Problem 1: Choose the right answer for each of the following:
Q1. If the Price Elasticity of Demand (PED) = 1 then...
a) Price should be decreased to maximize revenue.
b) Price should be increased to maximize revenue.
c) Revenue is at its maximum.
d) Profit is at its maximum.
Q2. If the demand for good X shifts to the right as the price of good Y rises, then goods X and Y are:
a) Inferior goods.
b) Complementary goods.
c) Normal goods.
d) Substitute goods.
Q3. Which of the following is not a determinant of Price Elasticity of Demand (PED)?
a) The availability of close substitutes.
b) Time horizon: the passage of time.
c) The proportion of income spent on the good.
d) The preferences of sellers.
Q4. The concepts of Utility and Marginal Utility are only applicable for:
a) Markets for two goods.
b) All the consumers of one good or service
c) An individual consumer or household.
d) None of the above.
Q5. An explicit cost is ...
a) A variable cost that increases with quantity.
b) A fixed cost that does not increase with quantity.
c) A cost that involves spending money.
d) The same as an opportunity cost.
Problem 2: 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 3: 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 4: 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 5: 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.
|
GOOD X
|
GOOD Y
|
|
Quantity
|
TU
|
MU
|
|
Quantity
|
TU
|
MU
|
MU per $
|
|
MU per $
|
|
0
|
0
|
-
|
-
|
0
|
0
|
-
|
-
|
|
1
|
32
|
|
|
1
|
60
|
|
|
|
2
|
60
|
|
|
2
|
108
|
|
|
|
3
|
84
|
|
|
3
|
144
|
|
|
|
4
|
104
|
|
|
4
|
168
|
|
|
|
5
|
120
|
|
|
5
|
180
|
|
|
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.
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