Question1)
A) Describe how one derives the indifference curves from the 3-dimensional utility function. Draw the graph and give explanation. Which principle explains the concave shape of the utility function? Why?
B) Describe the concept of Consumer Equilibrium. How does it relate to utility maximization? Draw the graph and show where consumer equilibrium occurs. Write down the equation which holds at the consumer equilibrium.
C) Describe how one can derive a Law of Demand from Consumer equilibrium.
D) Suppose that there are 2 goods, X and Y and P(X) = $20 and MU(X) = 100, and p(Y) = $50. Assuming that the consumer is presently maximizing her utility, compute MU(Y). show the equation you use and show your computation.
Question2)
A) Define and explain Short Run cost curves (total, average and marginal cost curves). draw graphs and label each curve on the graph. Explain the “law of diminishing returns”. Give the economic reason behind it.
B) Describe the Long Run Average Total Cost curve. Explain the concepts of Economies of Scale; Constant Returns to scale; Diseconomies of scale. Draw a graph.
Question3)
A) Write down the 4 most important characteristics of Perfectly Competitive markets.
B) Draw 3 graphs and describe the 3 possible situations that a competitive firm can face in the short-run.
C) Describe the LR equilibrium in a perfectly competitive market. Draw the graph.