Q.

1 Solution-
a. Point Elasticity of demand

% Change in Quantity = (40 - 50)/(50) = -0.20 = -20%

% Change in Price = (6.00 - 4.00)/(4.00) = 0.50 = 50%
Elasticity = |(-20%)/(50%)| = |-0.4| =/ 0.4 (4 or 0)

The elasticity of demand is 0.4 (inelastic).

b. (To find the quantity when the price is Rs. 10 a box, we use the same formula: )

Elasticity = 0.4 = |(% Change in Quantity)/(% Change in Price)|

% Change in Price = (10.00 - 4.00)/(4.00) = 1.5 = 150%

(Remember that before taking the absolute value, elasticity was -0.4, so use -0.4 to calculate the
changes in quantity, or you will end up with a big increase in consumption, instead of a
decrease! )

-0.4 = |(% Change in Quantity)/(150%)|

|(%Change in Quantity)| = -60% = -0.6
-0.6 = (X - 50)/50
X = 20 (6 or 0)

Q.2 a. [6 or 0]

Toll
12

10

8 Consumer
Surplus

6
P = 12 - 2Q

Crossings
1 2 3 4 5 6 7

b. At a price of zero, the quantity demanded would be 6. [4 or 0]

c. The consumer surplus with no toll is equal to (0.5)(6)(12) = 36. [3 or 0 for both values]
Consumer surplus with a Rs. 6 toll is equal to (0.5)(3)(6) = 9,
(illustrated in Figure).
Therefore, the loss of consumer surplus is Rs. 27. [2 or 0]
Q. 3. a.

We have the system of equations Q = 10PJ – 5*1 and Q = 100 − 15PJ + 10*5.
Solving for PJ and Q we get that PJ = 6.2 and Q = 57. [4 or 0]

b.
Q = 10PJ – 10 Q = 150 − 15PJ
Solving for PJ and Q we get that PJ = 6.4 and Q = 54. [4 or 0]

c.
Note that the price ceiling will be binding, since the equilibrium price from (a) is PJ = 6.2.
Plugging the price ceiling level into the supply and demand equations we get that QS = 45 and
QD = 75. QD > QS.
Hence, there will be shortage [2 or 0] of demand for apple juice of QE = 30. [3 or 0]

Q.4

MPK = 0.6(100) K 0.6-1 L0.4 = 60 (100/25)0.4 = 104.47 (Marking: 3/0)

MPL = 0.4(100) K 0.6 L0.4-1 = 40 (25/100)0.6 = 17.41 (Marking: 3/0)

Q.5 a. TC = Q 3 – 24 Q 2 + 600 Q

AC = TC/Q = Q3 – 24Q2 + 600Q / Q

AC = Q2 – 24Q + 600

AC’= 2Q – 24 (First order derivative)

Q = 12 (Marking: 3/0)

’’
AC = 2 > 0 (Second order derivative) (Marking: 1/0)

MC = d/dQ (TC) = 3Q2 – 48Q + 600

MC’= 6Q – 48 (First order derivative)

Q = 8 (Marking: 3/0)
’’
MC = 6 > 0 (Second order derivative) (Marking: 1/0)
Q.5 b.

Output, Capital, K Labor, L Fixed Variable Total AFC AVC ATC MC

Q (machines) (Workers) Cost, Cost, Cost,
(Units) FC VC TC
0 3 0 1500 0 1500 - - - -

13 3 1 1500 400 1900 115.38 30.77 146.15 30.76

27 3 2 1500 800 2300 55.56 29.63 85.19 28.57

39 3 3 1500 1200 2700 38.46 30.77 69.23 33.33

50 3 4 1500 1600 3100 30 32 62 36.36

59 3 5 1500 2000 3500 25.42 33.90 59.32 44.44

Marking Scheme: 2/0 3/0 2/0 2/0 2/0 2/0 3/0

Q.6

Solution:
a. Optimal consumption bundle is where:
MUf/Pf = MUc/Pc

MUf = C+10 MUc = F Pf = $1 Pc = $2

MUf/MUc = Pf/Pc → (C+10)/F = 0.5 → F - 2C = 20
Equation of budget constraint is: F + 2C = 10
There are two equations and two variables. Solve to get C = -2.5 (3 or 0)

Consumption of C is negative and the entire budget is exhausted therefore the entire income is
spent in consumption of F and 0 units of C. Price per unit is $1, hence optimal consumption
bundle for the individual is (10, 0) (3 or 0)

b.

BC
C↑ IC

F*=10 F→ [4 or 0]
c. Despite exhausting the entire income on Frankie at the current optimal consumption with the
given income MUf/Pf > MUc/Pc therefore the individual will consume more of F with an
incremental increase in income. [4 or 0]

Q7.
a. at Q=4 the short run marginal cost will be minimized. [3 or 0]

Sol: MC = 240 - 8Q + Q2
dMC/dQ = -8 + 2Q for minimum set the gradient =0 to obtain Q = 4
Apply the second derivative test to verify the point is at minimum of the function [1 or 0]

b. the average variable cost will be minimized for output level greater than Q=4 units.

Sol: AVC = 240 - 4Q +(1/3)Q2

dAVC/dQ = -4+(2/3)Q for minimum set the gradient = 0 to obtain Q = 6 > 4 [3 or 0]

Apply the second derivative test to verify the point is at minimum of the function [1 or 0]

c.
Sol: Total Profit = Total Revenue - Total Cost
TR-TC (profit) is maximum at MR=MC
900 = 240 - 8Q + Q2
Solve for Q to obtain Q=30, and -22. Since Q cannot be negative, therefore Q=30 [4 or 0]
At Q=30 total revenue is $27,000 and Total Cost = $13,600
Difference = $13,400 [2 or 0]

Q8. Solution: Use the data to construct the Production Possibility Schedule for Total
Apartments and Bread production.
a)
Production Possibility Schedule
Label Apartments Bread
(thousands of units) (millions of loaves)
A 30 0
B 24 16
C 18 22
D 6 26
E 2 29
F 0 30

Draw a rough sketch by plotting these points on X-Y plane (not to scale) [5 or 0]

b) MRT = |3| if moving from C to D or |1/3| if moving from D to C [4 or 0]