Economics Exam Questions and Solutions

Question 1: Market Equilibrium for Tofu

For question 4, worked out solution for 4 (a): The Demand equation for Alpha is known to be : D = $1000-bQ To find out b, based from the diagram, b = (P1 - P2) / (Q1 - Q2) When P1 = $1000, Q1 = 0 When P2 = $100, Q2 = 180 b = ($1000-$100) / (0-180) b = 5 Therefore, the demand equation for Alpha is: D = $1000-5Q. will require the solutions for: (b) Identify the optimal output and the price for Alpha. Calculate the profit or loss for Alpha at this output (d) Compare the welfare between Alpha as a profit maximiser and welfare maximiser. Is the society better off with Alpha as a social welfare-maximising firm or as a profit-maximising firm? You need to consider both the short-run and the long-run situation and explain.

In the past, tofu was considered a low quality food and its production is mainly from small household businesses using simple tools. Today tofu has become popular as it is considered a high-protein healthy food. At the same time, tofu production has evolved to become factorybased using modern large scale food processing technologies. Diagram with demand and supply curves to examine and illustrate the market equilibrium for tofu over time. What does the demand-supply model predict about changes in the quantity of tofu sold and the prices of tofu over time? 

The schedule below shows the number of packs of candy bought in a candy shop at a variety of prices. Price of candy ($/pack) Number of packs purchased per day 5 300 4 600 3 900 2 1200 1 1500

(a) Determine the price elasticity of demand for candy when the price of candy increases from $2 to $3 using the midpoint method. Classify the product based on the price elasticity of demand for candy and explain the effect on the total revenue when the price of candy increases. 

(b) Determine the price elasticity of demand for candy when the price of candy increases from $4 to $5 using the midpoint method. Classify the product based on the price elasticity of demand for candy and explain the effect on the total revenue when the price of candy increases. 

(c) Based on your answer in (a) and (b), explain the relationship between the total revenue and the price elasticity of demand for candy. 

(d) A consultant suggests to the shop owner to set the price of candy at $3 in order to maximise profit. Do you agree? Explain. 

Tom has a weekly allowance of $24 and all of which he spends on pizza and movie rentals. Prices of pizza and movie rentals are $6 per a slice of pizza and $3 per a movie rental, respectively. Assume that slices of pizza and movie rentals are available only in whole-number amounts.

(a) Identify all the possible combinations of slices of pizza and movie rentals for Tom. 

(b) Tom’s total utility from the amounts of slices of pizza and movie rentals consumed per week is shown in the table below. Apply the rational spending rule to determine the quantities of slices of pizza and movie rentals that are consistent with this rule. Hence or otherwise, determine and explain the amount of pizzas and movie rental that Tom should consume each week in order to maximise his total utility. Slices of Pizza Total utility from slices of pizza Movie rentals Total utility from movie rentals 0 0 0 0 1 20 1 40 2 38 2 46 3 54 3 51 4 68 4 55 5 80 5 58 6 90 6 60 7 98 7 61 8 104 8 61.5 

Alpha is the only company that produces smartphones in a city. The diagram below depicts the demand and the cost function of producing smartphones by Alpha.

(a) Compute the demand equation for Alpha. 

(b) Identify the optimal output and the price for Alpha. Calculate the profit or loss for Alpha at this output. 

(c) Suppose that the CEO of Alpha decides that maximising social welfare is more important than maximising profits. Calculate the price, output and profit or loss when Alpha produces smartphones at the social welfare maximising output level. 

(d) Compare the welfare between Alpha as a profit maximiser and welfare maximiser. Is the society better off with Alpha as a social welfare-maximising firm or as a profit-maximising firm? You need to consider both the short-run and the long-run situation and explain. 

(e) How would Alpha sustain the output level that maximises the social welfare for the society? Explain.