MicroeconomicsHomework 1.

Due Date: July 17, 2012

There are ve questions in this homework, with each question having several subparts. There are a total of 100 marks. The marks for each subpart is indicated in brackets after the statement of the main question. For example, (10 + 10) indicates that both subparts are worth 10 marks each. 1. BW Exercise 2.4; Page 56. (15) 2. BW Exercise 2.11 Page 57. (20) 3. Suppose that people who go to a movie theatre can be classied into two groups: general public (gp) and students (s). Suppose the demand curves for the general public (Qgp ) and students (Qs ) are as follows: Qgp = 500 5P Qs = 200 4P, where Q stands for quantity demanded and P is price. (5+5+5+5+5) (a) Graph the two demand curves with P on the vertical axis and Q on the horizontal axis. If the current price of tickets is 35, identify the quantity demanded by each group. (b) Find the price elasticity of demand for each group at the current price and quantity. (c) Is the movie theatre maximizing its revenue by charging 35 for each ticket? Explain. (d) What price should be charged from each group if the theatre wants to maximize revenue collected from ticket sales? (e) Normally, sellers try to maximize prots instead of revenue. In this case, explain why maximizing revenue is equivalent to maximizing prots. 4. Explain which of the following items in each pair is more price elastic. (10+10) (a) The demand for a specic brand of toothpaste and the demand for toothpaste in general. (b) The demand for petrol in the short run and the demand for petrol in the long run. 5. Suppose the total benet of working for H hours is B(H) = 1000H 20H 3 while the total cost is C(H) = 100H + 60H 2 . (7+7+6) 1

(a) Find the marginal benet and marginal cost functions. (b) Calculate the optimal number of hours that the individual should work for? (c) Suppose there is now a sunk cost of 100. What is the total cost function now? What is the optimal number number of hours now? Provide the intuition behind your answer.