Answers for Assignment 1

1. B

2. D

3. C

4. E

5. E

6. B

7. D

8. C

9. D

10. D

Answers for Assignment 2

a) The demand for X decreases

b) The demand for Y decreases
c) The demand for X increases
d) No, the term inferior product refers to the demand depending on consumer’s income not the
quality of the good

a). QXS = - 30 + 2Px - 4Pz.

putting Px=600 and Pz=60 we get

supply of product:

X= -30+2*600-4*60= 930

b) putting Px = $80 and Pz = $60?

we get supply of X is -30+2*80-4*60= -110

which means no supply of X so the answer is 0

c). we have QXS = - 30 + 2Px - 4Pz and Pz= 60

QXS = - 30 + 2Px - 4*60

QXS = -270 +2Px

Inverse supply function: PX = 135+0.5QXs

 PX

d) (0,135)

(-270,0)

QXS

a) Good Y:

dQx/dPy=-1 Because this is negative there is a negative relationship between the price of good y and
the quantity demanded of good x; i.e. this shows that if the price of good y increases, the quantity
demanded of good x decreases. Thus, good y must be a complement of good x

Good Z:

dQx/dPz =9: Because this is positive there is a positive relationship between the price of good z and the
quantity demanded of good xl i.e. this shows that if the price of good z increased, the quantity
demanded of good x increases. Thus, good z must be a substitute for good x

b) dQx/dPz= 1/10 . Because this is positive there is a positive relationship between income and quantity
demanded of good; i.e. this shows that as income increases, so too does quantity demanded. Thus, good
x must be a normal good

c) Qx =6,000- 1 2 (5,230)-6,500+9(100)+ 1/10 (70,000)=4,785

d) For the given income and prices of other goods, the demand function for good X is

Q x = 6000 - 1/2 * Px - 6,500+9(100)+ 1/10 (70,000)

Qx = 7, 400 - 1/2 * Px

To find the inverse demand equation, solve for price to obtain:

Px = 14, 800 - 2Qx

Px

(0,14800)

(7400,0) Qxd
4

(a) QXd = 500 - 4PX

QXd - 500 = -4PX
4PX = 500 – QXd
PX = (500 - QXd)/4
PX = 125 - 0.25QXd

Thus, PX = 125 - 0.25QXd

(b) QXd = 500 - 4PX

Calculate the PX when QXd is zero
QXd = 500 - 4PX
0 = 500 - 4PX
4PX = 500
PX = 500/4 = 125

Caculate QXd when PX is $50

QXd = 500 - 4PX = 500 - (4*50) = 500 - 200 = 300

Calculate the consumer surplus -

CS = 1/2 * (PX when QXd is zero - PX) * QXd

CS = 1/2 * (125 - 50) * 300 = $11,250

Thus, the consumer surplus that consumers receive when PX = $50 is $11,250

(c) QXd = 500 - 4PX

Calculate the PX when QXd is zero

QXd = 500 - 4PX

0 = 500 - 4PX

4PX = 500

PX = 500/4 = 125

Caculate QXd when PX is $35 -

QXd = 500 - 4PX = 500 - (4*35) = 500 - 140 = 360

Calculate the consumer surplus -

CS = 1/2 * (PX when QXd is zero - PX) * QXd

CS = 1/2 * (125 - 35) * 360 = $16,200

Thus, the consumer surplus that consumers receive when PX = $35 is $16,200

(c) The level of consumer surplus increases as the price of a good falls.

5. a) 𝑄𝑥 𝑑 = 𝑄𝑥 s

14 – 1/ 2 𝑃𝑥 = 1 /4 𝑃𝑥 − 1

𝑃𝑥 = 20

𝑄 = 14-20/2=4

b) 𝑄𝑥 s = 1/ 4 (𝑃𝑥 − 12) − 1

14 − / 2 𝑃𝑥 = 1/ 4 (𝑃𝑥 − 12) − 1

𝑃𝑥 = 24

𝑄 = 14 − 1 2 ∗ 24 = 2

c) Gov’t revenue =12 ∗ 2 = $24

6 a) The own price elasticity of demand (Ed) is calculated as:

