UGBS 201: Practice Questions

Question 1
Suppose that the demand and supply functions for good X are

a. What are the equilibrium price and quantity?

b. What is the market outcome if price is 2.75? What do you expect to happen? Why?

c. What is the market outcome if price is 4.25? What do you expect to happen? Why?

d. What is the effect of a price ceiling of 3?

e. What happens to equilibrium price and quantity if the demand function becomes

f. What happens to equilibrium price and quantity if the supply function becomes

(demand is )?

Question 2
Suppose that the general demand function for good X is
Qd = 60 - 2Px + 0.01M + 7PR
where
Qd = quantity of X demanded
Px = price of X
M =(average) consumer income
PR = price of a related good R
a. Is good X normal or inferior? Explain.
b. Are goods X and R substitutes or complements? Explain.
Suppose that M = $40,000 and PR = $20.
c. What is the demand function for good X?
Suppose the supply function is
Qs = 2600 + 10Px
d. What are the equilibrium price and quantity?
e. What happens to equilibrium price and quantity if other things remain the same as in part d but
income increases to $52,000?
f. What happens to equilibrium price and quantity if other things remain the same as in part d but
the price of good R decreases to $14?
g. What happens to equilibrium price and quantity if other things remain the same, income and the
price of the related goods are at their original levels, and supply shifts to Qs = - 360 +10Px?

Question 3
The demand curve for haircuts at Terry Bernard’s Hair Design is

Q = 100 – 5P

where Q is the number of cuts per week and P is the price of a haircut. Terry is considering raising
her price above the current price of $15. Terry is unwilling to raise price if the price hike will cause
revenues to fall.

a. Should Terry raise the price of haircuts above $15? Why or why not?

b. Suppose demand for Terry’s haircuts increases to Q = 100 – 2.5P. At a price of $15, should Terry
raise the price of her haircuts? Why or why not?

Question 4
a. ABC ltd is a firm that specializes in the production of shoes. The following table shows the
amount of total output of shoes produced from various combinations of labor and capital by
the firm.

Units of Capital
Units of Labour 1 2 3 4
1 50 120 160 180
2 110 260 360 390
3 150 360 510 560
4 170 430 630 690
5 160 480 710 790

i. Calculate the marginal product and average product of labor of the firm when capital is held
constant at 2 units.
ii. Using the answer in (i) above, when the average product of labor is increasing, what is the
relation between the average product and the marginal product? What about when the
average product of labor is decreasing?
iii. Using the marginal product obtained in (i) above, at which worker does the law of
Diminishing Marginal Returns start working? Explain

b. Suppose that a firm that specializes in the production of Tables is currently employing 20
workers, the only variable input, at a wage rate of ghc 60. The average product of labor is 30, the last
worker added 12 units to total output, and total fixed cost is ghc 3,600.

i. What is marginal cost of the firm?

ii. What is average variable cost of the firm?
iii. How much output is being produced by the firm?
iv. What is average total cost of the firm?
Question 5
MOH Enterprise is a firm that specializes in the production of canned tomatoes. The first two
columns in the following table give the firm’s short-run production function when the only variable
input is labor, and capital (the fixed input) is held constant at 5 units. The price of capital is Ghc
2,000 per unit, and the price of labor is Ghc 500 per unit.

Cost Average cost

L Q APL MPL TFC TVC TC AFC AVC ATC MC
0 0
20 4000
40 10000
60 15000
80 19400
100 23000

i. Complete the table by calculating the two measures of productivity (APL and MPL) and the
various categories of cost corresponding to each number of workers.
ii. Using the answer in (i) above, what is the relation between average variable cost and
marginal cost of the firm?
iii. Using the answer in (i) above, what is the relation between average product and average
variable cost of the firm?

Question 6
a. What is perfect competitive market? How is different from a monopolistic competitive market?

b. If the firms in a perfect competitive market are earning economic profits or losses in the short
run, would you expect them to continue doing so in the long run? Explain

c. A perfectly competitive firm faces a market-determined price of Ghc 30 for its product.

Qty Total cost Average Marginal Marginal Profit Total profit

total cost cost revenue margin
0 2000
200 4000
400 6600
600 9600
800 14000
1000 20000

i. The firm’s total costs are given in the schedule above. Complete the table.
ii. How much output should the competitive firm produce? Explain.
iii. Suppose the demand for the firm’s product decreases and the market price falls to Ghc13.
Should the firm shut down? If not, how much output should the firm produce? Explain.

Question 7
a. Briefly explain three sources of barriers to entry in a monopoly market
b. Explain why the manager of a profit-maximizing monopoly always produces and sells on the
elastic portion of the demand curve.

c. A monopolist faces the following demand and cost schedules:

Price Qty Total cost
20 7 36
19 8 45
18 9 54
17 10 63
16 11 72
15 12 81

i. How much output should the monopolist produce?

ii. What price should the firm charge?
iii. What is the maximum amount of profit that this firm can earn?

Question 8
a. What is monopolistic competitive market?

b Explain why the fast food industry in Ghana is a better fit for a monopolistic competitive
industry?

c Using a diagram, explain why firms in monopolistic competition always produced with excess
capacity

Question 9
a. Please fill in the blanks in the following table:
Units of labor Total Product Average Marginal
Product Product
1 40
2 48
3 138
4 44
5 24
6 210
7 29
8 -27

b. Please fill in the blanks in the following table:

Output Total Total Total Average Average Average Marginal
Cost Fixed Variable Fixed Variable Total Cost
Cost Cost Cost Cost Cost
100 260 60
200 0.30
 300 0.50
400 1.05
500 360
600 3.00
700 1.60
800 2,040

Question 10
A competitive firm has the cost structure described in the following table.

Q ATC MC

40 14 6

60 12 10

80 12 20

100 15 31

a. If the firm is faced with a market equilibrium price of $10 and the minimum of the
average variable cost is $8, how much output should the firm produce?
b. How many units of output will it produce at a market price of 20?
c. Calculate its profits if the market price is $20.

Question 11
Assume a consumer with the utility function

and the typical budget constraint

a. Derive the consumer’s demand for X and Y in terms of the parameters.

b. If income of the consumer is 100, price of X is 2 and price of Y is 4, what the quantities of
X and Y that gives the consumer maximum satisfaction?
c. What is the consumer’s marginal rate of substitution between X and Y

Question 12
Use the following information to answer parts (a) through (d). Consider the market for coconuts in
a small island nation. The domestic demand curve (in cedis) is P = 140 – 4QD and the domestic
supply curve is P = 20 + 2QS.
a. What is the market equilibrium price and quantity?
b. If the government, hoping to help poor consumers, imposes a price ceiling of $40, what will be
the shortage of coconuts in the market? Graph your response.

c. Suppose the government price target is ¢80, which they plan to accomplish by use of a price
support program. How many coconuts will the government have to buy with this program, and how
much will the program cost the government? Graph your results, and shade the region
corresponding to total government cost.

Question 13
2 3
David’s utility function for good X and Y is given by ( , )= . Where , and I are the price of
good X, price of good Y and consumer income respectively.
a. Write the budget Constraint of the consumer.
b. Drive the demand functions for good X and Y

c. What combination of X and Y maximizes the consumer’s at I=100, = 4, =5

d. Calculate the marginal rate of substitution between X and Y at equilibrium and interpret your
results.

Question 14
Explain the total effect of a price change for the following type of good:
a. Normal good
b. Inferior good
c. Giffen good