1: SHORT QUESTIONS (7*8=56 points)

1. Consider the following cost function:

TC=720+3q+12q⁶

where TC is total cost of production and q is quantity produced. Please identify the average fixed cost, the average variable cost and the marginal cost.

2. Consider the following cost function:

TC=720+q

where TC is total cost of production and q is quantity produced.

Assume the price to be $25.

What is the "Break-even quantity" for the firm? What does this number mean?

3. You are indifferent (derive the same utility) between the following investments:

1. An investment with a sure return of 50 $
2. An investment with an expected outcome of 100$ and standard deviation of 80$
3. An investment with an expected outcome of 300$ and standard deviation of 160$

How does your risk premium change as you take on more risk?

4. Please create your own numerical example and show the relationship between opportunity costs and comparative advantage in trade. Is it ever possible for neither party to have comparative advantage? What would the opportunity costs look like?

5. When is income elasticity of demand negative? Explain with an example.

6. The effect of increasing minimum wage on the labor market (unemployment and job loss numbers) are largely dependent on the nature of the supply and demand in the labor market, as well as the nature of elasticities in the product market (of the product that the firm produces). Explain when an increase in minimum wage will have no impact on employment.

7. We have seen that the relative price elasticities of supply and demand determine how a tax imposed on a producer is shared between the consumer and the producer. Explain clearly when all of this tax can be passed on to the consumer?