Microeconomic Questions & Answers

Microeconomic questions and answers.

Question 1- The government proposed a law for all Australians to wear hats. (i) How would this affect the demand for and equilibrium price of hats? (ii) How would the law affect the marginal product and the value of the marginal product of hat workers? (iii) How would the law affect the demand and equilibrium wage of hat workers?

Answer 1 – (i) Before the law the demand and supply curve are at equilibrium (draw graph) and show changes in price and quantity. Demand curve moves to the right in the short-run. Producers profit goes up and price. Supply is unchanged. Economic profit goes up and influences more producers to join the market, the supply curve then goes back to the original level (down). (ii) The marginal product (quantity a labourer can produce per hour multiplied by price) MP = Q x P. MP goes up. No change in productivity of each labourer, society is still producing the same quantity. (iii) There is change. As the wage depends on marginal product (goes up). Adding more value to the firm. Claim more wages. Only if the number of workers remain unchanged. More workers will seek employments in this industry as wages go up. As supply changes wage goes down.

Question 2- Cars and fuel are complements. Fuel has an inelastic demand and cars have elastic demand. Because of the instability in the fuel supply is very limited. Use diagram to answer the following questions. (i) What does happen to the price of cars? What does happen to the total expenditure on cars? (ii) What does happen to the price of fuel? What does happen to the total expenditure on fuel?

Answer 2- (i) Price of the car as a complement of the fuel price going up would decrease. Demand for cars overall will decrease. People seek out substitute goods (public transport). Draw on graph showing demand curve shifting down to new equilibrium. Elastic demand, more responsive. Time frame. (ii) The price of fuel increases due to scarcity. Elastic. Move/shift supply curve to left, quantity will drop and price will rise. People will spend a lower proportion of their disposable income on fuel.

Question 3- The absolute price of food is $5 and the absolute price of shelter is $10. Bob has $100 income to spend on food and shelter. (i) If Bob maximizes his pleasure with this budget constraint and his marginal utility for food turns out to be 5, what will his marginal utility be for shelter? (ii) The price of food doubles and Bob’s income doubles also. What will be the effect on consumption of shelter and food?

Answer 3- (i) Price of food is 5 (marginal utility) and price of shelter is 10, income is 100 between the two goods. His budget constraint moves outward his marginal utility for shelter would be 10. Px/Py = MuX/MuY PriceFood/PriceShelter, 5×10/5. (ii) The price of food doubles and income doubles. Draw budget line on graph, food and shelter. Food = P20, when shelter = Q0, Shelter = P10, when shelter = Q0. Income line shifts outward. 200/5 = 40 (food), 200/10 = 20 (shelter). Food remains unchanged 200/10 = 20 (food). Shelter increases and food stays the same.

Question 4- An individual’s demand curve for gasoline is given by P=100-Q, where P=price and Q=quantity. The individual’s monthly income is AUD 10000 and the current price of food is $10/unit. Show the effect on consumer surplus if price goes up to $15/unit.

Answer 4- Demand curve P=100-Q, monthly income is 10,000, price of food is 10 per unit. The effect on consumer surplus if price goes up to 15/unit. 10 = 100 – Q, Q=90. 15 = 100 – Q, Q=85. Plot on graph. Consumer surplus was all above 10, now above 15. Find price at zero quantity. P=100 – Q, P = 100 – 0 = 100. ½ x length x base, ½ x 90 x 90 (consumer surplus 1). ½ x 85 x 85 (consumer surplus 2).

Question 5- Consider public aimed at smoking. (i) Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a packet of cigarettes currently costs $8 and the government wants to reduce smoking by 20 percent, by how much should it increase the price? (ii) If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or five years from now?

Answer 5- (i) 40 = -20/P, -20/0.4=50 Price goes up by 50%, price is $12. (ii) Provide reason as to why it is longer or shorter.

Question 6- (i) What is the shut-down condition for a perfect competitive firm?

Answer 6- (i) Shut down production, price is less than AVC. Exit, price is less than AVTC.

Question 7- For each of the following situations in the Australian kangaroo market, determine whether the quantity supplied changes, or whether the supply curve shifts and determine the direction of the change. (i) The number of kangaroo farms and ranches closes, ceteris paribus. (ii) Professor Roo develops an antibiotic that ensures more kangaroos survive on ranches. (iii) The cost of kangaroo food rises. (iv) America announces it is going to increase the number of kangaroo farms in the next 5 years.

Answer 7- (i) Supply curve will move to the left, due to less supply. (ii) Supply curve move to the right, due to more supply, price decreases. (iii) Supply curve move to the left as production costs go up. (iv) Price falls, supply curve in Australian market will not change, it is along the supply curve (quantity demanded). Holding all else constant.

Question 8- A bread shop is open form 9 a.m. to 5 p.m., Monday to Friday. The cost of making and selling bread averages $0.50 per loaf. At 5 p.m. on Friday evening, the owner still has several dozen unsold loafs. The bread will not be saleable on Monday. (i) What is the best price strategy for the bread shop to take? Justify your answer.

Answer 8- (i) Sell the bread at a lower cost when P = costs to cover costs. Lower sunk costs to cover some as you can’t sell on Monday. Keep lowering the price below the cost price to sell all. Marginal benefit and cost curves. Opportunity cost higher than the cost of a loaf.

Question 9- Bob loves milkshakes. The table shown reflects the value Bob places on each milkshake he drinks. (i) If the price of milkshakes are $0.20, how many milkshakes will Bob buy? (ii) If the price of milkshakes increased to $0.40, how many donuts would he purchase now? (iii) What would happen to Bob’s consumer surplus? Show this change on your graph.

Answer 9- Benefit and cost equal. Consumer surplus will drop when price goes from 0.40 to 0.20. Draw graph and label. (P and Q)

Question 10- The before-trade domestic price of honey in Australia is $6 per gallon. The world price of honey is $5 per gallon. Australia is a price taker in the honey market. Given this information, answer the following questions. (i) Will Australia import or export honey? (ii) What will the price of honey be in Australia if free trade is allowed? (iii) Who will benefit from free trade in this case? (iv) Who will lose from free trade?

Answer 10- (i) Import (perfectly competitive), absolute and comparative advantage Australia doesn’t have. (ii) $5. (iii) Consumer. (iv) Australian Producer of honey, in long run will move to different industries.