Kyiv National Economic University named after Vadym Hetman

Course work in microeconomics

Anna Kolos
EO-107i
Management of business organizations
 1. The first chapter: the main tasks performed on the topics "Introduction to
microeconomics" and "Fundamentals of supply and demand analysis"

1.1
Conditions: Define the difference in the size of producer’s surplus and
consumer’s surplus between the basic case and case when all conditions are the same
and only the slope of the supply line will be steeper. For example, let the “s” is equal
to not “2” but 0.5.
Imagine that other conditions are held constant but the slope of the supply line
becomes bigger. Please remember that to display the changes in slope we change the
coefficient near the price and so the smaller will be that coefficient the steeper will be
the supply line and the lower will be the size of supplier’s surplus. So, we say that the
lower price elasticity of supply leads to a smaller supplier’s surplus (if other
conditions are held constant).
Please check that thesis.

Solution:
The first step: we find the initial equilibrium. The initial equilibrium conditions
will be expressed as follows:
-100+2P = 500 – 2P
4P = 600
P = 150
Qd = Qs = 200

The second step: we find the initial size of consumer surplus and producer’s
surplus.
To do that for consumer surplus we need to know the maximum (initial) price
of demand, the price of equilibrium and equilibrium quantity.
The maximum price of demand may be defined if we equate the demand function
to zero (because the maximum price is a price which provides the zero quantity
demanded). The price of equilibrium and equilibrium quantity are known by the
defined earlier equilibrium conditions (P is equal to 150, quantity is equal 200).
As a result we have:
Qd = 0 = 500 – 2P
Pdmax = 250
To define a producer's surplus, we need to know the minimum (initial) price of
supply, the price of equilibrium and equilibrium quantity.
The minimal price of supply may be defined if we equate the supply function to
zero (because the minimal price is a price which provides the zero quantity supplied).
The price of equilibrium and equilibrium quantity are known by the defined earlier
equilibrium conditions.
As a result we have:
Qs = 0 = -100 + 2P
Psmin = 50
The consumer’s surplus in general form is equal to ((Pdmax – Pe) * Qe ) / 2. So
in our case the consumer’s surplus is equal to:
((250 – 150) * 200 ) / 2 = 10000
The producer’s surplus in general form is equal ( (Pe – Psmin) * Qe ) / 2 . So in
our case the producer’s surplus is equal to:
( (150 – 50) * 200 ) / 2 = 10000

The third step: the expression of government intervention on the market (as we
remember our problem supposes that the government passes a tax: 20 monetary units
per unit of a good. It means that every unit purchased brings to the producers not
price, but price minus tax. We express such events through change of supply function.
The new supply function will be defined as:
-100 + 2 * (P-20) as displaying that each unit of good sold brings to the producer
revenue which equal price minus tax.
And we repeat the procedure of equilibrium defining with new supply function
and unchanged demand function:
 -100 + 2 * (P-20) = 500 – 2 * P (and), that leads us to new parameters of
equilibrium:
-140 + 2P = 500 – 2P, 4P = 640, P = 160, Q = 180
It doesn’t matter to display tax passing through the demand or supply function.
We will obtain the same equilibrium parameters if we amend the supply or demand
function, but the general logic of tax displaying should be kept. If we change the
supply function we must write “P – T”, as an expression, that every unit purchased
brings to the producer “price minus tax” . If we change the demand function we will
write “P+T” as an expression of fact, that consumers are faced with the need to pay
the sum of price with tax per unit.
So, we obtain the new parameters of equilibrium:

The fourth step: we define the size of consumer and producer surplus after the tax
introduction.
The new minimal price of supply we define from equation:
-100 * 2(P-20) = 0, P = 70.
The minimal price of supply will be increased exactly at the tax rate.
And the consumer and producer’s surplus that are relevant to the new equilibrium
parameters may be defined through the same procedure as was used for initial
conditions:
The consumer’s surplus is equal: ( (250 – 160) * 180 ) / 2 = 8100
The producer’s surplus is equal: ( (160 – 70) * 180 ) / 2 = 8100.
 So, the tax impact on the consumer’s wellbeing will be defined as 8100 – 10000 =
-1900, and the tax impact on the producer’s wellbeing will be defined as 8100 –
10000 = -1900.
And on that stage we need to investigate: what will be the results of changing the
parameter near the price (change of sloop) in the supply function.

