Question

1. Suppose there is a decrease in the price of gasoline. With the aid of a demandand-supply diagram, explain how this will affect the equilibrium price and

quantity in the market of gasoline cars. (6 marks)

2. Suppose the market for Japanese grapes is represented by:

Supply: Q = 400 + P2

Demand: Q = 1000 – 5P2

i) Find the market equilibrium price and quantity.

ii) Calculate the price elasticity of demand when the market is at the

equilibrium. Show your steps. (5 marks)

3. Suppose the market of ice-cream is competitive. A typical firm producing icecream has the following total cost function:

C = 60 + 3q + 6q2

where C is total cost and q is the output level.

Assume the market price of ice-cream is $39.

i) Find the marginal cost function of a typical ice-cream firm. Show your

steps.

ii) Find the profit maximizing output level of a typical ice-cream firm. Show

your steps.

iii) Find the amount of loss of a typical ice-cream firm. Show your steps.

iv) Explain whether a typical ice-cream firm should shut down in the short

run.

(9 marks)

Answer 1

If a firm could not cover its variable cost in the short run it should shut down. Here the firm covers its variable cost.