𝐸𝑑 =𝑑𝑄𝑥𝑑/𝑑𝑃𝑥 ∗𝑃𝑥/𝑄𝑥𝑑

𝐸𝑑 = −3 ∗140/1200 − 3 ∗ 140 − 0.1 ∗ 300 = −0.56

The demand is inelastic at this price because the absolute value of E is less than 1. If the firm decided to
charge a price below $140, its revenue would increase because the demand is inelastic.

b) Similarly, we can calculate Ed for Px = $240:

𝐸𝑑 = −3 ∗240/1200 − 3 ∗ 240 − 0.1 ∗ 300 = −1.6

The demand is elastic at this price because the absolute value of E is greater than 1. If the firm
decided to charge a price above $240, its revenue would decrease because the demand is elastic.

c) The cross-price elasticity of demand between good X and good Z when Px = $140 is

calculated as:

𝐸𝑥𝑧 =𝑑𝑄𝑥𝑑/𝑑𝑃𝑧 ×𝑃𝑧/𝑄𝑥𝑑

𝐸𝑥𝑧 = −0.1 ×300/450 = −0.067

The negative sign indicates that goods X and Z are complements.

 7. Change in revenue= {PxQx (1 + Ex) + PyQy (Ey)} * change in P

= (20,000(1+(-3)) + 80,000(-1.6)) =-336,000

Increase the price by 2% will decrease the revenue by 336,00

8. a) Average product of labour = Q/L

APL = (K¾ L¼)/L

APL= (K¾)/ (L¾)

So when K=81 and L=16

APL= (81)¾ / (16)¾

APL= 3³/2³ = 27/8 = 3.375

When L= 256 and K= 81

APL = (81)¾ / (256)¾

APL= 3³/4³ = 27/64 = 0.421

b) The Marginal product of labour is calculated by differentiating the production function with
respect to L, so

MPL = 1/2 ( K)¾ / (L)¾

When K = 81

MPL = 1/2 ( (81)¾ / L¾)

MPL = 27/4/(L³/⁴)

MPL = 6.75. L^ (-0.75)

Thus, when L = 16

MPL = 6.75 / (8)

MPL= 0.843

When L= 81

MPL= (6.75/27)

MPL = 0.25 = 0.25

c) We have MPL = 6.75 (L) ^(-0.75)

Price = $200, wage = $50

 At maximum profit level

MPL × Price = Wage rate

6.75 ( L)^( -0.75) ×200 = 50

1350 (L)^ (-0.75) = 50

L⁰'⁷⁵ = 1350/50

L⁰'⁷⁵ = 27

L^(3/4)= (27)

Raising power 4/3 on both sides we get

L = (27)⁴/³ = 81

Capital Labor Output MPK APK APL VMPK

0 20 0 - - - -
1 20 50 50 50 2.5 200
2 20 150 100 75 7.5 400
3 20 300 150 100 15 600
4 20 400 100 100 20 400
5 20 450 50 90 22.5 200
6 20 475 25 79.17 23.75 100
7 20 475 0 67.86 23.75 0
8 20 450 -25 56.25 22.5 -100
9 20 400 -50 44.44 20 -200
10 20 300 -100 30 15 -400
11 20 150 -150 13.64 7.5 -600

a) Fixed cost is the cost of labor

cost of labor =labor unit *wage = 20*30=$600

b) the fixed cost is $600

c) Variable cost is the cost of capital to produce the output

variable cost =number of capital units *rent

the 475 output is possible at two places

Variable cost by using 6 unit of capital =6*25=$150

Variable cost by using 7 unit of capital =7*25=$175

d) MP(n)=(TP(n)-TP(p))/(n-p)

MP(n)=marginal product of n the unit of input

 TP(n)= total product of n inputs

TP(p)=total product of p inputs

MPK(1)=(50-0)/(1-0)=50

MPK(2)=(150-50)/(1-0)=100and so on

APK=output/number of capital units

APK(1)=50/1=50

APK(2)=150/2=75 and so on

APL(20)=50/20=2.5

APL(20)=150/20=7.5 and so on

VMPK=MPK*price

VMPK(1)=50*4=200

VMPK(2)=100*4=400 and so on

the firm maximize output by employing inputs at VMPK=price of capital =rent or nearest less rent

VMPK=100 and rent =25 at K=6 units

the firm maximizes profit at K=6 units

e) Profit=TR-TC

TR=P*Q=475*4=1900

TC=FC+VC=600+6*25=750

profit=1900-750=$1150

f) the MPK is increasing up to 3 unit of capital as it decreases from 150 to 100 units at the 4th unit of
capital

g) a decreasing return means the marginal product is decreasing as input increases which includes the
negative marginal product as well.

