ANSWERS TO TEST ASSIGNMENT

Ans1. Average cost for the average month in this case will $1.1735. Marginal cost in this case will be nil as Internet provider is charging fixed fee of $19.95 , so total cost will remain same if he uses it for additional hour in the same month.

Ans2. a. let us transform these into quantity demanded as a function of price

10 is the intercept on Y axis.5 is the intercept on X axis.Joining both you can graph the line.Slope in the above case will be -2

b)

100 is intercept on Y axis25 is intercept on X axis. Joining both by straight line you can graph the lineSlope is -4

d)

Intercept on x axis is 10,000Intercept on Y axis 20.Join both the points by a straight line .Slope is -1/500= 0.002

c)

Intercept on Y axis is 50 .Slope is 6+.

This means for every 6 Rs increase in Price Supply will increase by 1 unit.PRICE SUPPLY50 0110 10170 20230 30

Plot the above table to graph the line.

ANS:3 a) OPPORTUNITY COST OF POTHOPLDERKristen =15/3 =5Anna= 12/2 =6

b) Kristen for her opportunity cost is lower than Anna. In other words Kristen for every potholder produced will sacrifice 5 wristbands whereas Anna for every potholder produced will sacrifice 6.

c) Kristen maximum wristbands she can produce 20*15 = 300 (intercept on y axis) maximum potholders she can produce 20*3= 60. (intercept on x axis)join both the intercepts you will get PPF which will show all the possible combinations.Slope in the above case will be -5.

Anna. Similar procedure to be adopted for Anna.

d) Kristen wristbands =15*10=150

potholders= 10*3=60.Similarly for Anna and (e) part can Be solved.

f. If Kirsten produces wrist bands (20*15=300) 300*$1=300 If she produces potholders (20*3=60) 60*5.50= 330If Anna produces wrist bands (12 *20=240) = 240*$1=240If Anna produces potholders ( 2*20 = 40) = 40 * $ 5.50=220

Kirsten should produce potholders only as he has comparative advantage in that and Anna should devote all herr 20 hours on production of wrist bands in which shE has comparative advantage.

Their max joint evenue will be 330 + 240 = 570.

Ans4.a) Disagree , they are complementary goods (Price of petrol rises demand for car will fall). a) Graph can be drawn as per procedure explained in answer to 2nd question…

b) Agree (demand remaining the same when supply increases equilibrium price falls)c) Disagree demand for normal goods will rise but for inferior will fall with rise in

income.d) Disagree they can be as Pizza can be for hamburger.e) Disagree. Depends on the comparative increase in demand and supply. It may rise

, fall or remain same.f) Agree if with fall in price of good A Demand for good B rises they are

complementary gods.

Ans5. b) At. Equilibrium

Substituting the value in demand function

qs= 100.

So equilibrium quantity in this case will be 100 and price $ 10.c) If price rises to $ 15 Producers will tend o supply 300-100 =200 Where as consumers will demand 300-300 = 0.This will result into excess supply by 200. This will induce competition among the producers and price will start falling till it reaches $10.

d) the new market demand in this case will be :

Substituting value in either qs or qd you will get equilibrium quantity.

Qd = 133.

Answer 6. Consumer surplus is the difference between what consumer is ready to pay and what actually he is paying.

Consumer surplus in this case is $18.

Producer surplus is difference between at what price he is ready to sell and what price he is getting.

Producer surplus in this case is again $ 18.

If production is cut to 3 million meals per day.

Both consumer and producer surplus falls to $ 13.5.Total dead weight loss $9 million.