MICROECONOMICS - EXERCISES Czesaw Jerzy Ossowski

Translated by Tomasz Korol

Gdask 2008

The level of stocks in one of the car company on 31st of December 2006 was 350 cars. During the year 2007 the company produced 52 550 cars. The firm sold 52 530 cars in 2007. Calculate the level of stocks on 31st of December 2007.

Exercise 1

Exercise 2

The level of savings on 31st December 2005 in one of the household was 5250 USD. The income and expenditures of this household in 2006 were as follow: January: 2340 USD and 2510 USD February: 3120 USD and 2220 USD March: 5190 USD and 4130 USD. a) Calculate the level of savings at the end of each month of 2006. b) Calculate the stream of income and expenditures in first quarter of 2006.

Exercise 3.

Consumer spends on buying the oranges (Y) and apples (X) his income = 50 EUR. Prices are following: oranges (Py) = 5 EUR/kg, apples (Px) = 2 EUR / kg a) Calculate the maximum amount possible to buy oranges and/or apples b) Draw budget constraint line c) Calculate the cost of changing in consumption one good with another: -how many kg of oranges consumer must resign in order to be able to buy 1 kg more of apples ? - how many kg of apples consumer must resign in order to be able to buy 1 kg more of oranges ? d) Draw the budget constraint line, when the price of apples increases up to 4 EUR / kg

Exercise 4.

Knowing that the budget constraint equation of individual consumer with the income M is following: m = p1q1 + p2q2 + p3q3 + ...+ pk-1qk-1 + pkqk where: 1. price of TV set : p1 = 1000 [z/ 1 tv set], 2. price of sausage : p2 = 10 [z/kg], 3. price of butter: p3 = 8 [z/kg], 4. price of margarine: p4 = 5 [z/l], 5. price of Apples: p5 = 2 [z/kg], .... Calculate and interpret: the cost of changing each of above good with 1 kg of apples (how many units of each good, consumer must resign in order to be able to buy 1 kg of apples more?)

Exercise 5.

As a result of decreased price of the good from P0 = 5 zl/kg to P1 = 4 zl/kg, the monthly quantity of the demand for this good increased: Situation A) from Q0 = 10 tons to Q1 = 11 tons Situation B) from Q0 = 10 tons to Q1 = 15 tons 1. Calculate and interpret the price elasticity of the demand for this good. 2. Calculate and interpret the change of consumer expenditures (revenues of producers)
Exercise 6.

The demand function for the good is as follow: Q = 500 2 p Where: Q demand in tons, P price in zl / kg 1.Interpret the primary function of the demand 2. Interpret the inverse function of the demand 3. Draw the given function of the demand
Exercise 7.

The demand function for the good is as follow: Q = 500 2 p Where: Q demand in tons, P price in zl / kg 1. Calculate and interpret price elasticity of the demand at: Price 200 zl / kg, 150 zl / kg, 100 zl / kg, 50 zl/kg 2. Calculate and interpret the total consumer expenditures at these prices.
Exercise 8.

The demand function for the goods X and Y are as follow: Qy = 5000 py -2,5; Qx=5000 px -0,5 Where: Qy,x the demand for goods X and Y in tons, Py, Px = the price of the goods X and Y in z / kg. Calculate and interpret: 1. Price elasticity of the demand for the good X and Y. 2. Expenditure elasticity for the goods X and Y.
Exercise 9.

The price of the good Y increased from the level Py1 = 2 zl / l to Py2 = 2,5 zl / l. This caused: The decrease of the demand for the good Y : from Qy1 = 50 tons to Qy2 = 45 tons The increase of the demand for the good X: from Qx1 = 100 tons to Qx2 = 102 tons The decrease of the demand for the good Z: from Qz1 = 1500 units to Qz2 = 1450 units The increase of the demand for the good V: from Qv1 = 400 units to Qv2 = 450 units. 1. Calculate and interpret the price elasticity and cross elasticities. 2. If Y is gasoline, what kind of goods can be X, Z and V?

