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# Microeconomics

Microeconomics Portfolio Questions

This is my microeconomics coursework portfolio questions. Where we have to answer the questions
correctly. This is a total of 40% of my final grade so please make sure the answers are direct and get right
to the point. It doesnt have to be in an essay format, simply place the answer below the question.

Seminar 2

1. A simple supply and demand schedule
a. Plot the demand and supply curves on excel or a graph and identify the equilibrium
price and quantity

4812162024

Price (£)

0
50
100
150
200
250

Supply and Demand Curves

Quantity Demanded
Quantity Supplied

The equilibrium price is £14 and the equilibrium quantity is 100

b. Explain why the equilibrium price is a stable one;

The equilibrium price is stable because the quantity demanded is relatively equal to the quantity
supplied, which significantly minimizes price fluctuations.

1. Assuming the potato is an inferior good; analyze the effect of a rise in national income on
the equilibrium price and quantity of potatoes. Now analyze the effect on the potato
market of a plague of carbohydrate-loving potato locusts.

Since potato is an inferior good, a rise in national income will shift the equilibrium price and
quantity of potatoes to the left because the increased purchasing power will make consumers to
move to other superior alternatives thereby decreasing the demand for potatoes as well as the
prices. On the other hand, a plague of carbohydrate-loving potato locusts will shift the
equilibrium price and quantity of potatoes to the right because it will result to a decline in supply
of potatoes to the market, which will in turn increase the demand for the potatoes and
consequently an increase in the prices.

1. Use the supply and demand model to discuss the economic effects of :
a. Setting minimum wages for low paid workers;
Setting minimum wages for low paid workers results to increased labor costs, this subsequently
leads to increased good prices and consequently a decrease in demand.

b. Setting maximum rents for private accommodation, and
This ensures that the prices for private accommodation are regulated and always at or below
maximum margin, which increases demand for the accommodation.
c. Levying an indirect tax on the sale of a product.
Levying an indirect tax increases the price of a product subsequently leading to decreased
demand.
d. Giving a production subsidy
Production subsidy increases quantity supplied in turn leading to a reduction in the prices of
products, but often without losses to producers because of reduced cost of production attributable
to the subsidy.

3.portfolio question Explain carefully what is meant by consumer surplus. What happens to
consumer surplus when price increases?

Consumer surplus is referred to as the economic measure used in determining consumer
satisfaction, and its calculation is done through analysis of the difference between the price a
consumer is willing to pay for a service or good relative to the market price of that service or
good. This means that consumer surplus is only felt when there is willingness of the consumer to
pay more for a certain service or product that its prevailing market price. An increase in market
price of a product or service either reduces consumer surplus or when the increase in price is
significant the consumer is lost altogether.

4portfolio question Carefully explain the meaning, derivation and properties of indifference
curves and budget lines. Use indifference analysis to show how a rational consumer maximizes
his/her utility from a given income.

Indifference curves are a method used to illustrate the tastes and preferences of consumers, while
a budget line is used to indicate the extent of income allocated by a consumer to goods and
services. Derivation of an indifference curves is based of preference and tastes of consumers,
where in the figure shown below in which point a is preferable to point c, and point b is
preferable to point a. However, when a is preferable to d but e is preferable to a, then there is
movement from point d to e, and it is advisable to align to more preferred combinations rather
than less preferred ones. Thus, by doing so we connect all the points to obtain the indifference
curves illustrated in the figure below:

The indifference curves for pens and books are derived by taking any combinations that fall
along curve I 1 for pens and books yielding similar level of utility as any other combination on

that curve. This means that the consumer is indifferent among them, and through extension, any
curve I 2 combinations will be preferable to any curve I 1 combinations as shown below:

The three main properties of indifference curves include: 1) higher indifference curves are a
representation of higher satisfaction levels; 2) there is a negative sloping of indifference curves
and they tend to bow towards the origin; and 3) it is impossible for indifference curves to cross.
A rational consumer can use indifference curves to maximize utility by consuming at the point
where her budget line is tangent to an indifference curve. At this point, the consumer chooses
point a, where her budget line just touches indifference curve I 1 .

5portfolio question Derive the price consumption curve. Why does a change in the price of
good affect the consumption of another good?

From the budget line and indifference curves shown below it is possible to derive the price
consumption curve.

