Download revision microeconomic and more Exercises Economics in PDF only on Docsity!
REVISION MICROECONOMICS
Q1. What are the fundamental problems of economics?
Q2. What is the difference between microeconomics and macroeconomics? Provide examples.
Q3. What are economic decisions related to scarcity?
Q4. Define opportunity cost and provide an example.
Q5. What does thinking at the margin mean?
Q6. What is a circular flow of income model and what it is used for?
Q7. What is a production possibilities Frontier?
Q8. What are the key features of PPF?
Q9. Explain the law of demand.
Q10. What is the factor causing the movement along the demand curve?
Q11. Explain the law of supply.
Q12. What is the factor causing the change in the demand for a product?
Q13. What is the factor causing the movement along the supply curve?
Q14. What is the factor causing the change in the supply of a product?
Q15. The effects of an in the price of inputs on the market outcomes.
Q16. Provide the changes to the market equilibrium price and quantity.
Demand Supply Equilibrium Price Equilibrium Quantity
Increase Unchanged
Decrease Unchanged
Unchanged Increase
Unchanged Decrease
Increase Increase
Decrease Decrease
Increase Decreases
Decrease Increase
Q17.
Use the following equations to answer the following questions. Q D
= 200 – 5P; Q
S
= 100 + 5P
i) What is the equilibrium price?
ii) What is the equilibrium quantity?
iii) What is the market situation if the product is sold at $15 per unit? Explain the
market reaction and adjustment.
iv) What is the market situation if the product is sold at $5 per unit? Explain the market
reaction and adjustment.
v) If price floor 15$, Price ceiling 12$, what happens on market.
vi) Find CS, PS, Total PS
vii) The government imposes tax 5$/unit for seller.
Find new equilibrium point.
Find new CS, PS, Total PS
Find P B
, P
S
, Total tax revenue, deadweight loss
- Find the burden of the tax for seller/ buyer
Q18. What is the price elasticity of demand?
Q19. What is the Cross elasticity of demand (CED)?
Q20. What is the income elasticity of demand (IED)?
Q21. James bought 5 sandwiches when the price was $5 per sandwich. When the price of a sandwich
fell to $2 per sandwich, he bought 10 sandwiches. Calculate James’s PED. Use the mid-point method.
Q22.
Refer to the above diagram.
i) At what price and quantity, the price elasticity is equal to one
ii) What is the maximum revenue?
iii) At what price range the demand is elastic?
iv) At what price range the demand is inelastic?
v) At what price and quantity, the PED is infinity?
vi) At what price and quantity, the PED is zero?
Q23.
Suppose a consumer has $20 with him which he wants to spend on two goods (good X and good Y).
The price of each unit of X is $5 and Y is $2.
Q TU
X
TU
Y
i) Calculate the marginal utility of goods X and Y.
ii) Calculate the marginal utility per dollar for goods X and Y.
iii) What is the optimal consumption bundle?
iv) What is the maximum utility that can be attained by the consumer?
Q26. What are the microeconomic reasons for the government to intervene in the economy? What are
the related microeconomic objectives for the intervention?
Q27.
Use the following equations to answer the following questions. QD = 400 – 5P QS = 100 + 5P
i) What is the equilibrium price?
ii) What is the equilibrium quantity?
iii) Explain the changes to the market outcomes if the government sets a price ceiling of $
per unit.
iv) Explain the changes to the market outcomes if the government sets a price ceiling of $
per unit.
Q28. Explain the impact of indirect tax on the market participants and outcomes.
Q29.
Suppose Country A with the given resources and technology can produce food and cars. Country A
production possibilities are given in the table below.
a) Use the information given in the table to construct the PPF for country A.
b) Can Country A produce 200 tons of food and 30 cars? Explain
c) Can Country A produce 300 tons of food and 10 cars? Explain
d) Can Country A produce 100 tons of food and 23 cars? Explain
e) Suppose country A is currently producing at production possibility C and it decides to
increase the food production by another 100 tons. Explain the outcomes of this decision.
f) Describe the shape of the PPF.