Exercise 10.

Consider the following demand functions: a) Qy = 10 - 2py + 2,5px b) Qy = 92 - 4py - 2px where : Qy the demand for good Y in kg py price of the good Y in z/kg px price of the good X in z/kg 1. To interpret the influence of the price of good Y and the good X on the volume of demand for the good Y. What kind of good is the good X relatively to the good Y? 2. To present the primary and inverse function of the demand for good Y, when: a) Px = 6 zl / kg b) Px = 8 zl / kg 3. To draw the demand function for the good Y in both situations. 4. To calculate and to interpret price elasticity of the demand for the good Y, when Py = 10 zl/kg. 5. To calculate and to interpret the cross elasticity (Px=6 zl / kg, Px = 8 zl / kg, Py = 10 zl /kg).
Exercise 11.

The demand function on the market was as following: Period I: Qy= 40 4py Period II: Qy= 30 2py 1. To draw the above functions. 2. To calculate the price Py where both demand functions cross each other. 3. To calculate the price elasticity of the demand for the good Y at the price, where both functions cross each other.
Exercise 12.

The increase of the consumer income from the level M1 = 400 Euro to M2 = 500 Euro, caused that the demand for the good Y increased from the level Qy1 = 10 kg to Qy2 = 11 kg. 1. Calculate and interpret the income elasticity of the good Y. 2. If the price of the good Y, Py = 10 zl / kg, calculate and interpret average consumption propensity, and marginal consumption propensity (represent the demand for good Y in value not quantity).
Exercise 13.

The demand function for the good Y is as follow: Qy = 7,5 + 0,01m , Where: Qy- monthly demand for good Y in kg, M monthly average consumer income in zl. 1. Calculate and interpret income elasticity, when: a) M = 150 zl b) M = 250 zl 2. If the price of the good Y Py = 8 zl / kg, present the demand for the good Y in valued form, and calculate average consumption propensity, and marginal consumption propensity. 4

Exercise 14.

The demand function for the goods A, B and C are as follow: Qa = 2,5 m 1,5 Qb = 1,5 m 0,4 Qc = 3,5 m -0,15 Where: Qa/b/c- monthly demand for good A,B,C in kg, M monthly average consumer income in thousand zl. Interpret the income elasticities for these goods.
Exercise 15.

The demand function for the goods Y, X and Z are as follow: Qy = 100 py -1,5 pz 0,4 pv-0,6 m 1,4 Qx = 100 px -0,25 pz -0,75 pv1,7 m 0,9 Qz = 100 pz -4,2 px 0,8 pv-2,5 m -0,9 Where: Qy/x/z- monthly demand for good Y,X,Z in tons, P price of good (Z,X,Y,V) in zl /kg M monthly average consumer income in zl. Interpret the appropriate elasticities.
Task 16.

The increase of labour input from L1 = 3000 man-hours to L2 = 3200 man-hours, caused the increase of production output from the level of 6000 kg to 6100 kg. The price of the good P is 5 zl /kg, the average cost of materials ACm = 2 zl / kg. 1. Calculate and interpret the average physical product and average valued product. 2. Calculate and interpret the marginal physical product and marginal valued product.
Task 17.

The Total product curve is given : q = 20l2 2l3 = 2l2(10 - l), where: Q production in tons / week L labour in thousands of man-hour per week 1. 2. 3. 4. 5. 6. Calculate and draw the function of total product curve for L from 0 to 9 Calculate and draw the function of average physical product (APPL) for L from 0 to 9. Calculate and draw the function of marginal physical product (MPPL) for L from 0 to 9. Interpret all calculated values. Estimate the input of labour man-hours at which average physical product is the highest. Estimate the input of labour man-hours at which marginal physical product is the highest
0 1 2 3 4 5 6 7 8 9

L Q APPL=q/L MPPL=dq/dL

Task 18.

