Question 1

Suppose the market for pencils can be described by the quantity in thousands of units. Qd = 10 - P and Qs = 4 +P, where P is price in dollars and Q is the quantity in thousands of units.

(a)What is the equilibrium price and quantity in the free market?

(b)Suppose the government impose a tax of $1 per unit to raise government revenue. What price will the buyer pay? What price will the seller receive?

Question 2

(a)A firm has a fixed production cost of $5000 and a constant marginal cost of production of $500 per unit produced. What is the firm's total cost function? Average total cost? Average variable cost?

(b)A production process has a marginal rate of substitution (MRTS, LK) of 3, the wage rate is $2 and the rental rate of capital is $1. What must the firm do to minimize costs? Explain.

Question 3

A firm uses labour and capital in the production of good X. the firm's engineers have estimated its short run production function as: Q = 421 +0.612-0.0813, where Q represents output per hour and L represents unit of labour.

(a)Derive, algebraically, the firm's average product (AP) and marginal product (MP) functions.

(b)At what points diminishing MP and AP start.

(c)Graph the AP and MP curves explain the relationship between them.

Question 4

The "Woodcutters Limited" runs a tree-cutting service. Its TC is as follows: TC=200+4q+2q2, where the TC is total cost in dollars and q is the number of trees cut per day.

(a)If the firm is operating in a perfectly competitive market, and the market rate for cutting trees is $24 per tree, what is the profit maximising output rate?

(b)At this output, is the firm earning profit or making a loss?

(c)Show in a diagram the profit or loss situation for the firm.

(d)Should the firm continue production or temporarily shut-down in the short run?

Question 5

(a)Define the term producer surplus.

(b)What is the difference between economic profit and producer surplus?

(c)Explain the relationship among a competitive firm's short run supply curve. MC and AVC curves.

Question 6

The demand and supply curves for apples are given as follows: Q=220-5P and Q= -20+3P.

(a)Calculate the equilibrium price and quantity algebraically. Calculate the consumer surplus, producer and total surplus at the equilibrium price.