We begin to repeat all steps with the new parameter “s” in supply function.
The first step: initial equilibrium
-100+1*P = 500 – 2P
3P = 600, Pe = 200, Qe = 100
Initial consumer’s surplus
( (250 – 200) * 100 ) / 2 = 2500
Initial producer’s surplus (to define the minimal price of supply we equate the
supply function to zero and obtain P which leads to zero quantity supplied: -100 +P =
0, P = 100), so: initial producer’s surplus will be equate to:
( (200 – 100) * 100 ) / 2 = 5000.
We see that the decreasing of coefficient near price in supply function causes:
1. The supply slope has increased
2. The equilibrium price has raised, the equilibrium quantity has decreased.
3. Producer’s SP has decreased, the consumer’s SP has decreased, the reduction
of consumer surplus, caused by change in supply slope was bigger, comparing the
reduction of producer’s SP).
The second step: we find equilibrium after taxation applying.
The new supply function is: -100+1*(P-20) would be equate to constant demand
function:
-100+P-20 = 500-2P, -3P = -620, Pe= 206.7, Qe = 86.7
The new consumer’s surplus will be equal: ( (250 – 206.7) * 86.7 ) / 2 = 1877.1
(less on 622.9 than before taxation)
The new producer’s surplus will be equal: ( (206.7 – 120)*86.7 ) / 2 = 3758,4
(less on 1241.5 than before taxation).
 The deadweight losses will be equal 86.7*20 – (1241.5+622.9) = -130.5
So, we can say that the decreasing of coefficient near price in supply function
causes:
1. The impact of taxation on consumer’s wellbeing become more destructive

1.2
Conditions: The table illustrates the market's demand and supply for cheddar
cheese. Graph the data and find the equilibrium. Next, create a table showing the
change in quantity demanded or quantity supplied, and a graph of the new
equilibrium, in each of the following situations:

a. The price of milk, a key input for cheese production, rises, so that the supply
decreases by 80 pounds at every price.

b. A new study says that eating cheese is good for your health, so that demand
increases by 20% at every price.

Solution:
The price and quantity equilibrium is the point in which both lines intersect,
represented by the “E”. The blue line represents demand and the red line represents
supply.
a) The changes you can see in the table below. This decrease in the quantity of the
supply due to the increase in the price for milk means the equilibrium price of
cheese is going to rise. As we can see from the table, the new equilibrium price
of cheese is $3.60 and the new equilibrium quantity is 620.

Price per pound Qty. of demand Qty. of supply

$3.00 750 540-80=460

$3.20 700 600-80=520
$3.40 650 650-80=570
$3.60 620 700-80=620
$3.80 600 720-80=640
$4.00 590 730-80=650

The updated graph of supply and demand curves is shown below. “E” is the
new equilibrium ($3.60 and 620 pounds).
 b) The table below shows the new quantities of demand after the 20% increase.
This increase means that the equilibrium price will increase, which will be
$3.80, while the new equilibrium quantity is 720.

Price per pound Qty. of demand Qty. of supply

$3.00 750*1.20=900 540

$3.20 700*1.20=840 600
$3.40 650*1.20=780 650
$3.60 620*1.20=744 700
$3.80 600*1.20=720 720
$4.00 590*1.20=708 730

The updated graph of supply and demand curves is shown below. “E” is the
new equilibrium.

1.3
Conditions: shows information on the demand and supply for bicycles, where the
quantities of bicycles are measured in thousands.
a) What is the quantity demanded and the quantity supplied at a price of $210?
b) At what price is the quantity supplied equal to 48,000?
c) How can you determine the equilibrium price and quantity from the graph?
How can you determine the equilibrium price and quantity from the table?
What are the equilibrium price and equilibrium quantity?
d) If the price was $120, what would the quantities demanded and supplied be?
Would a shortage or surplus exist? If so, how large would the shortage or
surplus be?

Solution:
a) At the price of 210: the quantity demanded is 28000 items and the quantity
supplied is 56000 items.
b) The quantity supplied is 48000 at the price of 180.
c) The price and quantity equilibrium on the graph is the point in which both lines
intersect. The price and quantity equilibrium in the table can be found by
looking where the demand and supply numbers are equal. In that exact case,
the equilibrium price is 150 dollars, the equilibrium quantity is 40000 items.
d) At the price of 120 dollars : the quantity supplied is 36000 items and the
quantity demanded is 50000. Then there is a shortage ( 50 - 36 ) by 14000
items.
 2. The second chapter: "Application of supply and demand analysis tools for
making economic decisions" and "Cardinal, ordinal utility and consumer
choice"

