This booklet has two sections.

Section One consists of compulsory questions grouped into

three parts (multiple-choice, true or false, and discussion and workout questions). All of the
questions in this section will be marked. The questions in Section Two will not be marked
and thus you are not supposed to send them to the tutorial center. However, they are very
important for your understanding of the course and for your final exam.

Section One: Compulsory Questions

Part I: Multiple-Choice Questions: Choose the Correct Answer and Encircle the Letter
of Your Choice.

1. When income elasticity of demand for a good is positive and less than one, the good is:
A. Luxury and normal D. Normal and necessity
B. Substitute and normal E. Normal and complement
C. Luxury and substitute
2. A horizontal demand curve shows that:
A. Demand is perfectly elastic
B. Demand is perfectly in elastic
C. The demand curve is negatively sloped
D. Demand is unitary elastic
E. None
3. One of the following is not true about the characteristics of well-behaved indifference
curves.
A. They are convex to the origin
B. All points on an indifference curve yield the same level of satisfaction
C. They are straight lines
D. As we move closer to the origin, the level of satisfaction will diminish
E. None
4. Suppose the demand function for good X is given by Q = 32 – 0.5P. So the price
elasticity of demand for commodity X when P equals Birr 8 is:

A. – 0.5 B. 2 C. 1 D. – 1 E. None
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5. The demand for commodity X in the above question is:
A. Elastic D. Perfectly in elastic

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 B. Inelastic E. None
C. perfectly elastic

The total output of a manufacturing plant changes from 100 units to 300 units when labor
input changes from 10 to 20 units. Correspondingly, total variable cost rises from Birr 2000
to Birr 2400, while fixed cost associated with the existing plant is Birr 400. Based on the
above data, answer questions 6 to 8.

6. The marginal product of a unit of labor (for the change given) is:
A. 10 units D. 0.2 units
B. 40 units E. none
C. 20 units
7. Average total cost of production at the initial level is:
A. Birr 15 D. Birr 20
B. Birr 24 E. none
C. Birr 14
8. Marginal cost of producing an extra unit (for the change given) is:
A. Birr 2 D. Birr 20
B. Birr 4 E. none
C. Birr 9

Part II: True or False Questions: Write True for Correct Statements and False for the
Wrong Ones. Use the Space Provided.

________ 1. I n a perfectly competitive market, a firm is in loss minimization when price is

less than ATC but greater than AVC.
________ 2. When total product increases at an increasing rate, marginal product rises; when
total product reaches its maximum, marginal product is also at its maximum;
and when total product declines marginal product is negative
________ 3. In the short run, when average product of labor is rising, average variable cost
is declining and when average product of labor reaches maximum average
variable cost reaches its minimum, and this is due to the law of diminishing
returns.

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________ 4. The rising portion of the marginal cost function above the minimum point of
average variable cost represents the short run supply curve of a perfectly
competitive firm.
________ 5. Price discrimination is not possible if there is a possibility that the original
purchaser can resell the product.
________ 6. The law of variable proportions is a long run law while the law of returns to
scale is a short run one.
________ 7. The average total cost and average variable cost curves tend to get closer as
output increases, but they never meet each other.
________ 8. The crucial difference between a pure monopolist and a pure competitive seller
lies on the cost (supply) side of the market.

Part III: Workout and Discussion Questions: Answer Each of the Following Questions
in Accordance with the Specific Requirement of Each Question. Use Your Own
Papers for this Part of the Assignment.

1. Discuss the differences and similarities between the cardinal and ordinal utility theories.
2. Compare the economic behaviors of risk-averse, risk-neutral, and risk-loving consumers
(with the help of hypothetical utility functions).
3. The market price that a perfectly competitive firm faces is Birr 16. The total cost of this
Q3
firm is given by: TC   5Q 2  40Q . Determine the profit-maximizing level of
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production.
4. The production function of a firm is given by: Q  La K b , where Q = output, L labor, K
capital (a and b are constants). Derive the cost function of the firm if the wage rate is Birr
5 per unit of labor, and the rental price of capital is Birr 3 per unit.
5. The manager of Tabor Ceramic S.C. estimates that the total revenue from the sale of her
Q2
firm’s product is given by the equation: TR  300Q  and the total cost function is
2
estimated to be: TC  5000  60Q  Q 2 .
A. What are the profit-maximizing levels of price and output?
B. Find the maximum economic profit.

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 C. What is the output rate for which average cost is minimized? At this output rate, what
is the amount of economic profit?
6. Suppose you are the manager of a watch-making firm operating in a competitive market.
Your cost of production is given by C = Q3 – 2Q2 + 5Q + 100, where Q is the level of
output and C is total cost.

