MT Practice Qs

Q1. A firm faces the following demand and cost functions:

P = 23 – 0.6q
AVC = 3 + 0.4q
AFC = 40q-1
(a) Calculate the output that minimizes Average Cost.
(b) Calculate the output that maximizes profits.

Q2. A firm faces the following demand and total cost functions:

Q= 29.5 – 0.5P

TC = 50 + 4Q + 0.5 Q2
(a) At what price is demand unitary elastic?
(b) Calculate Q that minimizes Average Cost.
(c) Calculate the Profit-maximizing price and quantity.

Q3. Given that a firm’s profit function is:

 = -50 + 28Q1 + 14Q2 - 2Q12 - Q22 - Q1Q2
Determine the values of Q1 and Q2 that maximize profit.

Q4. The market for woozles is characterized by the following demand and supply curves:
Qd = 100 - 5P
Qs = 5P
The government imposes a price floor of $15.
If the government is required to purchase any excess supply at the price floor, how much will the
government have to pay to purchase the excess in this market?

Q5. An individual faces the following utility function:

U = 4XY + 10X - X2 + 20Y – 5Y2
(a) Calculate her utility-maximizing choice of X and Y if both goods are free, i.e., PX = PY = 0?
(b) Calculate her utility-maximizing choice of X and Y if Px = Py = $2, and her income is $150?
(c) Give an economic interpretation to the value of the Lagrangian multiplier.
(d) What income level maximizes her total utility from X and Y?
Q6. Shannon visits Absurdistan where the local currency is the absurd; the only souvenirs she is
interested in buying are absurdities (X) and nonentities (Y), both made in China, of course! Her
preferences for x and y trinkets are given by:
U = 6x - 0.5x2+ 4y - y2
and PX = 2, PY = 4.
(a) What is Shannon’s optimum choice of x and y trinkets if she has 14 absurds to spend.
(b) What is her optimum choice of x and y trinkets if instead she were to have 38 absurds to
spend.
(c) Provide a one-sentence explanation to the marginal utility of an absurd obtained in (b) above.
(d) At what income level is Shannon’s marginal utility of an absurd equal zero?
(e) Sketch Shannon’s indifference curves and budget constraint, illustrating the solutions to (a), (b)
and (d).

Q7. The demand for Joy’s new high-alcohol content beer has enjoyed rapid growth recently.
From the analysis of Joy’s various outlets, it was found that the demand curve follows this
pattern:

QJ = 150 - 200 PJ - 100 PC + 10 T – 150 AC + 250 AJ

where QJ = the number of beers served per week

PJ = the price of Joy’s new high-alcohol content beer
PC = Average price of the competition
T = Average outdoor temperature (measured in ya-ba-da-ba-doo degrees)
AC = Monthly Advertising expenditures (in units) by the competition
AJ = Monthly Advertising expenditures (in units) by Joy’s outlets
Currently PJ = 7.00, PC = 6.00, T = 35, AC = 10, and AJ = 20.
(a) Should PJ be increased or decreased to maximize revenue? How do you know?
(b) Calculate the elasticity of demand for Joy’s beer with respect to PC, T, and AC.
(c) Calculate the price range over which the demand for Joy’s beer is price elastic.
(d) If the cost per beer is 5 and Joy’s behaves as a monopolist, how many beers will be sold
and
at what price?

Q8. Desi Samosas, Ltd. provides delivery and carryout service to the city of Surrey and
surrounding areas. An analysis of the daily demand for samosas reveals the following demand
equation:
Qx = 1,500 - 200Px - 5PS + 0.01CSP + 400S
where Qx is the quantity measured by the number of samosas per day, Px is the price ($), PS is a
price index for soda pop, CSP is the college student population and S, a binary or dummy
variable, equals 1 on Friday, Saturday and Sunday and zero otherwise.
Currently Px = $5, PS = 50, and CSP = 35,000.
(a) Calculate the quantity demanded on Tuesdays and Fridays if all price-related variables are as
specified above.
(b) Calculate the price elasticity of demand for Desi samosas on these two days.
(c) If Desi Samosas, Ltd is primarily interested in maximizing revenue, should they charge the
same price every day of the week? If not, what prices should they charge?
(d) If the cost per samosa is $2.00 and Desi Samosa, Ltd., behaves as a profit-maximizing
monopolist, should they charge the same price every day of the week? If not, what prices should
they charge?

