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ECONOMICS FOUNDATION - MBA 502

Homework Assignments

Chu Nguyen Quynh Huong

Class: M0111

Assignment 1 – Microeconomics

1. The Basics of Supply and Demand (Pindyck – Chapter 2): Excercises 9, 10 (page 63).

Excercises 9:

a) The original demand is

QD =18-3P

And supply is

QS =-6+9P

The 20-percent increase in demand means that the new demand is 120 percent of the original demand, so the new demand is

Q ́D =1.2QD

Q ́D =1.2(18–3P)=21.6–3.6P.

The new equilibrium is where Q ́D equals the original supply: 21.6 – 3.6P = - 6 + 9P

The new equilibrium price is P* = $2.19 per pound. An increase in demand of 20 percent, therefore, increases price by 19 cents per pound, or 9.5 percent.

b) ...view middle of the document...

Therefore, - 0.05 = - b(50/34), and b = 0.034, or 0.03 rounded off.

Substituting b = 0.03, D = 34, and P = 50 in the demand equation gives

34 = a - 0.03(50)

so that a = 35.5.

Hence the short-run world demand equation is D = 35.5 - 0.03P.

b) Do the same calculations as above but now using the long-run elasticities:

ES = 0.4

ED = - 0.4: ES = d(P*/Q*)

ED = - b(P*/Q*)

implying 0.4 = d(50/20)

⇨ 0.4 = - b(50/34).

So d = 0.16 and b = 0.27.

Next solve for c and a:

Sc = c + dP and D = a – bP

implying 20 = c + 0.16(50) and 34 = a - 0.27(50).

So c = 12 and a = 47.5.

c) OPEC’s supply increases from 14 bb/yr to 16 bb/yr as a result.

Add 16 bb/yr to the short- run and long-run competitive supply equations. The new total supply equations are:

Short-run: S’T=16 + Sc = 16 + 18 + 0.04P = 34 + 0.04P, and

Long-run: S”T= 16 + Sc = 16 + 12 + 0.16P = 28 + 0.16P

These are equated with short-run and long-run demand, so that:

34 + 0.04P = 35.5 - 0.03P

implying that P = $21.43 in the short run

28 + 0.16P = 47.5 + 0.27P

implying that P = $45.35 in the long run.

2. The Analysis of Competitive Markets (Pindyck – Chapter 9): Exercise 1 (page 343).

a) in free market equilibrium: Ls = LD = 80-10w

If the minimum wage is $5: LD = 30

The number of people be employed is 30 million workers

b) w denote the wage received by the employee

Ls = 10ws

Ws – wd = 1 = s

LD = 80 – 10(ws-1) = 90 – 10ws

Ls = LD

⇨ 10ws = 90 – 10ws

⇨ ws = 4.5

The new equilibrium will be given by intersection of the old supply curve with the new demand curve, ws= $4.5/ hour

L = 10w = 45

3. Theories of Production and Costs (Pindyck – Chapter 6 & 7): Exercise 8 (page 220); Exercise 1 (page 261)

Acounting cost = 40000+ 0 + 25000=65000

Economic cost = 40000+0+25000+ (50000-40000) + 24000 = 99000

Exercise 9 (page 262).

TC = 200 + 55q

A, the company’s fixed cost

q= 0 => TC = 200

⇨ FC = 200

b, if the company produce 100000 unit

q = 100000/1000 = 100

⇨ VC = 55q = 5500

⇨ AVC = vc/q = 55

c) AVC = constant => marginal cost MC = AVC

=> MC = 55

d, AFC = FC/q = 200/q

q= 100

⇨ AFC = 2

E, when the company borrow’s money

Fixed cost = FC’ = 50000

New variable cost = VC’ = 45000

⇨ AVC’ = 45

⇨ TC = 50 +45q +3i

4. Market Structures (Pindyck – Chapter 8 & 10):

Exercise 5 & 6 (page 307);

C = 50 +4q+2q2

MC = 4 + 4q

At the given market price of $20

MC = MR = P

⇨ 4 +4q = 20

⇨ q = 40

the given is producing 5 unit => it is not maximizing it’s profit

when q = 4, the maximized profit = Pq – C = 20.4 – (50 +4.4 + 2q2) = -18

when q = 5, the profit == Pq- C = -20

The firm should decrease its quantity of output to 0 and exit the market in the long run.

Exercise 6 (page 388).

C = 100+2q2

MC = 4q

P = 90 – 2Q

MR = 90 – 4Q

A, the profit can maximized its profit when MR = MC

MC = (c/(q = 4q

⇨ q = 11.25

the monopoly quantity = 11.25

the monopoly price = P = 90 -2Q = 67.5

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