2.1
Conditions: fill in the table below and find the optimal consumer choice and
maximum TU.

Solution:
P - price
Q - quantity
TU - Total Utility. It is defined as the sum of the satisfaction that a person can
receive from the consumption of all units of a specific product or service.
MU - Marginal utility. It is the added satisfaction that a consumer gets from
having one more unit of a good or service. The concept of marginal utility is used by
economists to determine how much of an item consumers are willing to purchase.
The first step: We need to calculate MUa. We see that quantitatively the MU may
be defined as an increment of total utility, caused by growth the quantity consumed
on one unit:
MU = ∆TU / ∆ Q
We use that to solve the task:
1. MUa=(20-0)/(1-0) = 20
2. MUa=(30-20)/(2-1) = 10
3. MUa=(38-30)/(3-2) = 8
4. MUa=(46-38)/(4-3) = 8
5. MUa=(50-46)/(5-4) = 4
 The second step: We need to calculate MUb. We see that quantitatively the MU
may be defined as an increment of total utility, caused by growth the quantity
consumed on one unit:
MU = ∆TU / ∆ Q
We use that to solve the task:
6. MUa=(16-0)/(1-0) = 16
7. MUa=(30-16)/(2-1) = 14
8. MUa=(42-30)/(3-2) = 12
9. MUa=(52-42)/(4-3) = 10
10.MUa=(60-52)/(5-4) = 8

The third step: We need to calculate MUa/Pa. As we know from the condition the
Pa = 2. We get:
1. MUa/Pa=20/2=10
2. MUa/Pa=10/2=5
3. MUa/Pa=8/2=4
4. MUa/Pa=8/2=4
5. MUa/Pa=4/2=2

The fourth step: We need to calculate MUb/Pb. As we know from the condition
the Pb = 3. We get:
1. MUb/Pb=16/3=5.(3)
2. MUb/Pb=14/3=4.666667
3. MUb/Pb=12/3=4
4. MUb/Pb=10/3=3.(3)
5. MUb/Pb=8/3=2.666667

As a result we get such table:

 What consumer will obtain and what he will lose if he chooses the first variant
and directs one dollar on buying “A”. He will obtain a positive increment of TU from
the additional quantity of “A” and a negative increment of TU from decreasing the
quantity of “B”
If the MU which may be gained from dollar directed to purchasing “A” is bigger
than MU, which will be lost through decreasing the quantity “B” consumed, we may
obtain more utility through redistribution budget:”. And we obtain positive increment
utility from additional portion “A” which will be bigger than negative increment
utility through decreasing quantity “B”.
If the MU, gained from dollar devoted to purchasing “B” is bigger than MU from
the dollar, directed to buy “A” we may take a dollar from “A” and direct to buy “B”
and obtain a bigger positive increment of utility from additional portion “B” than
negative increment utility through decreasing spending on “A”. So the single
condition of the optimal structure of budget distribution between “a” and “b” – it is
equality the MU gained from additional dollar devoted to purchasing “B” and MU
gained by additional dollar devoted to purchasing “A”.
The formal condition:
MUa / Pa = MUb / Pb
That is a first necessary but insufficient condition of the consumer's optimum.
The second necessary condition of optimal choice - the equality of general
spending on purchasing chosen sets of goods to consumer’s budget. If the purchased
Qa * Pa + Qb * Pb is equate to consumer budget – so, we have a second necessary
condition of consumer optimum.
And finally, the couple of conditions which are necessary and sufficient
conditions of the consumer’s optimum may be defined as follows:
MUa/ Pa = MUb / Pb
Qa*Pa + Qb*Pb = B

The fifth step: in the table I highlighted with pink the numbers that satisfy the
condition MUa/ Pa = MUb / Pb.
The condition Qa*Pa + Qb*Pb = B should be satisfied as well. From the
condition we know that B=17. Let’s check it:
4*2+3*3=17
The second condition is satisfied.

The sixth step: to find the maximum TU we need to add TUa and TUb that were
chosen as optimal in the previous steps. We get:
TUmax=46+42=88

2.2
Conditions: Refer to Table. If the six people listed in the table are the only
consumers in the market and the equilibrium price is $11 (not the $8 shown), how
much consumer surplus will the market generate?