the decreasing return starts at 4 unit of capital and goes on decreasing there is no upper limit from given
inputs its 11 units.

from given table 4 to 11 unit of capital.

h) A negative marginal product of capital set in at the 8th unit of capital and goes on then there is no
positive marginal product of capital

from given table, 8 to 11 units of capital

10 The Cost Function of the Firm is C(Q) = 90 + 30Q + 25Q ^ 2 + 10Q ^ 3

a. The fixed cost of producing 10 units of output is $90 because fixed cost does not vary with level of
output.

b. The variable cost of producing 10 units of output is = 300 + 2500 + 10000 =12 ,800

C(10) = 30(10) + 25 * (10) ^ 2 + 10 * (10) ^ 3

c. The total cost of producing 10 units of output = Total Fixed Cost + Total Variable Cost =90
+12,800=12,890

d. The average fixed cost of producing 10 units of output is = Total Fixed Cost/units of Output = 90/10=9

e. The average variable cost of producing 10 units of output is = Total Variable cost/ Units of output =12,
800/10 =1,280

f. The average total cost of producing 10 units of output is = Total Cost/ units of output =12, 890/10
=1,289

g. Marginal cost tells us how much it will cost to expand the firms output by one unit.

So, the Marginal Cost when Q = 10 is the difference between total cost of producing 9 units and 10 units
of output

11

Q FC VC TC AFC AVC ATC MC

0 $15,000 0 $15,000 - - - -

100 $15,000 $15,000 $30,000 150.00 150.00 300 150

200 $15,000 $25,000 $40,000 75.00 125.00 200 100

300 $15,000 $37,500 $52,500 50.00 125.00 175 125

400 $15,000 $75,000 $90,000 37.50 187.50 325 375

500 $15,000 $147,500 $162,500 30.00 295.00 225 725

600 $15,000 $225,000 $240,000 25.00 375.00 400 775

12 a) Yes, there are economies of scope. One simple way of finding out whether there is an economy of
scope from a production function is to look at the sign before the coefficient of the two products i.e.
Q1Q2. In this case, it is negative therefore, there are economies of scope in producing 10 units of
products 1 and 2 each.

b. Cost complementarities exist since a = - 0.5 < 0 which holds in this case. Cost complementarities
exist because the coefficient of the Q1Q2 term (which represents the interaction between the two
products) is negative (-0.5).

13- Fixed costs are expenses that do not change regardless of the level of production or sales. These
costs remain constant over a certain period, such as rent, salaries, insurance, and property taxes. Fixed
costs do not vary with the level of output or sales revenue.

Variable costs, on the other hand, are expenses that change in direct proportion to the level of
production or sales. These costs can include raw materials, direct labor, and sales commissions. As
production increases, variable costs also increase, and as production decreases, variable costs decrease.

An example that illustrates the difference between fixed and variable costs is a manufacturing company.
The rent for the factory space and the salaries of the administrative staff are fixed costs because they do
not change with the level of production. In contrast, the cost of raw materials and direct labor are
variable costs because they increase as the company produces more goods.

In general, fixed costs provide the basic infrastructure for a business to operate, while variable costs are
directly tied to the production or sales activities of the business.

14 a) Q = min(8; 12) = 8 units are produced.

b) The cost-minimizing mix of K and L that produce Q = 8 is

K = 1, L = 1.

c) Since K and L are perfect complements n the production process, the cost-minimizing levels of K
and L do not depend on the rental rates of K and L. Therefore, the cost-minimizing levels of K and L do
not change with changes in the relative rental rates

15 a) when K=2 and L=3, then

Q=4K + 8L

Q=4(2) + 8(3)
Q= 32 units

b) Since there are substitute goods, the firm can either use 23/4 = 8K or 32/8 = 4L

Cost of 8K = 8(20) =\$160 Cost of 4L = 4(60) =S240

Since cost of using 8K is lower, the firm will use (8K,0L) to produce 32 units output.

c) The firm can either use 23/4 = 8K or 32/8 = 4L

Cost of 8K = 8(20) =\$160 Cost of 4L = 4(20) =\$80

Since cost of using 4L is lower, the firm will use (0K,4L) to produce 32 units output.