Problem 1: You have a limited amount of money to invest and you like to do a business, but you are also afraid of risk, what kind of a business organization would you choose: a proprietorship or a partnership? Explain your choice.
Problem 2: Answer the following questions:
1. Define the principal-agent problem and give examples.
2. Explain three solutions that companies use to solve the principal-agent problem.
Problem 3: Solve the following problems on elasticity.
When the price of good X was AED 10, the quantity demanded was 90. Now the price of good X increased to AED 12 causing the quantity demanded to fall to 70.
1. Calculate the Price Elasticity of Demand, using the mid-point formula.
2. Calculate the change in revenue as a result of the price increase.
3. If you are the producer of good X, what should you do?
Problem 4: The following table shows the total utility for Mansoor which he enjoys from consuming quantities of good X and good Y. The price of good X is $ 2, while the price of good Y is $ 3. The budget that Mansoor has to spend on the two goods is $ 15.
1. Fill in the empty cells by calculating the marginal utility and the marginal utility per dollar for each good.
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GOOD X
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GOOD Y
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Quantity
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TU
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MU
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Quantity
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TU
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MU
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MU per $
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MU per $
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0
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0
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0
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0
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1
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32
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1
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60
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2
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60
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2
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108
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3
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84
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3
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144
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4
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104
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4
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168
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5
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120
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5
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180
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2. Which combination or combinations of the two goods that meet one condition that maximizes Mansoor's total utility?
3. Which combination meets both conditions of maximum utility? Show all calculations.