[Document title]

[Document subtitle]

[Date]

Aklilu Basha
[company name]
 Answers To the Given Questions
1. P = 20 -2Qd and P = 5 + 0.5Qs
i. Equilibrium price and quantity:20−2Q=5+0.5 Q
20−5=0.5 Q+20 Q
Q=1.37−−−equilibriumquantity
P=5+ 0.5 ( 1.37 )=5.69−−−equ . price

ii. If P = 50 → 50 > 5 + 0.5(1.37) so, there will be a surplus quantity. B/C the given price
is greater than the equilibrium price.
iii. The same with question(i).
% △ Q △ Q P 1 −50 2000 −2
2. i. Pe = = × = × = =−0.66
% △ P △ P Q1 500 300 3
ii. It means if the price of ticket increases by 1 unit, then the quantity demand
decreases by 0.66 unit.
iii. The price elasticity is inelastic because |Pe| between 0 and 1.
∆ Q P −500 10
3. A. E= × = × =−0.29
∆P Q 5 3500
B. As the price of Z increases by one unit the quantity demand of Y decreases by 0.29 unit.
C. Good Z and Y are complimentary because their cross elasticity is negative.

4. A. E=
% △ Q 80
= =6.67
% △ P 12
B. As price of coffee increases by one unit the supply will increases by 6.67 unit.
5.

c a

In this graph a consumer prefers indifference curve “a” b/c it is more outward. point c is common for
both curves which means a = c and b = c but these violets the above statements that a > b. therefore,
indifference curve never cross each other.

MUx 8 x+ 15 y
6. i. MUX = 8x +3y MUY = 12y +3x ii. MRSXY = = iii. At equilibrium
MUy 12 y +3 x
MUx Px 8 x+ 3 y 2
= = = → 3(8 x +3 y )=2(12 y +3 x) → 18 x−15 y=0 ……* and the
MUy Py 12 y+ 3 x 3
budget line equation is 2 x+3 y =60……** using equ. * and ** we get the equilibrium quantity
of x and y.

{182 x+3
x −15 y=0
y =60
→ -42y = -540 → y = 12.86 2x +3(12.86) = 60 → x = 10.71
2 2
iv. U ( x,y ) = 4 ( 10.71 ) + 3 ( 10.71 )( 12.86 ) + 6 ( 12.86 ) =1864.29 …. Total utility
 Answers To the Given Questions
v. MUx=8(10.71)+3(12.86)=124.26 MUy=12(12.86)+3(10.71)=186.45
A. MC=¿ B. MC at Q = 1000 is 3(1000)2 + 20(1000)2 + 55 = 3,020,055
2 3
TC 100+55 Q−10Q +Q
C. AC= = D. AC at Q = 1000 is 990,055.1
Q Q
E. AVC is Q3 + 10Q2 – 55Q F. AVC at Q = 1000 is 10003+ 10(1000)2 - 55(1000) = 1,065,000
2 3
100+55 Q−10 Q +Q 2
G. minimum of AC is when AC = MC → =3Q +20 Q+55
Q
TFC 100 100
H. AFC= = I. AFC at Q=1000 is =0.1
Q Q 1000
7.

8. When inputs are perfect substitutes, the isoquant is a straight line, indicating a constant marginal
rate of technical substitution (MRTS); for example, one worker can replace one machine at a fixed ratio.
In contrast, when inputs are perfect complements, the isoquants are L-shaped, reflecting a fixed
proportion requirement between inputs; for instance, a production process might need exactly one
machine and one operator to produce output, with no benefit from increasing one input alone. Another
case involves kinked isoquants, which arise in systems with limited substitution or discrete technologies,
where the isoquant changes slope abruptly at points where one production method becomes more
efficient than another, such as switching between different tools or machinery. These special cases
illustrate how the relationship between inputs shapes production possibilities.

9. The demand curve is derived from the marginal utility curve based on the principle of diminishing
marginal utility, which states that as a consumer consumes more of a good, the additional satisfaction
(marginal utility) derived from each successive unit decreases. Consumers aim to maximize their utility
by equating the marginal utility of a good to its price, such that MU =PMU=P MU =P . When the
price of a good falls, the consumer's marginal utility at that price increases relative to the cost,
incentivizing them to purchase more of the good to restore equilibrium. Conversely, when the price
rises, fewer units are purchased to balance the higher price with the diminished marginal utility. This
relationship creates a downward-sloping demand curve, as lower prices lead to higher quantities
demanded, reflecting the consumer's marginal utility-based decision-making.

10. The four types of market structures— Perfectly competitive market, monopolistically competitive,
oligopoly, and monopoly—differ in characteristics such as the number of firms, product differentiation,
entry barriers, and market power. Perfectly competitive market features many small firms producing
identical products, with no single firm influencing price, and free market entry and exit.
Monopolistically competitive market also involves many firms, but products are differentiated, giving
each firm some price-setting power, though entry barriers remain low.

