Assignment:
Question 1: Babsie is a daughter related to Ronald Blump who is a wealthy billionaire. She only consumes Chanel 5 (perfume) and sushi. Suppose the price of a one sushi is $10, the price of a bottle of Chanel 5 is $15, and she has an income of $200. Her father provides her the allowance each month.
1. Draw Babsie's budget constraint. Show which bundles are in her feasible set and which are not. Briefly discuss what the slope and intercepts of the budget constraint mean.
2. Suppose that the government imposes a 100% tax on Chanel 5 so the price to Roland rises to $30 per bottle. Show how her budget constraint changes. Discuss what happened to her feasible set. Is she likely to care that the price has risen?
Question 2: Suppose the return on a one year bond from Ford Motor is given by the following table:
|
Probability
|
Rate of Return
|
|
0.1
|
1%
|
|
0.7
|
15%
|
|
0.2
|
3%
|
a. Does this probability distribution satisfy the characteristics of a probability distribution?
b. What is the expected return on this bond? Show your work!!
c. How does the expected utility differ from an expected return? Explain.
Question 3: The following is a graph of Albert's Sweet Potato Farm located in Bensenville, Arkansas which is a perfectly competitive firm.
Answer the following questions based on this graph:
a. What is the profit maximizing price for this firm? Profit maximizing output?
b. Will Albert's Sweet Potato Farm earn a profit? Explain.
c. If Albert's Sweet Potato Farm is earning a profit, how much profit is being earned?
d. What is the amount of marginal revenue? Average revenue?
e. What is the amount of average total cost (ATC)?
f. How much total profit is being earned by Albert's Sweet Potato Farm? Total cost?
g. What are the characteristics for a perfectly competitive firm? Just list them.
Question 4: Short Answer Questions-please answer the following questions
a. If the marginal revenue is less than the marginal cost, what should a profit maximizing company do?
b. In a perfectly competitive graph, how does one calculate the economic profit?
c. What it is the shutdown point in a perfectly competitive firm?
d. Briefly what is the difference between economies of scale and diseconomies of scale? Why is it important to the firm?
e. Given the following total cost function TC(q) = 1000 + 13q. Find the fixed cost, variable cost, average total cost, and the marginal cost. How do you know that these costs are in the short-run? Explain.