Solution:
Using the values above, we first note that an individual will only purchase the
goods if his or her “maximum price willing to pay” is greater than or equal to the
price of the product ($11). This implies that only Bob, Barb, and Bill are willing to
purchase the good at the price of $11.
 We can calculate the consumer surplus by adding up the difference between the
“maximum price willing to pay” and the actual price paid.
Bob’s consumer surplus is $2 ($13 – $11).
Barb’s consumer surplus is $1 ($12 – $11).
Bob’s consumer surplus is $0 ($11 – $11).
The total consumer surplus equals $3 ($2 + $1 + $0).

2.3

Condition: Praxilla, who lived in ancient Greece, derives utility from reading poems
and from eating cucumbers. Praxilla gets 30 units of marginal utility from her first
poem, 27 units of marginal utility from her second poem, 24 units of marginal utility
from her third poem, and so on, with marginal utility declining by three units for each
additional poem. Praxilla gets six units of marginal utility for each of her first three
cucumbers consumed, five units of marginal utility for each of her next three
cucumbers consumed, four units of marginal utility for each of the following three
cucumbers consumed, and so on, with marginal utility declining by one for every
three cucumbers consumed. A poem costs three bronze coins but a cucumber costs
only one bronze coin. Praxilla has 18 bronze coins. Sketch Praxilla’s budget set
between poems and cucumbers, placing poems on the vertical axis and cucumbers on
the horizontal axis. Start off with the choice of zero poems and 18 cucumbers, and
calculate the changes in marginal utility of moving along the budget line to the next
choice of one poem and 15 cucumbers. Using this step-by- step process based on
marginal utility, create a table and identify Praxilla’s utility-maximizing choice.
Compare the marginal utility of the two goods and the relative prices at the optimal
choice to see if the expected relationship holds. Hint: Label the table columns: 1)
Choice, 2) Marginal Gain from More Poems, 3) Marginal Loss from Fewer
Cucumbers, 4) Overall Gain or Loss, 5) Is the previous choice optimal? Label the
table rows: 1) 0 Poems and 18 Cucumbers, 2) 1 Poem and 15 Cucumbers, 3) 2 Poems
and 12 Cucumbers, 4) 3 Poems and 9 Cucumbers, 5) 4 Poems and 6 Cucumbers, 6) 5
Poems and 3 Cucumbers, 7) 6 Poems and 0 Cucumbers.
Solution:

The first step: From the above information, we can see that Praxilla consumes two
types of goods. One poem costs Praxilla 3 bronze coin while one cucumber costs one
bronze coin. When the price of consumption rises, marginal utility falls.

The second step: We can use a graph to represent Praxilla’s budget constraint.
Horizontal axis represents the quantity of cucumber consumed while the vertical axis
represents the quantity of poems consumed. At the corner point of the budget line,
where the line meets the horizontal axis, Praxilla does not consume any poem (18, 0).
Similarly, Corner point of the budget line, when the line meets the vertical axis, it
means that Praxilla consumes poems (0,6).

The third step: We can use a table to illustrate the information. Second column will
indicate marginal gain from more poems. Third column indicates marginal loss of
cucumbers and the fourth column indicates overall gain. There will also be the last
column that will indicate the optimal point.

Marginal Marginal Choice Overall gain Optimal

from more from fewer
poems cucumbers
0 Poem 18 30 3 63 27 no
Cucumbers
1 Poems 15 27 6 90 21 no
Cucumbers
2 Poems 12 24 9 11 15 no
Cucumbers
3 Poems 9 21 12 126 9 no
Cucumbers
4 Poems 6 18 15 135 3 no
Cucumbers
5 Poems 3 15 18 138 -3 yes
Cucumbers
6 Poems 0 - - 135 - no
Cucumbers

From the table above, optimal choice for Praxilla is to consume 5 poems and 3
cucumber. This is because the utility is maximized at this point.

3. The third chapter: "The basics of producer behavior" and "Cost of

production and enterprise optimum"
3.1
Conditions: in long-run equilibrium, P = minimum ATC = MC. Of what
significance for economic efficiency is the equality of P and minimum ATC? The
equality of P and MC? Distinguish between productive efficiency and allocative
efficiency in your answer.

Solution: The equality of P and minimum ATC means the firm is achieving
productive efficiency; it is using the most efficient technology and employing the
least costly combination of resources. The equality of P and MC means the firm is
achieving allocative efficiency; the industry is producing the right product in the right
amount based on society’s valuation of that product and other products.

3.2
Conditions: If two painters can paint 200 square feet of wall in an hour, and
three painters can paint 275 square feet, what is the marginal product of the third
painter?
Solution:
As we know, the formula to find the marginal product is:
marginal product = change in total product/change in variable output

To use it we need to find the change in total product. It can be done so:
change in total product = 275 square feet − 200 square feet =75 square feet

We use that data in the formula and gain that:

marginal product = 75square feet/1worker = 75

The marginal product of the third painter is 75 square feet.

3.3
 Conditions: The WipeOut Ski Company manufactures skis for beginners. Fixed
costs are $30. Fill in Table 7.16 for total cost, average variable cost, average total
cost, and marginal cost.

Solution:
To find the total cost we need to add variable cost and fixed cost.
1. 10+30=40
2. 25+30=55
3. 45+30=75
4. 70+30=100
5. 100+30=130
6. 135+30=165

To find Average Variable Cost we need to use the formula AVC = VC / Q.

1. 10/1=10
2. 25/2=12.50
3. 45/3=15
4. 70/4 = 17.50
5. 100/5=20
6. 135/6=22.50

To find Average Total Cost we need to use the formula ATC=TC/Q.

1. 40/1=40
2. 55/2=27.50
 3. 75/3=25
4. 100/4=25
5. 130/5=26
6. 165/6=27.50

To find Marginal Cost we need to use the formula MC = ∆TC / ∆Q.

1. 40-30/1-0=10
2. 55-40/2-1=15
3. 75-55/3-2=20
4. 100-75/4-3=25
5. 130-100/5-4=30
6. 165-130/6-5=35

After the calculations the table will look like this:

Average
Variable Fixed Total Variable Average Marginal
Quantity Cost Cost Cost Cost Total Cost Cost

0 0 $30 $30 - - -

1 $10 $30 $40 $10.00 $40.00 $10

2 $25 $30 $55 $12.50 $27.50 $15

3 $45 $30 $75 $15.00 $25.00 $20

4 $70 $30 $100 $17.50 $25.00 $25

5 $100 $30 $130 $20.00 $26.00 $30

6 $135 $30 $165 $22.50 $27.50 $35

4. Conclusion
In the process of solving the tasks from the first chapter of that paper I used:

Equilibrium (in tasks 1.1, 1.2) - in economics is a condition where market forces are
balanced, a concept borrowed from physical sciences, where observable physical
forces can balance each other.

Consumers surplus (in tasks 1.1, 2.2) - is the difference between the price that
consumers pay and the price that they are willing to pay.

Producers surplus (in tasks 1.1) - is the total amount that a producer benefits from
producing and selling a quantity of a good at the market price.

Tax induction (in tasks 1.1) - type of tax that rises or falls when income, spending,
or profits rise or fall.

Deadweight loss (in task 1.1) - is a cost to society created by market inefficiency,
which occurs when supply and demand are out of equilibrium.

Demand (in tasks 1.1, 1.2, 1.3) - an economic principle referring to a consumer's
desire to purchase goods and services and willingness to pay a price for a specific
good or service.

Supply (in tasks 1.1, 1.2, 1.3) - relate to the amount available at a specific price or
the amount available across a range of prices if displayed on a graph.

Total utility (TU) (in task 2.1) - is the total satisfaction received from consuming a
given total quantity of a good or service.

Marginal utility (MU) (in task 2.) - is the added satisfaction a consumer gets from
having one more unit of a good or service.

Consumers optimum (in task 2.1) - represents a solution to a problem facing all
individuals -- maximizing the satisfaction (utility) from consuming different goods
and services subject to the constraint of household income and product prices.

Total consumers surplus (in task 2.2) - is the difference between willingness to pay
for a good and the price that consumers actually pay for it.
Optimal choice (in tasks 2.2, 2.3) - is attained when all income is spent, and the
consumer is on the highest attainable indifference curve

Budget constraint (in tasks 2.3) - refers to all possible combinations of goods that
someone can afford, given the prices of goods, when all income (or time) is spent.

Marginal profit (in task 2.3) - is the profit earned by a firm or individual when one
additional or marginal unit is produced and sold.

Average total cost (ATC) (in tasks 3.1 3.3) - refers to total cost divided by the total
quantity of output produced.

Marginal cost (MC) ( in tasks 3.1, 3.3) - refers to the additional cost incurred by
producing one additional unit of output, .

Marginal product (in task 3.2) - is defined as the extra output that results from
adding one unit of the input to the existing combination of productive factors.

Total cost (in task 3.3) - the sum of all costs incurred by a firm in producing a
certain level of output.

AVC (in task 3.3) - is a firm's variable costs (labour, electricity, etc.) divided by the
quantity of output produced.