Answers to Three Questions on Microeconomics

Question One (30 points)

Answer the following Three questions: (Your answer is expected to be provided after each question)

 Question One (30 points)

A local shop orders 400 cases of Coca Cola each week and sells them at a price of $5.00 per case. At the end of the first week, they have only sold 160 cases.  (6 points each)

1. What is the total revenue received from sales?

2. What economic situation is the shop facing, surplus or shortage? Why?

3. What will have to happen to price in order for equilibrium to be attained?

4. If the price of coca cola increases, which of the curves is going to shift, supply or demand? Explain your answer.

5. Which of the following can lead to an increase in the supply for Coca Cola?

• An increase in consumers’ income, assuming Coca Cola is normal.
• An increase in the wages paid to workers who are working in Coca Cola factory.
• An increase in consumers’ income, assuming Coca Cola is normal.
• New machines have been introduced in producing Coca Cola.

Question Two: (30 points)

1.During the previous 5 years, tuition fees at AOU have increased by 15%. At the same time, there is an increase in the number of students enrolled. Does this situation show that the law of Demand is false? Explain your answer. (6 points)

2. An increase in the price of a product will reduce the amount of it purchased because: (select and explain your answer). (6 points)
A. Supply curves are up sloping. 
B. The higher price means that real incomes have risen.
C. Consumers will substitute other products for the one whose price has risen.
D. Consumers substitute relatively high-priced for relatively low-priced products. 

3. The meaning of a ceiling price is: (select from the following and explain your answer)  (6 points)
A. Encourage new firms to enter the industry.
B. Result in an excess surplus for the product. 
C. Clearing the market. 
D. None of the above. 

4.If a decrease in the price of one product results in an increase in demand for another product, then the product is:  (Select the answer and explain why).(6 points)
A. Substitute good
B. Normal good
C. Inferior good
D. Complement good

5. Which of the following is NOT a characteristic of a market in equilibrium?(6 points)
A. Excess supply is zero. 
B. All consumers are able to purchase as much as they wish.
C. Excess demand is zero.
D.The equilibrium price is stable, i.e., there is no pressure for it to change.

Question Three  (40 points): 

1. Assume that the price in the market is $2 per output, the wage rate paid to each worker is $20/day and the total fixed cost = $10 ete the missing information in the above table.  (14 points)

2. From the above table, what is the maximum profit the producer will make? Explain your answer using the MR/MC concept.  (6 points)

3. From the above table, how many workers the producer should use? (6 points)

4. A firm encountering economies of scale over some range of output will have a: (6 points)
A) rising long-run average cost curve. 
B) falling long-run average cost curve. 
C) constant long-run average cost curve. 
D) rising, then falling, then rising long-run average cost curve.
Explain your answer.

5.Given the following table for a firm’s output and total cost: (8 points)

Does the above firm experiences economies of scale, constant returns to scale or diseconomies of scale? Justify your answer.