Q
The table below provides the production possibilities of countries A and B.
a) Calculate Country A’s marginal opportunity cost of producing pants and shirts.
b) Calculate Country B’s marginal opportunity cost of producing pants and shirts.
c) Explain the term ‘comparative advantage’.
d) Which country has the comparative advantage of producing pants and shirts?
e) Provide the trade price range beneficial to both countries.
f) Suppose both countries decide to be self-sufficient and allocate resources equally for
both production. What is the production and consumption possibility of the two
countries?
g) Suppose both countries specialize in producing the good it has a comparative
advantage, how much can they produce?
Suppose the terms of trade is 14 shirts for 14 pants. What is the consumption bundle for both
countries after trade? Explain how these countries gain from trade.
Q31. Given the supply and demand curves for Pepsi as follows:
P = 400 – 2Q; P = 100 + Q
( P: $/bottle; Q: millions of bottles)
a. Determine the equilibrium price and quantity, graph the Demand and Supply curve.
b. Calculate Consumer suplus and Producer suplus at the equilibrium.
c. Suppose there is a change in consumer preferences from Pepsi to Coca (Coca and Pepsi are
substitutes). Explain how this change leads to the Pepsi market by Supply – Demand model.
d. If the government imposes a tax $10/product, the new supply curve: P = 600 + Q/2 + 10. Calculate
Q, Pb, Ps, the incidence of tax, Tax revenue, DWL.
Q36. A firm operating in a perfectly competitive market has a total cost function:
TC = Q
2
/10 + 200 Q + 200,000 (P: $/product; Q: product)
a. Write an equation representing the firm’s supply curve.
b. If the market price is $600/product, How many products will the firm produce to maximize profit?
Calculate that profit?
c. If the market price is $300/product, How many products will the firm produce to maximize profit?
Calculate that profit? At what price does the firm shut down?
Q37. A perfectly competitive firm has an average total cost function:
ATC = Q + 7 + 49/Q (USD)
a. Write an equation representing the firm's supply curve?
b. How many units will the firm produce to maximize profit if the market price is $27/unit? Calculate
that profit?
b. Find the firm's closing price (shutdown).
Q38. Suppose the average total cost function of a perfectly competitive firm in the footwear industry
is as follows: ATC = Q + 2 + 169/Q (Price: USD/pair of shoes; Q: thousands of pairs of shoes).
a. How many pairs of shoes will the firm produce to maximize profit if the market price is $32/pair
of shoes? Calculate that maximize profit?
b. When the market price is $14/pair, should the firm continue production or shutdown? Explain?
Q39. A perfectly competitive firm has a total cost function:
TC = Q
2
+ 4Q + 36 (USD)
a. Find the equation for marginal cost MC, total variable cost TVC, average variable cost AVC,
average total cost (ATC).
b. If the firm sells goods in the market at P = $26. To maximize profit, How many outputs should the
firm produce? Calculate that total profit?
Q40. A monopoly firm has
variable cost: VC = 0.5Q
2
+ 2Q
Fixed cost: FC = 47.
Demand: P = 52 – 2Q
a. Find the price and quantity that maximize the company’s profit. Caculate that profit
b. Find the price and quantity that would maximize social welfare.
c. Calculate the deadweight loss from monopoly.
Q41. A monopoly firm has a demand curve Q = 30 – 2.5P and cost functions MC = 1.2Q + 4, TFC =
a. Find the price and quantity that maximize the company’s profit. Caculate that profit
b. Find the price and quantity that would maximize social welfare.
c. Calculate the deadweight loss from monopoly.
Q42. Consider the market for minivans. For each of the events listed here, identify which of the
determinants of demand or supply are affected. Also indicate whether demand or supply increases or
decreases. Then draw a diagram to show the effect on the price and quantity of minivans.
a. People decide to have more children.
b. A strike by steelworkers raises steel prices.
c. Engineers develop new automated machinery for the production of minivans.
d. The price of sports utility vehicles rises.
e. A stock market crash lowers people’s wealth.