Based on the previous task, determine the function of total product curve in money values knowing that the net price of the good Pn = 0,25 thousands of zl / ton. Draw also the function of labour cost , knowing that the wage rate per man-hour is 10 zl . Mark the area where production is generating the profits.
Task 19.

The increase of production from the level Q1 = 100 tons to Q2 = 110 tons, caused that the production costs increased from the level TC1 = 900 ths. zl to TC2 = 950 ths. zl. 1. Calculate and interpret the average total cost (ATC) 2. Calculate and interpret the marginal cost (MC)

Task 20.

Variable cost of labour (VCL) and variable cost of materials (VCM) are given: VCL = q3 10q2 +20q VCM = 30q Where: q the production output in tons VCL, VCM costs in ths. zl. The fixed cost (FC) = 30 ths. zl. Write and draw the function of variable costs VC (for Q from 0 to 10 tons) Write and draw the function of total cost TC (for Q from 0 to 10 tons) Write and draw the function of marginal cost MC Write and draw the function of average variable cost AVC Write and draw the function of average total cost ATC Estimate the amount of production output at which average variable cost AVC is the smallest. 7. Estimate the amount of production output at which average total cost ATC is the smallest. 8. Interpret the calculated results.
Lp 1 2 3 4 5 6 7 8 9 10 11 q 0 1 2 3 4 5 6 7 8 9 10 VC TC MC AVC AC

1. 2. 3. 4. 5. 6.

TC and VC present on graph 1. ATC, AVC and MC present on figure 2.

Task 21.

Based on the previous task, determine: 1. Shutdown point and the minimal price 2. Breakeven points , when the price of the good P = 38 ths. zl/ton 3. The production output which let the company receive the biggest profit (P=38 ths zl/ton) 4. Unit profit and total profit (for point 3).
Task 22.

Total cost of production and the price of the product is given: TC= 0,5 Q2 + 4Q + 54; p=16 Where: Q weekly production output in ths. of units, P price of the product in ths. zl/ ths. units TC total cost in ths. zl. Calculate: 1. Breakeven points. 2. The optimal production output (maximization of profits) 3. The total profit for the optimal production output. 4. The production output at which average total cost ATC is the smallest. 5. The total profit for production output which guarantees the smallest ATC. 6. The minimal price.
Task 23.

The function of the supply is given: QS = -2 + 0,5p - 0,2pe Where: QS the supply in ths. tons, P the price of the good in euro /kg Pe the price of electricity in cents / KWh 1. Interpret the influence of the price of the product (P) and the price of electricity on the supply of the product. 2. Determine the function of the supply, when price of electricity: a. Pe = 10 cents / KWh b. Pe = 20 cents / KWh 3. Interpret the inverse function of the supply. 4. Draw the functions of supply. 5. Calculate and interpret the price elasticity of the supply, at the level of the price P = 20 euro/kg
Task 24.

There are given two functions of supply for 2 periods: QS1 = -2 + 0,2p, QS2 = -4 + 0,2p, Where: QS the supply in tons, P price of the good in zl/kg 1. Interpret the primary and inverse functions of supply. 2. Draw both functions.

Task 25.

Following demand and supply functions are given: QD = 10 - 1,25p QS = 1,5 + p - 5pr Where: QD and QS the demand and supply of the good in mln tons, P the price of the good in zl/kg Pr the price of electricity in zl/KWh 1. Assume that the price of electricity is 0,1 zl/KWh, calculate the equilibrium price and quantity of demand and supply. 2. Draw the function of the demand and the supply , (assume that Pr = 0,1 zl/KWh). 3. Examine by how many of mln. of tons the supply decreases, if the price of electricity increases from 0,1 zl/KWh to 0,19 zl/KWh. Write new function of the supply. 4. Calculate the new equilibrium price, and check how much of increased equilibrium price assign to 1 unit of decreased supply. 5. Write the function of equilibrium price as a function of the price of electricity. 6. Calculate and interpret price elasticity of the demand in equilibrium.
Task 26.