Q9. The demand for Widgets (QX) is a function of the price of widgets (PX), the price of

woozles (PY), and per capita income (I):

QX = 1950 - 10 PX + 5 PY - 0.1I

Currently, PX = 25, PY = 10, and I = 15,000.

(a) Calculate the elasticity of demand for widgets with respect to its own price, the price of
woozles, and income.
(b) Over what range of prices is the demand for widgets elastic?
(c) If the cost per widget is 10 and the manufacturer behaves as a monopolist, how many
widgets will be sold and at what price.
(d) By how much must the price of widgets change if there is a 1% decrease in per capita
income and the goal is to keep QX constant.
(e) What happens to the elasticity of demand for widgets if the price of woozles doubles?

Q10. Jack consumes widgets (X) and a composite good (Y) whose price is always 1. In period 1
the widget company sets the price of widgets at $10 per unit and Jack’s equilibrium basket
consists of 20 widgets and 100 units of the composite good. In period 2 the widget company
revises its pricing plan, charging $15 per unit for the first 10 units and $5 per unit for each
additional unit. Using budget constraints and indifference curves,
(i) Illustrate Jack’s equilibrium (on the same diagram) in period 1 and 2.
(ii) In which period is Jack better off and why?
Q11. Consider a family with a cash income of $1,000 per month. With food on the horizontal

axis and income on the vertical axis, and assuming the price of food is $1:

(a) Illustrate the equilibrium of a family who spends 60% of their income on food.
(b) Suppose now this family is eligible for food stamps: It pays $200 per month to obtain $600
worth of food. Draw this family's new budget constraint.
(c) Illustrate the family’s new equilibrium if they continue buying the same amount of food as
before.
(d) Show graphically that this family may be better off if they were given $400 in cash instead.
Do they buy more or less food?

Q12. With good Y on the y-axis and coffee on the x-axis,

(a) Using indifference curves and budget lines, illustrate three utility-maximizing equilibrium
points for Maxwell whose income elasticity of demand for coffee is zero.

(b) Is good Y normal or inferior to Maxwell?

(c) Explain whether you agree or disagree with the following statement: At each of the three
equilibrium points in part (a), MUx/Px = MUy/Py and the marginal utility of money (l) is
constant.

Q13. Assess the validity of the following: If true, mark true; if false, explain why the
statement is false.

(a) In a world with just two goods, both goods cannot be inferior.
(b) The quantity demanded at a zero price is undefined for a constant elasticity demand
curve.
(c) Higher prices for houses will cause the demand for houses to decline. This will eventually
result in lower prices for houses.
(d) For constant elasticity demand curves, any price change will have a zero effect on total
revenue.
(e) The marginal rate of substitution decreases as the consumer moves down any indifference
curve.
(f) According to frictional profit theory, above normal profits are sometimes caused by
barriers to entry that limit competition.
(g) When the price of butter was “low”, consumers spent $5 billion annually on its
 consumption. When the price doubled, consumer expenditures increased to $7 billion.
This means that people are buying more butter at the higher price.
(h) For the demand curve Q = 20 – P, price elasticity equals zero at P = 20.
(i) If the price consumption curve for good Y is parallel to the y-axis, the demand for good Y
is unitary elastic.
(j) The demand for good X is given by Q X = 20 PX-2PY1.5I0.5. If income (I) decreases by 2
percent, and the goal is to keep QX constant, the price of X must be lowered by one percent.