Ace Institute of Management Economic Analysis for Business Assignment II

Assignment Date: February 24, 2011 !"urs#ay$ Attem't all (uestions: %ubmission Dea#line: Marc" 0&, 2011 Full Mar)s: 100

1. Assume that in the short run, a firm is operating in a competitive market for computer keyboard at a price level of Rs. 22 each. The firms marginal cost curve is given by M !2"#$ %here $ is the firms output. Average fi&ed costs are given by 2'($ and average variable costs by 2"2$. a) At %hat level of output does the firm ma&imi*e profits+ (5) b) At this profit ma&imi*ing output level, calculate average total costs and the value of ma&imum profit. (5) c) ,elo% %hat price %ould the firm shut do%n in the short run and in the long run+ -&plain the reason %hy these prices differ. (5) 2. .uppose you take a /ob that pays 01',''' and set some of this income aside in a savings account that pays an annual interest rate of 2 percent. 3se a diagram %ith a budget constraint and indifference curves to sho% ho% your consumption changes in each of the follo%ing situations. To keep things simple, assume that you pay no ta&es on your income. a. 4our salary increases to 0#',''' b. The interest rate on your bank account rises to 5 percent. (5) (5)

1. 6a) 7or the 8roduction function9 $ ! 1':'.2;'.2 %hose, capital 6:) is fi&ed < units, selling price per unit is 02 and the number of labour 6;) hired is 22, find the %age rate of each labour in 0. (5) 6b) =ohn spends all of his income on t%o goods9 food and shelter. The price of food is 02 per

unit and the price of shelter is 01' per s>uare yard. At his current consumption levels, his marginal utilities for the t%o goods are 2' utils per unit and 1' utils per s>uare yard respectively. alculate and check if =ohn is ma&imi*ing his utility+ .uggest a %ay =ohn can reallocate his spending. (5)
#. onsider a market %hich has demand and supply functions as follo%s9

(10)

$d ! 1?'' @ 1''p $s ! 1#'' " A''p 7or the above market, the government is planning to impose 2'B sales ta& on sellers to raise the government revenue. Covernments economic advisor suggested that it should rather impose 01 per unit ta& on sellers %hich %ill raise much higher revenue. Ds that true+ Df yes, by ho% much+
1 I EAB-Assignment 2

2.

.uppose that you and a classmate are assigned a pro/ect on %hich you %ill receive one combined grade. 4ou each %ant to receive a good grade, but you also %ant to do as little %ork as possible. The decision bo& and payoffs are as follo%s9

Assume that having fun is your normal state, but having no fun is as unpleasant as receiving a grade that is t%o letters lo%er. a. Ehat is the dominant strategy for you+ 7or your classmate+ FFFFFFFF.62.2) b. Gefine Hash e>uilibrium. Ehat is the Hash e>uilibrium for the above pro/ect+ F62.2) c. Df neither you nor your classmate kno%s ho% much %ork the other person is doing, %hat is the likely outcome+ Goes it matter %hether you are likely to %ork %ith this person again+ -&plain your ans%er. FFFFFFFFFFFFFFFFFFFFF62.2) d. ,ased on your understanding, do you think that the above payoffs actually reflect you and your classmates %elfare under the above four possible outcomes+ FFF..62.2)
?. The production function for a company is $ ! 2': '.2;'.2.

a) Df the price of the capital is 02 per unit and the price of the labour is 0# per unit, determine the least cost combination of input for producing 2'' units of output. 62) b) Df the price of labour increases from 0# to 05 per unit, determine the efficient input combination for an output rate of 2''. 62)

A. alculate average variable cost, average total cost, and marginal cost for each >uantity. Q 0 1 2 VARIABLE COST $0 10 25 TOTAL COST $ 30 40 55 2 I EAB-Assignment 2

(5)

3 4 5 6

45 70 100 135

75 100 130 165

5. onsider the follo%ing table of longIrun total cost for three different firms9 QUANTITY Firm A Firm B Firm C 1 $60 11 21 2 $70 24 34 3 $80 39 49 4 $90 56 66 5 $100 75 85 6 $110 96 106 7 $120 119 129

(5)

Goes each of these firms e&perience economies of scale or diseconomies of scale+ Jo%+

<. -&plain %ith e&amples ho% a market outcome is the most efficient one.FFF..61')

1'. Jo% does an indifference curve represent consumer preferences+ -&plain four properties that describes most of the indifference curvesFFFFFFFF.. . FFFFF612)

3 I EAB-Assignment 2