Lisa runs a cake shop. When she employs 1 person, she produces 4,000 cakes a week. When she hires a second worker, her total product doubles. Her total product doubles again when she hires a third worker. When she hires a fourth worker, her total product increases further but by only 60 per cent. When she hires a fifth worker, her total product increases still further but by only 30 per cent. Lisa pays $2,000 a week for equipment and $1000 a week to each worker she hires.

Using the above information calculatetotal product, average product, and marginal product. Over what range of workers doesLisaexperience increasing marginal returns? Over what range of workers doessheexperience decreasing marginal returns?[2 Marks].

ANSWER:In answering this question,complete the table given below and then provide a discussion.

QUESTION-8:

PART (a):In a perfectly competitive market, can a firm choose the price of the product it sells? Discuss.[2 Marks].

ANSWER:

PART (b):Rachel operates in a perfectly competitive market and produces sandwiches. The market price is $29 a batch. The table below contains the information on the costs of sandwiches. What quantity does Rachel produce? What are her total economic profits or losses in the short run?[3 Marks].

ANSWER:

QUESTION-9:

SUPERCIRCUS is the only company in the country that runs circus shows. The demand schedule for circus-show tickets and the cost schedule for circus shows per week are given in the table below.

Use the information given above to answer the following questions.

PART (a):Calculate SUPERCIRCUS’s profit-maximizing price,output in terms of circus shows, and total economic profit/loss if it charges a single price for all tickets.

[2.5 Marks].

ANSWER:In answering this question,complete the table given above and provide a discussion here (below).

PART (b):If SUPERCIRCUS is regulated to produce efficient level of output in terms of circus shows (usingmarginal cost pricing rule), what is the quantity of tickets sold and the price of a ticket? Discuss.Show all yourcalculations/workings.[2.5 Marks].

ANSWER:

QUESTION-10:

PART (a):The diagram below shows the demand (D) curve, marginal revenue (MR) curve, marginal cost (MC) curve and average total cost (ATC) curve of a PRESTIGEWATCH firm, a producer of wrist watches in monopolistic competition.

In the short run, what is the quantity thatPRESTIGEWATCH firmproduces, the price it charges, its economic profit, and excess capacity? In the long run, will new firms enter the market or will existing firms exit from the market, and will the price rise or fall? Explain your answer.[2.5 Marks].

(Note:no need to draw a new diagram. Instead, use this diagram above to answer the question).

ANSWER:

PART (b):Consider that MEGABEER and SUPERBEER are the only two firms that produce a special brand of beer. Both MEGABEER and SUPERBEER are trying to figure out how much of this brand of beer to produce. They have two strategies – ‘expand’ or ‘limit’ production. They know the following.

(i) If they both limit production to 10,000 liters a day, they will make the maximum attainable joint profit of $200,000 a day—$100,000 a day each.

(ii) If either firm produces 20,000 liters a day while the other produces 10,000 liters a day, the one that produces 20,000 liters will make an economic profit of $150,000 and the other one will incur an economic loss of $50,000.

(iii) If both increase production to 20,000 liters a day, each firm will make zero economic profit.

Construct a payoff matrix for the game that these firms, MEGABEER and SUPERBEER, must play. What is the equilibrium of this game? Discuss.[2.5 Marks].

ANSWER: