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Problem Set2

This document contains a practice problem set for a principles of microeconomics course. It includes 6 questions about topics such as the effects of taxes, price floors, marginal costs, monopoly profits, and cost-benefit analysis for building a bridge. Students are asked to analyze supply and demand diagrams, calculate costs and profits, determine efficient price and output levels, and recommend policy decisions.

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Lê Hoàn Minh Đăng
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© © All Rights Reserved
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17 views

Problem Set2

This document contains a practice problem set for a principles of microeconomics course. It includes 6 questions about topics such as the effects of taxes, price floors, marginal costs, monopoly profits, and cost-benefit analysis for building a bridge. Students are asked to analyze supply and demand diagrams, calculate costs and profits, determine efficient price and output levels, and recommend policy decisions.

Uploaded by

Lê Hoàn Minh Đăng
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ECO204/ PRINCIPLES OF MICROECONOMICS Q3 (2019-2020)

Problem Set #2
Deadline: 9:40am August 18, 2020

Question 1: (10 points)


How does a tax on a good affect the price paid by buyers, the price received by sellers,
and the quantity sold?

Question 2: (20 points)


The government has decided that the free-market price of cheese is too low.
a. Suppose the government imposes a binding price floor in the cheese market.
Draw a supply-and-demand diagram to show the effect of this policy on the price of
cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese?
b. Farmers complain that the price floor has reduced their total revenue. Is this
possible? Explain.
c. In response to farmers’ complaints, the government agrees to purchase all the
surplus cheese at the price floor. Compared to the basic price floor, who benefits from
this new policy? Who loses?

Question 3: (10 points)


If the government places a $600 tax on luxury cars, will the price paid by consumers rise
by more than $600, less than $600, or exactly $600? Explain.

Question 4: (20 points)

XYZ, Inc., makes computers and then sells them door-to-door. Here is the relationship
between the number of workers and XYZ’s output in a given day:

Workers Output Marginal Total Cost Average Total Marginal Cost


Product Cost
0 0
1 20
2 50
3 90
4 120
5 140
6 150
7 155

a. Fill in the column of marginal products. What pattern do you see? How might you
explain it?
b. A worker costs $100 a day, and the firm has fixed costs of $200. Use this information
to fill in the column for total cost.
c. Fill in the column for average total cost. (Recall that ATC = TC/Q.) What pattern do
you see?
d. Now fill in the column for marginal cost. (Recall that MC = ΔTC/ΔQ.) What pattern
do you see?

EIU – BECAMEX BUSINESS SCHOOL Page 1


ECO204/ PRINCIPLES OF MICROECONOMICS Q3 (2019-2020)

e. Compare the column for marginal product and the column for marginal cost. Explain
the relationship.
f. Compare the column for average total cost and the column for marginal cost. What
pattern do you see?

Question 5: (20 points)

A monopoly company has the demand function (D) for its products and Total Cost
function (TC) as follows:
(D): P = 100 – 0.01Q ($)
(TC): TC = 30,000 + 50Q ($)
Calculate the quantity of products (Q, unit) that the company will produce to make its
maximum profit?

Question 6: (20 points)


A company is considering building a bridge across a river. The bridge would cost $2
million to build and nothing to maintain. The following table shows the company’s
anticipated demand over the lifetime of the bridge:

Price per crossing ($) Number of crossing, in thousands


8 0
7 100
6 200
5 300
4 400
3 500
2 600
1 700
0 800

a. If the company were to build the bridge, what would be its profit-maximizing price?
Would that be the efficient level of output? Why or why not?
b. If the company is interested in maximizing profit, should it build the bridge? What
would be its profit or loss?
c. If the government were to build the bridge, what price should it charge?
d. Should the government build the bridge? Explain.

EIU – BECAMEX BUSINESS SCHOOL Page 1

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