Q43. The market for pizza has the following demand and supply schedules:
Price Quantity Demanded Quantity Supplied
$4 135 pizzas 26 pizzas
a. Graph the demand and supply curves. What are the equilibrium price and quantity in this market?
b. If the government sets a price ceiling $7. What are the price, quantity supplied, quantity
demanded, and size of the shortage or surplus?
c. If the government sets a price floor $8. What are the price, quantity supplied, quantity demanded,
and size of the shortage or surplus?
Q44. Nimbus, Inc., makes brooms and then sells them door-to-door. Here is the relationship between
the number of workers and Nimbus’s output during a given day:
workers Output Marginal
product
Total cost Average total
cost
Marginal cost
a. Determine the equilibrium rice price and rice quantity sold in the market. How much is
consumer surplus, producer surplus and total surplus? Illustrate on the appropriate graph (
mark)
b. If rice price now is 4 $ per kg, what happens in the market? How much is the quantity shortage
or surplus? Illustrate on the graph. (0.5 mark)
c. From the equilibrium price, suppose that rice price falls to 2 $ per kg, what is the price
elasticity of demand and its meaning? How much will consumer suplus increase due to new
buyers entering the market and existing buyers paying lower price? (1 mark)
d. Continue question a, if the Government imposes tax on seller t = 1$ per kg, what happens to
the market outcome? How is the incidence of tax for buyers and sellers? How much is tax that
government collect? Illustrate on the graph. (1 mark)
Q46. Suppose that each firm in a competitive industry has the following costs:
Total cost: TC = 50 + ½ q
2
Marginal cost: MC = q
where q is an individual firm’s quantity produced. The market demand curve for this product is:
Demand: Q D
= 120 - P
where P is the price, measured by $ and Q is the total quantity of the good, measured by unit.
Currently, there are 9 firms in the market.
a. What is each firm’s fixed cost? What is its variable cost? Give the equation for average total
cost. (0.5 mark)
b. What is the equilibrium price and quantity for this market in the short run? (0.5 mark)
c. In this equilibrium, how much does each firm produce? Calculate each firm’s profit or loss. Is
there incentive for firms to enter or exit? (0.5 mark)
Q47. The table below illustrates the shrimp market in Blue Star City.
Price per kg ($)
Quantity demanded
(100 kg per week)
Quantity supplied
(100 kg per week)
a. Determine the equilibrium price and quantity shrimp sold in the market. How much is
consumer surplus, producer surplus and total surplus? Illustrate on the appropriate graph (
mark)
b. If price now is 2$ per kg, what happens in the market? How much is the quantity shortage or
surplus? Illustrate on the graph. (0,5 mark)
c. From the equilibrium price, suppose that price rises to 5$ per kg, what is the price elasticity
of demand and its meaning? How much will consumer surplus decrease due to buyers leaving
the market and existing buyers paying higher price? (1 mark).
d. Continue question a, if the Government imposes tax on seller t = 1.5 $ per kg, what happens
to the market outcome? How is the incidence of tax for buyers and sellers? How much is tax
that government collect? Illustrate on the graph. (1 mark)
Q48. John Kennet has just finished recording his latest CD. His record company’s marketing
department determines that the demand for the CD is as follows:
Price ($) 24 22 20 18 16 14
Number of CDs (1,000 pcs) 10 20 30 40 50 60
The company can produce the CD with no fixed cost and a variable cost of $5 per CD.
a. Find total revenue for quantity equal to 10,000, 20,000, and so on. What is the marginal revenue
for each 10,000 increase in the quantity sold? (0,5 mark)
b. What quantity of CDs would maximize profit? What would the price be? What would the profit
be? (0,5 mark)
c. If you were John’s agent, what recording fee would you advise Johnny to demand from the record
company? Why? (0,5 mark)
Q49. The table below illustrates the laptop market in The Star City.
Price per pcs ($)
Quantity demanded
(pcs per week)
Quantity supplied
(pcs per week)
