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Assignment Questions (Summer, 2012)

Part A – Microeconomics – Worth 10% of total assessment: Answer any five (5) of the following questions. Each question is worth 10 marks.

Question 1:

Which of the following are likely to be fixed costs and which variable costs for a chocolate factory over the course of a month? Explain your choice.
(a)The cost of cocoa (1 mark).
(b)Business rates (local taxes).(1 mark)
(c)An advertising campaign for a new chocolate bar. (1 mark)………………………………........
(d)The cost of electricity (paid quarterly) for running the mixing machines (1 mark)……………..
(e)Overtime pay (1 mark)
(f)The basic minimum wage agreed with the union (workers must be given at
least one month’s notice if they are to be laid off) (2 marks).
(g)Wear and tear on wrapping machines (1 mark).
(h)Depreciation of machines due simply to their age (1 mark).
(i)Interest on a mortgage for the factory: the rate of interest rises over the
course of the month (1 mark).

Question 2:

(a)Complete the following table of costs for a firm. (Note: enter the figures in the MC column between outputs of 0 and 1, 1 and 2, 2 and 3, etc.) (6 marks)

Output (Units)| TC ($)| AC ($)| MC ($)| 012345678910 | 55 85110130280610| 4042 | 90110 150 |

(b)How much is total fixed cost at:

(i)an output of 0 units ? (1/2 mark)
(ii)an output of 6 units?(1/2 mark)

(c)How much is average fixed cost at:

(i)an output of 5 units? (1/2 mark)
(ii)an output of 10 units? (1/2 mark)

(d)How much is total variable cost at an output of 5 units? (1 mark)
(e)How much is average variable cost at an output of 10 units? (1 mark)

Question 3:

Suppose the jeans industry is an oligopoly in which each firm sells its own distinctive brand of jeans, and each firm believes its rivals will not follow its price increases but will follow its price cuts.

Draw and explain the demand curve facing each firm, and given this demand curve, does this mean that firms in the jeans industry do or do not compete against one another?
(5 marks for the correct demand curve and 5 marks for the correct explanation)

Question 4:
(a) Explain the impact of external costs and external benefits on resource allocation; (2.5 marks)

(b) Why are public goods not produced in sufficient quantities by private markets? (2.5 marks)

(c) Which of the following are examples of public goods (or services)? Delete the incorrect option
(1 mark each).

(i)The Judicial system Yes/No
(ii)Pencils Yes/No
(iii)The quarantine service Yes/No
(iv)The Great Wall of China Yes/No
(v)Contact lenses Yes/No

Question 5:

(a) Suppose the income elasticity of demand for pre-recorded music compact disks is +4 and the income elasticity of demand for a cabinet maker’s work is +0.4. Compare the impact on pre-recorded music compact disks and the cabinet maker’s work of a...
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