TECO101 Microeconomics Principles
All questions should be attempted.
The marks of each question would be awarded based on
your understanding of the questions, concepts and
procedures; hence you should demonstrate your answers
step by step.
Question 1 (4 marks)
The schedule below shows the number of packs of bagels bought in Sydney, each day at a variety of prices.
i) Graph the daily demand curve for packs of bagels in Sydney.
ii) Calculate the price elasticity of demand at a point on the demand curve where the price of bagels is $2 per pack.
iii) If bagel shops increased the price of bagels from $2 per pack to $3 per pack, what would happen to total revenues?
Question 2 (6 marks)
a) For pizza seller whose marginal, average variable and average total cost curves are shown in following diagram, what is the profit-maximizing level of output and how much profit will this producer earn if the price of pizza is $2.50 per slice?
b) Suppose you are a monopolist in the market for a specific video game. Your demand curve is given by P=80-Q/2, and your marginal cost curve is MC=Q. Your fixed cost is $400.
i) Graph the demand and marginal cost curve.
ii) Derive and graph the marginal revenue curve.
iii) Calculate and indicate on the graph the equilibrium price and quantity.
iv) What is the profit?
Question 3 (6 marks)
Suppose the weekly demand for a certain good, in thousands of units, is given by the equation P = 8 − Q and the weekly supply of the good is given by the equation P = 2 +Q, where P is the price in dollars.
2. Suppose a per-unit tax of $2, to be collected from sellers, is imposed in this market. Calculate the direct loss in economic surplus experienced by participants in this market as a result of the tax.
3. How much government revenue will this tax generate each week? If the revenue is used to offset other taxes paid by participants in this market, what will be their net reduction in total economic surplus?
Question 4 (4 marks)
Consider the following ‘dating game’, which has two players, A and B, and two strategies, to buy a ballet ticket or a football ticket. The payoffs, given in points, are as shown in the following matrix. Note that the highest payoffs occur when both A and B attend the same event.
Assume that players A and B buy their tickets separately and simultaneously. Each must decide what to do knowing the available choices and payoffs but not what the other has actually chosen. Each player believes the other to be rational and self-interested.
i) Does either player have a dominant strategy?
ii) How many potential equilibriums are there? (Hint: To see whether a given combination of strategies is an equilibrium, ask whether either player could get a higher payoff by changing his or her strategy.)
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