Problem set

Problem set

1) Beer and pies are complements because they are often enjoyed together. When the price of beer
rises, what happens to the supply, demand, quantity supplied, quantity demanded and the price in
the market for pies? Support your answer with a diagram.
2) Over the last 35 years, technological advances have reduced the cost of computer chips. Explain
how this affected the market for computers, the market for computer software, and the market for
typewriters (provide a diagram in each case) (hint: realize that a computer chip is an input into the
production of computers, which makes supplying the computer cheaper).
3) Draw a production function that exhibits diminishing marginal product of labour. Draw the
associated total-cost curve. Explain the shapes of the two curves you have drawn.
4) Mary lives in Brisbane and runs a business that sells guitars. In an average year, she receives $1
million from sales of guitars. Of this sales revenue, she must pay the manufacturer a wholesale cost
of $500,000. She also pays wages and utility bills totalling $150,000. If she does not operate this
guitar business, she can work in an accounting firm and receive an annual salary of $75,000. She
owns her showroom. If she chooses to rent it out, she will receive $50,000 in rent per year. Assume
that the value of this showroom does not depreciate during the year. No other costs are incurred in
running this guitar business. What is Mary’s profit from the accounting (and tax) point of view?
What is her economic profit?
PART B:
5) Suppose that the price of tickets at your local movie theatre is determined by market forces.
Currently, the demand and supply schedules are as follows:
Price ($) Quantity demanded Quantity supplied
4 1000 800
8 800 800
12 600 800
16 400 800
20 200 800
a. Draw the demand and supply curves. What is unusual about this supply curve? Why might
this be true?
b. What are the equilibrium price and quantity of tickets?
c. Demographers tell you that next year there will be more movie goers in the area. The
additional people will have the following demand schedule:
Price ($) Quantity demanded
4 400
8 300
12 200
16 100
Now add the old demand schedule and the demand schedule for the new people to calculate
the new demand schedule for the entire area. What will be the new equilibrium price and
quantity?
6) You plan to set up an ice-cream van. The van itself costs $1000. The permit costs $500. The
ingredients for each cone of ice-cream cost $1, the hourly wage of your helper is $10 and you can
together produce a maximum of 100 cones per hour.
a. What is your fixed cost of doing business? What is your accounting (i.e. explicit) variable
cost per cone of ice-cream? Explain your answers (hint: the wage of the helper has to be
converted into per-cone terms, using that fact that for $10 he can produce 100 cones per
hour).
b. Construct a table showing your total cost, average total cost and marginal cost for output
levels varying from 0 to 2 cones. Roughly draw the total cost, the marginal cost and the
average total cost curves.
c. Mention other explicit as well as implicit costs that may be involved in this type of business.
Explain why above some quantity your average variable cost curve is likely to start sloping
upward.
7) Reflection and critical thinking
a. Write two good questions about any issues covered in this problem set.
b. Describe some real-world situation (from business or personal life) in which you could
apply the above economic concepts and theories, and briefly explain how.