Answer the following FOUR questions:
(Your answer is expected to be provided after each question)
Question One
a) Explain the effect of the increase of Coffee prices on the equilibrium price and equilibrium quantity of the tea.
b) A student claims to have spotted a UFO over the desert outside of Dubai. How will his claim affect the supply (not the quantity supplied) of binoculars in Dubai stores?
c) If we have an inferior good, explain the impact of the decrease in consumer’s income on the demand of that good.
1. How would each of the following affect the market supply curve for corn? A new and improved crop rotation technique is discovered.
2. The price of fertilizer increases
Question Two
Based on the following table, answer the questions below:
Output TC TFC TVC ATC AFC AVC MC
0 $400
1 $120
2 $240
3 $840
4 $320
5 $240
a) Complete the table below based on the relationships among the various cost functions.
b) If the marginal revenue equals $200, what is the level of production that maximize the profits of producer? Explain your answer.
Question Three
The Racqueteer Company makes tennis racquets out of graphite supplied to it by Acme Sporting Goods, which pays Racqueteer $10 for each finished racquet. Racqueteer’s only factors of production are lathe operators and a small building with a lathe. The number of racquets per day it produces depends on the number of employee-hours per day, as shown in the table below.
Number of racquets per day Number of employee-hours per day
0 0
5 1
10 2
15 4
20 7
25 11
30 16
35 22
a) If the wage is $15 per hour and Racqueteer’s daily fixed cost for the lathe and building is $60, what is the profit-maximizing quantity of racquets?
b) What would be the profit-maximizing number of racquets if the firm’s fixed cost were not $60 per day but only $30?
Question Four
Waleed owns and manages a café in downtown whose annual revenue is $5,000. Annual expenses are as follows:
Labor $2,000
Food and water 500
Electricity 100
Vehicle lease 150
Rent 500
Interest on loan for equipment 1,000
a) Calculate Waleed’s annual accounting profit.
b) Waleed could earn $1,000 per year as a recycler of aluminum cans. However, he prefers to run the café. In fact, he would be willing to pay up to $275 per year to run the café rather than to recycle.
1. Is the café making an economic profit? Calculate the economic profits?
2. Should Waleed stay in the café business? Explain your answer.
c) Suppose the café’s revenues and expenses remain the same, but recyclers’ earnings rise to $1,100 per year. Is the café still making an economic profit? Show your calculations.
