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2024 ECN 1115 Assignment 2

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41 views3 pages

2024 ECN 1115 Assignment 2

Uploaded by

mbalauelijah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIVERSITY OF ZAMBIA

INSTITUTE OF DISTANCE EDUCATION


ECN 1115: INTRODUCTION TO MICROECONOMIC THEORY

Assignment 2 (group work)

Specifications
 Your answer should be typed
 Due: 12th July, 2024
 Work in your groups
 Indicate active group members on the cover page
 Each group member is expected to submit a copy of the assignment.

Question One

You are given the following data concerning the production costs and the average revenue of a
profit maximising firm that produces Good X. The fixed costs of production are K100.

Output of good X Short run average costs Average Revenue (AR)


(AVC)
1 110 300
2 95 250
3 80 210
4 75 180
5 82 150
6 85 120
7 90 100
8 100 90
9 110 80
10 120 70

a) Given the table above, calculate Total Variable costs (TVC), Total Costs (TC), Marginal
costs (MC, Marginal revenue (MR) and profit (loss) at each level of output. (insert
extra columns in the table) (10
marks)
b) Determine the profit maximizing level of output. (1 mark)
c) Calculate the smallest rise in TVC that would force the firm to cease production in the
short run. (3 marks)
d) Distinguish between the short run and long run periods of production. (6 marks)
Total: 20 marks
Question Two

Your university newspaper, The Unipress, has fixed production costs of K70 per edition, and
marginal printing and distribution costs of 40n/copy. The Unipress sells for 50n/copy.

a) Write down the associated cost, revenue, and profit functions. (6 marks)
b) What profit (or loss) results from the sale of 500 copies of the Unipress? (2 marks)
c) How many copies should be sold in order to break even? (2 marks)
Total: 10 marks

Question Three

Suppose a firm has a cost function TC (Q) = 100 + 4Q2 – 2Q and faces a price of K150 on a
perfectly competitive world.

a) Determine the level of output that it should produce.


b) Find the profit at this level of output.
c) Depict this equilibrium position diagrammatically and explain what the firm will do.
Total: 12
marks

Question Four

a) Airbus makes 50 planes a year, which sell for $50 million each. If Airbus raises its price,
Boeing will leave its prices unaltered, so Airbus loses market share. It faces an elastic
demand curve. However, if Airbus cuts its price below $50 million, Boeing is forced to
match the price cut, so quantity demanded increases only to the extent that additional
plane orders are placed when planes are cheaper. Each company faces inelastic demand
when it cuts the price.

Draw the demand curve that Airbus thinks it faces. (4 marks)

b) Suppose the car manufacturing industry is a monopoly.


i) Explain the equilibrium position of the firm in the short run and in the long-run.
(4 marks)
ii) Discuss the concept of a natural monopoly. Provide examples and explain why
regulation might be necessary in such markets (8 marks)
iii) Describe any two (2) regulatory approaches that governments can take to
control monopolies. (4
marks)
Total: 20 marks

Question Five

Suppose that the labor market for cotton farm workers is characterized by a downward-sloping
labor demand curve and an upward-sloping labor supply curve. Assume that the labor and
output market for cotton is perfectly competitive.
a) Draw the market labor supply and demand curves on the left hand side, and an
individual firm’s labor demand curve on the right hand side. Label the equilibrium
market wage w ∗ and market employment Q∗, as well as the individual firm’s
employment q∗. Explain the individual demand curve.
(6 marks)
b) Draw a separate diagram depicting the individual supply curve of labour. Explain
this curve. (6
marks)
c) Outline the key characteristics of a perfectly competitive labour market. Describe how
these characteristics differ from those of a monopsonistic labour (8 marks)
d) Explain the potential effects of any two (2) labour market policies on a perfectly
competitive labour market. (6 marks)
e) Assume that the labor market for cotton is in equilibrium described in part (a).
Parliament makes a proposal to impose a minimum wage above the current equilibrium
wage. How will this minimum wage regulation affect the wage and the quantity of
labour? Explain and show graphically.
(8 marks)
f) Given that sunflower is an alternative crop to cotton, suppose that the labor supply for
sunflower is given by Supply: w = L + 2, where w is the wage per hour worked and L
is the number of employees in thousands. The marginal product of labor is given by
MPL = 10 − 0.5L. The market for sunflower is in equilibrium and the price is K2 per
kg.

Determine the equilibrium wage and the quantity of labour. (4 marks)

Total: 38 marks

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