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EC111Class4Questions - = £8,000 rags bought during the...

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UNIVERSITY OF ESSEX Autumn Term 2011/12 DEPARTMENT OF ECONOMICS Tim Hatton EC111 Introduction to Economics: Class Exercises 4 (week 6) 1. Suppose that telephone calls cost 12 pence a minute. John’s demand function for telephone calls is given by P = 300 18q, where P is measured in pence and q is minutes per week. (a) How many minutes per week of telephone calls will be made? Draw a diagram to illustrate your answer. (b) How much consumer surplus will be gained from making telephone calls? Suppose that, in addition to per minute charges, the telephone company charges a fixed rental fee of £5 per week. Will John be willing to pay the fee rather than be unable to make calls at all? What if the fee is £25 per week? 2. Over the past year a window cleaner has had incomings/outgoings as follows: revenue
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Unformatted text preview: = £8,000, rags bought during the year = £1,000, ladder bought at the beginning of the year = £100. What further information do we need to calculate his economic profit over the past year? 3. (a) Why is the MRTS equal to the ratio of factor prices at the cost-minimising combination of inputs for a given output? (b) What is meant by ‘increasing returns to scale’ and ‘decreasing returns to scale’ and why do they arise? (c) Show diagrammatically the effect of a decrease in the wage rate on the firm’s cost-minimising choice of capital and labour, holding the level of output constant. Key terms to review and understand: Consumer surplus Deadweight loss Expected utility Adverse selection Moral hazard Principal/agent problem Marginal product of labour Isoquant Isocost curve...
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