Assignment 1 - Statistical Analysis and data reconfiguration PDF

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Statistical Analysis and data reconfiguration...

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Introduction to Economics Assignment 1

Instructions: 1) 2) 3) 4)

To be done in groups. Max size 4 people Submission date: 10th October 2019 Attempt all questions Upload on LMS AND give a hardcopy as well. (We are indifferent about printed or handwritten as long as it is neat and easy to read)

Questions: Q1: Use supply and demand curves to illustrate how each of the following events would affect the price of butter and the quantity of butter bought and sold: (a) an increase in the price of margarine; (b) an increase in the price of milk; (c) a decrease in average income levels. Q2: The table below shows the retail price and sales for instant coffee and roasted coffee for two years. a. Using these data alone, estimate the short-run price elasticity of demand for roasted coffee. Derive a linear demand curve for roasted coffee. b. Now estimate the short-run price elasticity of demand for instant coffee. Derive a linear demand curve for instant coffee. c. Which coffee has the higher short-run price elasticity of demand? Why do you think this is the case?

Q3: Suppose that Bridget and Erin spend their incomes on two goods, food (F) and clothing (C). Bridget’s preferences are represented by the utility function U (F, C) =10FC, while Erin’s preferences are represented by the utility function U (F, C) = 0.20F2C2. a. With food on the horizontal axis and clothing on the vertical axis, identify on a graph the set of points that give Bridget the same level of utility as the bundle (10, 5). Do the same for Erin on a separate graph. b. On the same two graphs, identify the set of bundles that give Bridget and Erin the same level of utility as the bundle (15, 8).

c. Do you think Bridget and Erin have the same preferences or different preferences? Explain. Q4: Antonio buys five new college textbooks during his first year at school at a cost of $80 each. Used books cost only $50 each. When the bookstore announces that there will be a 10 percent increase in the price of new books and a 5 percent increase in the price of used books, Antonio’s father offers him $40 extra. a. What happens to Antonio’s budget line? Illustrate the change with new books on the vertical axis. b. Is Antonio worse or better off after the price change? Explain. Q5: The director of a theater company in a small college town is considering changing the way he prices tickets. He has hired an economic consulting firm to estimate the demand for tickets. The firm has classified people who go to the theater into two groups and has come up with two demand functions. The demand curves for the general public (Qgp) and students (Qs) are given below: Qgp = 500 - 5P Qs = 200 - 4P a. Graph the two demand curves on one graph, with P on the vertical axis and Q on the horizontal axis. If the current price of tickets is $35, identify the quantity demanded by each group. b. Find the price elasticity of demand for each group at the current price and quantity. c. Is the director maximizing the revenue he collects from ticket sales by charging $35 for each ticket? Explain. d. What price should he charge each group if he wants to maximize revenue collected from ticket sales? Q6: A firm has a fixed production cost of $5000 and a constant marginal cost of production of $500 per unit produced. a. What is the firm’s total cost function? Average cost? b. If the firm wanted to minimize the average total cost, would it choose to be very large or very small? Explain. Q7: The short-run cost function of a company is given by the equation TC = 200 + 55q, where TC is the total cost and q is the total quantity of output, both measure in thousands. a. What is the company’s fixed cost? b. If the company produced 100,000 units of goods, what would be its average variable cost? c. What would be its marginal cost of production? d. What would be its average fixed cost? e. Suppose the company borrows money and expands its factory. Its fixed cost rises by $50,000, but its variable cost falls to $45,000 per 1000 units. The cost of interest (i) also enters into the equation. Each 1-point increase in the interest rate raises costs by $3000. Write the new cost equation. Q8: A certain brand of vacuum cleaners can be purchased from several local stores as well as from several catalogues or websites. a. If all sellers charge the same price for the vacuum cleaner, will they all earn zero economic profit in the long run? b. If all sellers charge the same price and one local seller owns the building in which he does business, paying no rent, is this seller earning a positive economic profit? c. Does the seller who pays no rent have an incentive to lower the price that he charges for the vacuum cleaner? Q9: Suppose that a competitive firm’s marginal cost of producing output q is given by MC (q) =3 + 2q. Assume that the market price of the firm’s product is $9. a. What level of output will the firm produce? b. What is the firm’s producer surplus? c. Suppose that the average variable cost of the firm is given by AVC (q) = 3 + q. suppose that the firm’s fixed costs are known to be $3. Will the firm be earning a positive, negative, or zero profit in the short run? Q10: Why do people often want to insure fully against uncertain situations even when the premium paid exceeds the expected value of the loss being insured against? (Answer in terms of utility)...