Question # 5:

Part A(2 Marks)

a.Draw and explain a production possibilities frontier for an economy that produces cheese and milk. What happens to this frontier if a disease kills half of the economy's cows? (1 Mark)

b.Use a production possibilities frontier to describe the idea of "efficiency." (1 Mark)

Part B(4 marks)

Income of a person is Rs.8000 and he uses 60 units of a commodity.

1.Calculate income elasticity of demand when the income increased by 30% and consumption of the good is decline by 50%. (1 Mark)

Also calculate

2.New income (1 Mark)

3.New consumption (1 Mark)

4.Nature of good (1 Mark)

Part C(5 Marks)

a.Draw the cost curves for a typical firm. Explain how a competitive firm chooses the level of output that maximizes profit. At that level of output, show on your graph the firm's total revenue and total cost. (2 Marks)

b.Draw the demand curve, marginal revenue curve, average total cost curve, and marginal-cost curve for a monopolist. Show the profit-maximizing level of output, the profit-maximizing price, and the amount of profit. (2 Marks)

c.Why the demand curve for a firm operating in monopolistic competition is more elastic compared to the firm operating as a monopoly. (1 Mark)