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Course Description: BUECO1507 Business Microeconomics

Assignment Questions (Semester 1, 2016)


Part A Microeconomics Worth 10% of total assessment:
Answer any five (5) of the following questions. Each question is worth 10 marks.
Prepared by:

Paul McPhee (Course Coordinator)

Checked by:

David Spiers

Question 1:
Which of the following are likely to be fixed costs and which variable costs for a chocolate factory over the
course of a month? Explain your choice:
(a) The cost of cocoa (1 mark)...........................................................................................................................
(b) Business rates (local taxes).(1 mark)...........................................................................................................
(c) An advertising campaign for a new chocolate bar. (1 mark)........
(d) The cost of electricity (paid quarterly) for running the mixing machines (1 mark)..
(e) Overtime pay (1 mark)..................................................................................................................................
(f)

The basic minimum wage agreed with the union (workers must be given at
least one months notice if they are to be laid off) (2 marks)........................................................................

(g) Wear and tear on wrapping machines (1 mark)............................................................................................


(h) Depreciation of machines due simply to their age (1 mark)..........................................................................
(i)

Interest on a mortgage for the factory: the rate of interest rises over the
course of the month (1 mark).......................................................................................................................

Question 2:
(a)

Complete the following table of costs for a firm. (Note: enter the figures in the MC column between
outputs of 0 and 1, 1 and 2, 2 and 3, etc.) (6 marks)

Output (Units)

TC ($)

55

85

110

130

AC ($)

MC ($)

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Course Description: BUECO1507 Business Microeconomics

40

42

280

90

110

8
9

610

150

10
(b)

How much is total fixed cost at:


(i)
(ii)

(c)

an output of 0 units ? (1/2 mark)


an output of 6 units? (1/2 mark)

How much is average fixed cost at:


(i)
(ii)

an output of 5 units? (1/2 mark)


an output of 10 units? (1/2 mark)

(d)

How much is total variable cost at an output of 5 units? (1 mark)...............................................................

(e)

How much is average variable cost at an output of 10 units? (1 mark).......................................................

Question 3:
Suppose the jeans industry is an oligopoly in which each firm sells its own distinctive brand of jeans, and
each firm believes its rivals will not follow its price increases but will follow its price cuts.
Draw and explain the demand curve facing each firm, and given this demand curve, does this mean that
firms in the jeans industry do or do not compete against one another?
(5 marks for the correct demand curve and 5 marks for the correct explanation)

Question 4:
a

Illustrate and explain using a diagram, the impact of external costs and external benefits on resource
allocation; (2.5 marks)

Why are public goods not produced in sufficient quantities by private markets? (2.5 marks)
(c) Which of the following are examples of public goods (or services)? Delete the incorrect option
(1 mark each).
(i)

The Judicial system

(ii)

Pencils

(iii)

The quarantine service

................................................................................................. Yes/No

..................................................................................................................... Yes/No
............................................................................................... Yes/No

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Course Description: BUECO1507 Business Microeconomics

(iv)

The Great Wall of China

(v)

Contact lenses

.......................................................................................... Yes/No

......................................................................................................... Yes/No

Question 5:
a

Suppose the income elasticity of demand for pre-recorded music compact disks is +4 and the income
elasticity of demand for a cabinet makers work is +0.4. Compare the impact on pre-recorded music
compact disks and the cabinet makers work of a recession that reduces consumer incomes by 10 per
cent. (2 marks)

How might you determine whether the pre-recorded music compact discs and MP3 music players are in
competition with each other? (2 marks)

Interpret the following Income Elasticities of Demand (YED) values for the following and state
if the good is normal or inferior; (3 marks total, 1.5 marks per part)
YED= +0.5 and YED= -2.5

(d) Interpret the following Cross-Price Elasticities of Demand (XED) and explain the relationship between
these goods. (3 marks total, 1.5 marks per part)
XED= + 0.64 and XED= -2.6

Question 6:
You are given the following data about two firms:
FIRM A
Quantity

Total revenue ($)

10

20

30

40

50

60

Average revenue ($)

___

___

___

___

___

___

___

Marginal revenue ($)


Total cost ($)

___
30

___
42

Marginal cost ($)

___

Average cost ($)

___
50

___

___
60

___

___
76

___

___
100

___

140
___

___

___

___

___

___

___

FIRM B
Quantity

Total cost ($)

100

134

154

177

216

266

366

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Course Description: BUECO1507 Business Microeconomics

Average cost ($)


Marginal cost ($)
Price ($)

___
140

Marginal revenue ($)


Total revenue ($)

___

___
___

130
___

___

___
___

120
___

___

___
___

110
___

___

___
___

100
___

___

Complete the two tables above. (4 marks)

Are these firms operating in the short or the long run? (1 mark)

(c)

Are these firms operating under perfect or imperfect competition?


(1 mark)

(d)

What level of output will these firms produce in the short run?
(2 marks)

How would you describe their profit positions? (2 marks)

___
90

80

___
___

___

___
___

___

Firm A: short run / long run


Firm B: short run / long run
Firm A: perfect / imperfect
Firm B: perfect / imperfect
Firm A:.................................
Firm B:.................................

Firm A:.........................................................................................................................................................
Firm B:.........................................................................................................................................................
Question 7:
a Discuss the following statement: In the real world there is no industry which conforms precisely to the
economists model of perfect competition. This means that the model is of little practical value. (2.5
marks)
b

Illustrate with a diagram and explain the short-run perfectively competitive equilibrium for both (i) the
individual firm and (ii) the industry; (2.5 marks for diagram and 2.5 marks for explanation)

c Illustrate with a diagram and explain the long-run perfectly competitive equilibrium for the firm
(2.5 marks).

Question 8:
(2 marks each, 1 for explanation and 1 for the diagram)
Using supply and demand analysis, explain and illustrate graphically the effect of the following situations.
a

Population growth surges rapidly;

The prices of resources used in the production of good X increases;

The government is paying a $1 per unit subsidy for each unit of good Y produced.;

The income of consumers of normal good X increases;

The income of consumers of inferior good Y decreases;


Question 9:

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Course Description: BUECO1507 Business Microeconomics

a Explain and illustrate using a diagram why a monopolist would never produce in the inelastic range of
the demand curve. (3 marks for explanation, 3 marks for diagram)
b In each of the following cases, state whether the monopolist would increase or decrease output:
i

Marginal revenue exceeds marginal cost at the output produced; (2 marks)

(ii) Marginal cost exceeds marginal revenue at the output produced. (2 marks)

END OF ASSIGNEMENT THANK YOU

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