BEA111 Principles of Economics 1
Extended Spring Semester 2015/16
Second Weekly Test
INSTRUCTION: Answer each of the four questions using only the space provided for each question. Two questions will be randomly chosen to be graded. It is vital that you show all your work. Each question will be graded out of 5 marks.
Assessment for BEA111 is detailed on pp 9-11 of the Unit Outline. Only three of the four tests will count towards your final grade for the unit – so this test could potentially count 10% towards your final grade.
All students must submit the answers to the test by 5pm MONDAY 21 DECEMBER (NOTE EXTENDED DATE). Your answers must either be submitted as a pdf document in the MyLO Dropbox, or in assignment box No.15 in the third-floor foyer (beside the Coke machine). The answers to the test must be submitted before the deadline; no exceptions will be granted, including for claims of technical difficulties.
MAKE SURE YOU INCLUDE YOUR NAME AND STUDENT NUMBER.
Question 1: Consider the market for X, which is perfectly competitive.
(i) Draw a diagram showing the demand curve, the supply curve, and the initial equilibrium price and quantity.
(ii) On your diagram, shade in the area showing the consumer and producer surplus in the initial equilibrium. Explain your reasoning.
(iii) Consumers now receive a tax cut, increasing their real after-tax income. If X is a normal good, how does this change affect the equilibrium price and quantity in the market for X? Show these effects on a second diagram, and explain carefully.
(iv) Following the tax cut and the establishment of the new equilibrium price and quantity, consumer and producer surplus will have changed. What factors determine how much of the change in surplus is gained by consumers on one hand, and producers on the other? Explain.
Question 2: Toby’s current marginal utility from consuming peanuts is 100 utils per gram and his marginal utility from consuming cashews is 200 utils per gram. If peanuts cost 10 cents per gram and cashews cost 25 cents per gram, is Toby maximising his total utility from the two kinds of nuts? If not, explain how he should rearrange his spending.
Question 3: Consider two individuals, A and B, with a demand curve for apples.
(i) As illustrated in the diagram below, the market price is and at that price they both have the same demand, . Which of the two consumers, A or B, has the greater elasticity of demand for apples? Explain.
(ii) If the market price falls, which of the two consumers would change their demand the most? Explain how this is related to the elasticity of demand.
(iii) Now consider the alternative arrangement for demand curves illustrated in the second diagram; now B has greater demand at the market price than A, although both curves have the same slope. At the market price , who has the greater elasticity of demand – A or B? Explain.
Question 4. The table below describes the cost structure of a perfectly competitive firm. Note that four of the columns have been left blank.
Output (Q) ATC AVC Fixed Cost Total Cost Marginal Cost Marginal
1 44 4
2 28 8
3 29 16
4 34 24
5 40 32
The market price for the firm’s output is $49.
a) Complete the table, showing the appropriate calculations.(Hint: You are given enough information in the table to calculate fixed cost)
b) Does the firm’s production function have diminishing marginal product for at least some of its inputs? Explain.
c) Explain why producing only one unit (Q=1) is not profit maximising.
d) How many units should this firm produce to maximise profits? Explain.
e) Calculate the firm’s profit if it produces the profit maximising output.