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# TECO101 Principles Of Microeconomics

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## Questions:

Question 1

For the pizza seller whose marginal, average variable and average total cost curves are shown in the diagram,

What is the profit-maximising level of output and how much profit will this producer earn if the price of pizza is \$2.50 per slice?

### Question 2

Think about the demand for the three popular game consoles: XBox, PS3, and Wii. Using supply and demand diagrams to illustrate your answers, what is the effect on the demand for XBox games or the quantity demanded of XBox games (other things remaining the same) as a result of the following:

1. The price of an XBox falls?
2. The prices of a PS3 and a Wii fall?
3. Programmers who write code for XBox games become more costly to hire?

Question 3

In an hour, Kim can produce 50 pies or 400 cakes, and Liam can produce 150 pies or 300 cakes.

1. If Kim and Liam spend 30 minutes of each hour producing pies and 30 minutes producing cakes, how many pies and cakes does each of them produce?
2. Who has a comparative advantage in producing pies, and in producing cakes?
3. If Kim and Liam specialise and trade, what is the highest price of a pie at which Kim and Liam would agree to trade pies and cakes? What are the gains from trade?

### Question 4

Suppose that United Airlines and American Airlines are the only air carriers that serve between New York and Boston. Each currently earns a profit of \$6,000 per flight on this route. If United increases its advertising spending in this market by \$1,000 per flight, and American spends no more on advertising than it does now, United's profit will rise to \$8,000 per flight and American's will fall to \$2,000. If both spend \$1,000 more on advertising, each will earn an economic profit of \$5,500 per flight. These payoffs are symmetric, so that if United spends the same amount on advertising while American increases its spending by \$1,000, United's economic profit will fall to \$2,000 per flight and American's will rise to \$8,000.

1. Develop the payoff matrix.
2. Does each player have a dominant strategy?
3. What are the potential equilibriums?
4. Is this game a prisoner's dilemma? Explain

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