Following demand and supply functions are given: QD= 8*p(-0,5) * m(0,6) QS=2*p(1,1) Where: QD and QS the demand and supply of the good in kg, P the price of the good in zl/kg M the average income of consumer in zl. 1. Interpret price elasticity of the demand and the supply. 2. How many percent will change the demand, if the income of consumer increases by 1%? 3. How many percent will change equilibrium price, if the income of consumer increases by 1%? 4. How many percent will change equilibrium price, if the demand for the good increases by 1%?
Task 27.

Parallel markets substitutes Assume that on the market of margarine and butter there is perfect competition. There is equilibrium. What will happen on these two markets, if on the margarine market the demand for margarine increases (the change of consumer preferences).
Task 28.

Parallel markets complementary goods. Assume that on the market of gasoline and cars there is perfect competition. There is equilibrium. What will happen on these two markets, if on the gasoline market the supply of gasoline decreases due to the increase of the price of oil brent.

Task 29.

There is only one soccer stadium in the city. The capacity of this stadium is 55 000 spectators. The function of the demand for tickets is: Q = 100 000 - 4000p Where: Q the demand for the tickets, P unit price in zl / ticket 1. Write and interpret the primary and inverse function of the demand for tickets. 2. Write the function of total revenues (TR) and marginal revenues (MR). 3. Calculate the number of tickets and the price of the ticket, which will let get the maximum of total profits, knowing that the total cost of the soccer match is 525 000 zl. 4. Calculate the profit for the optimal amount of sold tickets. 5. How big would be the profit if the owner of the stadium gives the price which assure 100% attendance? 6. Calculate the price elasticity of the demand at the optimal attendance and 10% bigger and smaller attendance than the optimal one.
Task 30.

The producer of tractors is a monopolist on the domestic market. The function of the demand for the tractors is as follow: Q = 120 - p - 20pl Where: Q yearly demand for tractors in units P the price of the tractor in thousands of zl, Pl the price of the fuel in zl/l The government is considering to decrease the price of fuel for farmers from 1 zl/l to 0,9 zl/l. 1. Write the primary and inverse function of the demand for tractors for both prices of fuel. 2. Write the function of total revenues of the producer 3. Calculate the function of marginal revenues of the producer 4. Calculate the optimal production output and the price of tractor in order to get maximum profit. The producer knows the function of total cost (in mln zl): TC = 650 + 1,5 Q2 5. Draw the graph.
Task 31.

The function of the demand is given: Q = 800 - 4p, Where: Q the demand for individual product in units P the price of the product in Euro/ unit 1. Calculate the optimal production output for monopolist and the price, which let the company (monopolist) get the maximum profits, if the marginal cost is as follow: MC = 50 + 0,25Q . 2. Assume, that this monopolist company disintegrate into many small companies which are independent (assume that this market becomes the model of perfect competition). Calculate the optimal production output for perfect competition market and the price. 3. Compare the result of the point 1 and 2. Draw the graphs.

Task 32.

The market of municipal transport service can be divided into 2 segments: 1. The segment of pensioners, students and pupils 2. The segment of other people. On both segments, the functions of the demand for tickets are given: Q1 = 400 400p1 Q2 = 200 100p2 Where: Q1, Q2 the weekly amount of passengers in thousands, P1, P2 the price of tickets in zl/ ticket. The weekly function of the total cost of this municipal transport service company (monopolist) is as follow: TC = 100 + 0,001Q2, Where: TC Total cost in thousands zl. Q = Q1+Q2 (the number of passengers in thousands) 1. Calculate the optimal number of passengers and price of the tickets on both segments in order to maximize the profits of monopolist company. 2. Calculate the optimal number of passengers and price of the tickets on both segments in order to maximize the profits of monopolist company BUT assume, there is no segmentation of the market. USE following scheme of calculations: a) Write the inverse function of the demand for tickets b) Write the total revenue and marginal revenue functions c) Write the marginal cost function d) Calculate the optimal number of passengers e) Calculate the optimal price of tickets f) Calculate the total revenues g) Calculate the total cost h) Calculate the profit

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