For instance, changes in price of pens shifts the budget line of consumers from B 1 P 1 to B 1 P 2 in the
above figure, leading changes in the consumer equilibrium point from a to c. As a result, a plot
of the demand curve for pens gives the equilibrium quantity of pens at various prices. This is the
price consumprion curve and is illustrated in figure below:

A change in price of good affects the consumption of another good if they are substitutes,
whereby an increase in the price of one substitute increases consumption of its replacement while
a decrease in the price of a substitute product decreases the consumption of its replacement.
Seminar 5

1. The output of good X
a. Fill the gaps

Number of
workers

Total
Product Average Productivity of Labour

Marginal Productivity of
Labour
1 200 200 200
2 600 300 400
3 960 320 360

4 1120 280 160
5 1200 240 80
6 1200 200 0

b. A plot of the TP, AP & MP

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Number of workers

0
200
400
600
800
1000
1200
1400

Total ProductAverage Productivity of LabourMarginal Productivity of Labour

1. Firm’s cost of production
a. Fill the gaps

Quantity Produced
Total
Cost Average Total Cost Average Variable Cost

Average Fixed
Cost

Marginal
Cost
1 10 10 2 8 6
2 16 8 4 4 2
3 18 6 3.33 2.67 10
4 28 7 5 2 17
5 45 15 13.4 1.6 21
6 66 11 9.67 1.33 11

b. A plot of the data

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Quantity Produced

0
10
20
30
40
50
60
70

Total CostAverage Total CostAverage Variable CostAverage Fixed CostMarginal Cost

All the costs except the total cost tend to increase with in productivity, but at higher
productivity levels they begin to decrease. All average costs tend to behave the save
across different productivity levels.

1. What do we mean by Scale Economies? Why is a firm’s long-run average cost curve
sometimes taken to be U-shaped?

Scale Economies are referred to as the cost benefits that ensue from increased production output
in a firm, and often result to reduction in variable costs per unit due to operational synergies and

efficiencies. The reason why a firm’s long-run average cost curve is sometimes taken to be U-
shaped is because, initially the costs are high then they start to gradually to gradually up to a
point where they no longer reduce and then begin to rise up to to a point they are equal to the
beginning costs to form a U-shape.
Seminar 6

1. Define perfect competition. How realistic do you consider the assumptions behind the
perfect competition model to be?

Perfect competition is a market structure where no particular participant(s) are large enough to
assume power of setting the price for a product that is homogeneous. The assumptions behind the
perfect competition model are not realistic because it is usually very hard to find perfect
knowledge among consumers as well as perfect entry and exit from industry freedom.

1. Demonstrate, with the use of appropriate diagrams, the profit maximizing equilibrium of
a perfectly competitive firm.

In this scenario the firm has to concentrate on market supply and demand curves to establish its
appropriate mix because it has little influence on the market. This is achievable through the
diagrams shown below:

1. Perfectly competitive firms can never make supernormal profits. Is this true?
This is not true because in short-run perfectly competitive firms can make supernormal profits
before many other firms are attracted into the industry and profits begin declining.

Seminar 7

1. What do you understand by ‘monopoly’? Show how a monopolist sets a profit
maximizing output, and explain why this equilibrium may be a stable one in more than
the short-run.

This is a market structure where a single company or group controls nearly all or all the market
for a certain type of service or product. Monopolist sets a profit maximizing output through the
equilibrium shown below:

1. Explain, giving examples, the circumstance under which price discrimination is likely to
occur.
First circumstance is when consumer profit is transferred to producers by charging varied
prices from different groups for other purposes other than transportation costs. For example,
higher telephone charges during hours of business since the need to use the phone by
businessmen is high during business hours and cost is not a priority, while the same phone
charges are low at evening so that ordinary people are also encouraged to make calls.
2. ‘Monopoly is always against the public interest and should be curbed by the state.’ Do
you agree?

3.portfolio question Examine the effect of taxing smoking on the equilibrium price and
quantity of cigarettes? Why is the price elasticity of demand a useful concept in this case? Is it
true that government tax smoking solely in order to improve our health?

Taxing smoking does not have significant shift or movement on the equilibrium price and
quantity of cigarettes because its demand is not as elastic as those of other products. However,
some extent of a reduction in demanded quantity is experienced since high prices discourage new
smokers, relapse of those had quitted smoking, and also some smokers quit. The usefulness of
elasticity of demand is to determine the quantities of cigarettes to be produced per stipulated
period of time and also set prices for the cigarettes. It is not really true that government tax
smoking solely in order to improve our health, but also to raise revenues to fund its activities.

2.portfolio question What might be the main determinants of the market demand of the
following products?
a. larger beer; b. holidays abroad; c. sports cars; and d. spaghetti

The main market demand determinants for the above products include: the price of the
commodity per unit, tastes and preferences of a household or individual, as well as the prices and
substitutes nature.

3portfolio question What is the key difference between a change in price and a change in
any other factor affecting demand on the demand curve?

The key difference is that a change in price results to a movement or shift along the demand
curve.

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