Question 1

A firm's total cost function is given by the equation:

TC = 4000 + 10Q + 100Q ².

a.Writeanexpressionforeachofthefollowingcostconcepts:

i.TotalFixedCost (2marks)

ii.AverageFixedCost (2marks)

iii.TotalVariableCost (2marks)

iv.AverageVariableCost (2marks)

v.AverageTotalCost (2marks)

vi.MarginalCost (2marks)

b.CTRLCorporationproducesmechanicalkeyboardthataresoldtopersonalcomputer (PC) distributors. CTRL has estimated this productionfunction:

Q = 10L^0.6K^0.4,

whereQ=outputmeasuredinonethousandlots,L=labourmeasuredinpersonhours, andK=capitalmeasuredinmachinehours.CTRLcurrentlypaysawage of$10per hourandtherentalpriceforcapitaltobe$25perhour.

Determine the optimal capital-labour ratio.

(18marks)

TOTAL30MARKS

Question 2

a.ThemarketdemandandsupplyfunctionsforVCRmovierentalsare:

QD=10-0.04P and QS=3.8P+4.

Suppose that VCR movie rentals are taxed at $0.25 per unit. Calculate:

i.theequilibriumquantityandprice,pointelasticityofdemandinequilibriumand producer surplus withouttax. (12 marks)

ii.therevenuesgeneratedbythetax,thelossinproducersurplusandpercentage oftheburdenofthetaxfallsonproducers? (12 marks)

b.Determinethe"rule-of thumb"pricewhenthemonopolisthasamarginalcostof$25 and the price elasticity of demand of-3.0. (6 marks)

TOTAL 30MARKS

Question 3

a.Inacompetitivemarket,thefollowingsupplyanddemandequationsaregiven:

Supply: P = 5 + 0.36Q Demand: P=100-0.04Q,

wherePrepresentspriceperunitindollars,andQrepresentsrateofsalesinunitsper year.

i.Determinetheequilibriumprice,sales,elasticityattheequilibriumandtotal revenue. (12 marks)

ii.Determinethedeadweightlossthatwouldresultifthegovernmentwereto imposeapriceceilingof$40dollarsperunit. (12 marks)

b.Amonopolistfacesademandwithconstantelasticityof-3.Ithasaconstantmarginal costof$40perunitandsetapricetomaximizeprofit.

Ifmarginalcostshouldincreaseby35%,wouldthepricechangealsoriseby35%? (6marks)

TOTAL 30MARKS

Question 4

a.HattaEnterpriseshasdevelopedanewproduct.Themarketdemandforthisproduct is given asfollows:

QD = 240 - 4P

i.If the product is priced at $40, estimate the price elasticity of demand? Is demand elastic orinelastic? (10 marks)

ii.Iftheproductpriceisincreasedslightlyfrom$40,whatwillhappentothetotal expenditure on theproduct? (10 marks)

b.Thewheatmarketisperfectlycompetitiveandthemarketsupplyanddemandcurves are given by the followingequations:

QD=20,000,000-4,000,000P

QS=7,000,000+2,500,000P,

whereQDandQSarequantitydemandedandquantitysuppliedmeasuredinkilogram (kg), and P = price perkg.

i.Determineconsumersurplusattheequilibriumpriceandquantity. (10 marks)

ii.Assumethatthegovernmenthasimposedapricefloorat$2.25perkgand agrees to buy any resulting excesssupply.

How many quantity (kg) of wheat will the government be forced to buy? Determine consumer surplus with the pricefloor. (10marks)

TOTAL40MARKS