Question

1. Emilio buys pizza for $10 and soda for $2. He has income of $100. His budget constraint will experience a parallel outward shift if which of the following events occur?

a. The price of pizza falls to $5, the price of soda falls to $1, and his income falls to $50.

b. The price of pizza rises to $20, the price of soda rises to $4, and his income remains the same.

c. The price of pizza falls to $8, the price of soda falls to $1, and his income rises to $120.

d. The price of pizza rises to $20, the price of soda rises to $4, and his income rises to $400.

2. Charlie buys only milk and cereal. Milk is a normal good, while cereal is an inferior good. What does Charlie do when the price of milk rises?

a. buys less of both goods

b. buys more milk and less cereal

c. buys less milk and more cereal

d. buys less milk, but the impact on cereal is ambiguous

3. Raj opens up a lemonade stand for two hours. He spends $10 for ingredients and sells $60 worth of lemonade. In the same two hours, he could have mowed his neighbour’s lawn for $40. Raj has an accounting profit of ___ and an economic profit of ___.

a. $50, $10

b. $90, $50

c. $10, $50

d. $50, $90

4. A firm is producing 1000 units at a total cost of $5000. If it were to increase production to 1001 units, its total cost would rise to $5008. What does this information tell you about the firm?

a. Marginal cost is $5, and average variable cost is $8.

b. Marginal cost is $8, and average variable cost is $5.

c. Marginal cost is $5, and average total cost is $8.

d. Marginal cost is $8, and average total cost is $5.

5. A firm is producing 20 units with an average total cost of $25 and marginal cost of $15. If it were to increase production to 21 units, which of the following must occur?

a. Marginal cost would decrease.

b. Marginal cost would increase.

c. Average total cost would decrease.

d. Average total cost would increase.

Part II: Problems and Applications (90 marks)

1. Jim buys only milk and cookies.

a. In 2015, Jim earns $100, milk costs $2 per litre, and cookies cost $4

per dozen. Draw Jim’s budget constraint. (10 marks)

b. Now suppose that all prices increase by 10 percent in 2016 and that Jim’s salary increases by 10 percent as well. Draw Jim’s new budget constraint. How would Jim’s optimal combination of milk and cookies in 2016 compare to his optimal combination in 2015? (10 marks)

2. Consider your decision about how many hours to work.

a. Draw your budget constraint assuming that you pay no taxes on your

income. On the same diagram, draw another budget constraint assuming that you pay a 15 percent tax. (10 marks)

b. Show how the tax might lead to more hours of work, fewer hours, or the same number of hours. Explain. (10 marks)

3. Your aunt is thinking about opening a hardware store. She estimates that it would cost $500 000 per year to rent the location and buy the stock. In addition, she would have to quit her $50 000 per year job as an accountant.

a. Define opportunity cost. (10 marks)

b. What is your aunt’s opportunity cost of running a hardware store for a year? If your aunt thought she could sell $510 000 worth of merchandise in a year, should she open the store? Explain. (10 marks)

4. A commercial fisherman notices the following relationship between hours spent fishing and the quantity of fish caught:

Hours Quantity of Fish (in kilograms) 00

1 10

2 18

3 24 4 28 5 30

a. What is the marginal product of each hour spent fishing? (10 marks)

b. Use these data to graph the fisherman’s production function. Explain its shape. (10 marks)

c. The fisherman has a fixed cost of $10 (his pole). The opportunity cost of his time is $5 per hour. Graph the fisherman’s total-cost curve

Answer 1

Answer 1. The price of pizza rises to $20, the price of soda rises to $4, and his income rises to $400.

Reason- Budget line will shift outwards when income rises and will be parallel when price ratio remains same. 10/2=20/4 and 400>100.

Answer 2. less milk more cereal

Reason- When price of milk rises, demand for normal good milk falls. Since he consumes only two goods he will now consume me cereals.

Answer 3. 50,10

Reason- Accounting profit= Total revenue- Explicit cost= $60-$10=$50

Economic profit= Total revenue- Explicit cost- Implicit cost= $60-$10-$40= $10.

Answer 4. Marginal cost is $8, and average total cost is $5.

Reason- Marginal cost is the cost of producing one more unit $5008-$5000=$8

Average cost= Total cost/ Quantity= $5000/1000= $5

Note-According to HOMEWORKLIB RULES first four questions are answered.