A. If the price of a watch is Br. 60, how many watches should you produce to maximize
profit?
B. What will your profit level be?
C. At what minimum price will you produce a positive output?
7. Suppose HBF supplies ‘X’ sets of non-alcoholic beer per month at a total cost in Birr
given by: TC = 10X + 50. in addition, the owner of the factory is a monopolist and the
total demand for its product is X = 210 – 3P, where P is price in Birr per set. Assume
further that HBF can segregate the market for its product into two separate regions: the
Eastern Region and the Central Region, each of them having a demand curve with a
different elasticity. The demand functions of the two separated markets are:
X1 = 90 – P1…………. demand in the Eastern Region, and
X2 = 120 – 2P2 ………. demand in the Central Region.
Clearly X1 + X2 equals ‘X’ sets of non-alcoholic beer that can be supplied per month.
Assuming that the factory aims at profit maximization,
A. Calculate equilibrium price and output in each market.
B. Determine total revenue and profit that the monopolist realizes:
i by charging a uniform price.
ii by applying price discrimination.

Section Two: Optional Questions

Answer Each of the Following Questions According to the Specific Requirement(s) of

Each. Use Diagrams Wherever Necessary or Whenever You Find It Preferable.

1. Define and/or explain each of the following concepts:

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 a. Marginal rate of substitution of X for Y i. Income Offer Curve
b. Scarcity j. Price offer curve
c. Opportunity cost k. Engel curve
d. Efficiency l. The law of returns to scale
e. Law of diminishing returns to a factor m. Normal profit
f. Break-even point n. Shut-down point
g. Price discrimination o. Isocost
h. Dead Weight Loss due to monopoly p. Normative economics
2. Use the concepts of budget line and indifference map to illustrate how the demand for a
commodity is derived.
3. For a perfectly competitive firm, describe how the decision either to closedown or to
continue production is made.
4. Compare a pure monopolist and a perfect competitor with respect to:
a. price determination.
b. resource allocation and production (use a diagram).
5. Assume that, for a perfectly competitive industry that has 100 identical firms, the market
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demand supply functions are D  10,000  10P and S  (10P  2,000) respectively.
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a. Determine the equilibrium price and quantity for the industry.
b. Obtain the marginal cost of a single firm.
c. Determine the profit maximizing output for an individual firm.
6. A monopolist firm faces a demand curve: Q = 900 – 3P, and the costs of its two plants
are: C1  100Q1  50 and C 2  0.5Q22  10Q2 .
a. Find the profit maximizing levels of price and output in each plant.
b. What is the level of profit at equilibrium?
7. Given the total cost function TC = 1000 + 200Q – 9Q2 + Q3, determine:
a. the equations for TVC, TFC, AFC, AVC, ATC, and MC.
b. the lowest price for output that would allow the firm to break even.
c. the lowest price for output that would allow the firm to cover total variable cost.
8. A firm’s production function is given by Q  5L0.5 K 0.3 . The price of labor is Birr 1 per
unit and the price of capital is Birr 2 per unit. Find the minimum cost combination of
capital (K) and labor (L) for an output level of 20 units.

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9. Suppose a firm uses two factors of production (L and K) where the price of labor (w) is
Birr 10 and that of capital (r) is Birr 2.5 per unit.
a. Determine the isocost equation corresponding to a total cost of Birr 200.
b. Determine the isocost equation corresponding to a total cost of Birr 500.
c. If w falls from Birr 10 to Birr 8 per unit, ceteris paribus, determine the new isocost if
total cost equals Br. 500.
d. Compare your answers to a and b above. What did you learn?
e. Compare your answers to a and c above. What did you learn?
10. Kanofi concrete is a monopoly supplier of concrete in western Ethiopia. Demand for the
firm’s concrete is given by P = 110 – 4Q. The marginal cost of this firm is constant and
equal to Birr 10.
a. What are the profit-maximizing price and output?
b. What is the deadweight loss resulting from Kanofi’s monopoly?
c. Compared to pricing at marginal cost, how much income is redistributed from
consumers to the owners of the monopoly?
11. Show that the profit maximizing quantity for a monopolist will always lie in the elastic
region of the demand curve.
12. The demand equation for a monopolist is given by P = 50 – 2Q and the marginal cost is
Birr 10.
a. Compute the deadweight loss associated with monopoly pricing.
b. If P = 50 – 4Q, what is the deadweight loss?
c. Based on your answers to (a) and (b), how is the deadweight loss related to the slope
of the demand curve?