In an oligopoly, a few large firms dominate the market, often producing similar or slightly differentiated
products, and significant barriers to entry create interdependence among firms, influencing pricing and
strategy. A monopoly, by contrast, is a market with a single firm that controls the entire supply of a
unique product, facing no direct competition and often enjoying high barriers to entry, allowing
 Answers To the Given Questions
substantial pricing power. These structures represent a spectrum of competition, from perfect
competition's complete lack of market power to a monopoly's total control.

11. Macroeconomics studies the working of an economy in aggregation or as a whole. And it aimed

at how;

 To achieve high economic growth

 To reduce unemployment
 To attain stable prices
 To reduce budget deficit and balance of payment (BoP) deficit
 To ensure fair distribution of income

Macroeconomic problems are the following:

 Inflation: A sustained rise in general price levels, reducing purchasing

power.
 Unemployment: High joblessness causing economic inefficiency and
social issues.
 Recession: A decline in economic activity, leading to lower output and
income.
 Trade Deficits: Excessive imports over exports, weakening currency
value.
 Inequality: Unequal income distribution, exacerbating social and
economic disparities.
12. Macroeconomic stabilization policy refers to government actions aimed at managing overall
economic activity to reduce the volatility of economic growth, unemployment, and inflation, ensuring
long-term stability. There are two main types: monetary policy, managed by a country's central bank,
and fiscal policy, controlled by the government.

Monetary policy involves adjusting interest rates and the money supply to influence economic
conditions—expansionary policy lowers interest rates and increases the money supply to stimulate
demand during a recession, while contractionary policy raises rates and reduces the money supply to
curb inflation.

Fiscal policy, on the other hand, uses government spending and taxation to stabilize the economy—
expansionary fiscal policy increases spending or cuts taxes to boost demand and reduce unemployment,
while contractionary policy reduces spending or raises taxes to control inflation.

The key goals of these policies are to achieve full employment, price stability, economic growth, and
external balance. Policymakers face trade-offs, such as the risk of inflation from expansionary policies or
economic stagnation from overly tight fiscal or monetary measures. The effectiveness of stabilization
policies depends on the timing, magnitude, and context of the interventions, requiring careful balance
to maintain a stable and sustainable economy.

13. A Giffen good is a type of inferior good that paradoxically sees an increase in demand when its price
rises, defying the typical law of demand, which states that as the price of a good increases, demand
 Answers To the Given Questions
tends to decrease. This counterintuitive behavior occurs because the income effect of a price increase
outweighs the substitution effect for consumers. In the case of a Giffen good, when its price rises,
consumers, especially those with limited income, may no longer afford more expensive substitute goods
and thus buy more of the Giffen good, despite its higher price. Giffen goods are typically basic
necessities, such as staple foods like bread or rice in poor economies.

Suppose a consumer has a budget of $6 per day that they spend on food. They must eat three meals a
day, and there are only two options for them: the inferior good, bread, which costs $1 per meal, and the
superior good, cake, which costs $4 per meal. Cake is always preferable to bread. At present, the
consumer would purchase 2 loaves of bread and one cake, completely exhausting their budget to fill 3
meals each day. Now, if the price of bread were to rise from $1 to $2, then the consumer would have no
choice but to give up cake, and spend their entire budget on 3 loaves of bread, in order to eat three
meals a day. In this situation, their consumption of bread would have actually increased as a result of
the price increase. Thus, bread would be a Giffen good in this example.
7 1
14. f ( K , L )=50 K 8 × L 8

A. The given function is a Cobb-Douglas production function with constant returns to scale. It is also a
total production function with inputs capital and labor.
7 1
8 8 −1 7
B. MP = dTP = d (50 K × L ) = 1 L 8 × 50 K 8
L
dL d (L) 8
7 1
8 8 −1 1
dTP d (50 K × L ) 175 8
MP L = = = K × L8
dL d (K ) 4
−1 7
1 8
L × 50 K 8
C.
−MP L 8 −1 K
MRTS L ,K = = =
MP K 175
−1
8
1
8
7L
K ×L
4
−1 1
175 8
K × L8
D.
−MP K 4 L
MRTS K , L = = =−7
MP L 1
−1
8
7
8
K
L × 50 K
8
E.

F. The sum of their exponents is 1(7/8 + 1/8) which shows constant returns to scale.

15. Average cost (AC) - is the total cost per unit of output. It is calculated by dividing the total cost by
the level of output.

Average variable cost (AVC) - is total variable cost per unit of output. It is obtained by dividing total
variable cost by the level of output.
 Answers To the Given Questions
Marginal Cost (MC) - is defined as the additional cost that a firm incurs to produce one extra unit of
output.

Total Variable Cost (TVC) – a cost that is not constant in short run production. E.g. price of inputs

Total Fixed Cost (TFC) – is a constant cost in a short run production. E.g. house rent

Total Cost (TC) – is the sum of fixed cost and variable cost.

Average fixed cost (AFC) - Average fixed cost is total fixed cost per unit of output. It is calculated by
dividing TFC by the corresponding level of output.
 Answers To the Given Questions

output

cost