UNIVERSITY OF GHANA BUSINESS SCHOOL

DEPARTMENT OF FINANCE UGBS 201- MICROECONOMICS

AND BUSINESS
TUTORIAL SET 5

QUESTION 1
a. Suppose you are an aide to a U.K Senator who is concerned about the impact of a recently
proposed excise tax on the welfare of her constituents. You explained to the Senator that one
way of measuring the impact on her constituents is to determine how the tax change affects the
level of consumer surplus enjoyed by the constituents. Based on your arguments, you are given
the go-ahead to conduct a formal analysis, and obtain the following estimates of demand and
supply:

Qd = 250 - 5P and Qs = 2P - 30
i. Graph the supply and demand curves
ii. What are the equilibrium quantity and equilibrium price?
iii. How much consumer surplus exists in this market?
iv. If a $2 excise tax is levied on this good, what will happen to the equilibrium price and
quantity?
v. What will the consumer surplus be after the tax?

QUESTION 2
Suppose the demand and supply functions for a product X are given by

QX = 500 - 2P
QX = -100 + 3P
a) Find the equilibrium price and quantity.
b) If a regulator of the market for X imposes a price of GH₵ 100.00, discuss with figures, what
will happen in this market.
c) Instead of imposing the GH₵ 100 on the market by the regulator, government imposes a per
unit tax of GH₵ 1.00. Calculate
a. Government revenue from the tax.
b. The deadweight loss of the tax.
c. Show your results in a and b on one graph and the results for c on another graph

Question 3
The weekly demand for Kelewele among the 2016 cohort of MBA students at the UGBS
is

𝑄𝑑 𝑥 = 500 − 5𝑃𝑥 + 0.5𝐼 + 10𝑃𝑦 − 2𝑃𝑧

Where 𝑄𝑑 𝑥 is the quantity demanded of Kelewele

𝑃𝑥 is the price of Kelewele per lb
I is consumer income in Ghana Cedis
𝑃𝑦 and 𝑃𝑧 are the prices of two goods that are related to Kelewele.

a) Based on the demand function above, is Kelewele a normal good or an inferior good?
Explain your answer.

b) Based on the demand function above, what is the relationship between Kelewele and
good Y?

c) Based on the demand function above, what is the relationship between Kelewele and
good Z?

d) What is the equation of the demand curve if consumer incomes are GHS 30, the price
of good Y is GHS 10 and the price of good Z is GHS 20?

a) Graph the demand function for Kelewele from d)

Now suppose the weekly supply function of Kelewele at the UGBS graduate campus is

𝑄 𝑠 𝑥 = −210 + 20𝑃𝑥 − 5𝑃𝐼

Where 𝑄 𝑠 𝑥 is the quantity supplied of Kelewele and 𝑃𝐼 is the price of inputs used in
preparing Kelewele
f) What is the supply function if input prices are GHS 10?

g) Graph the supply curve from f).

h) Compute the equilibrium price and quantity of Kelewele.

Suppose authorities at UGBS are concerned that Kelewele sellers at UGBS are exploiting
students by charging exorbitant price for their Kelelwele so they decree that no one should
seller Kelewele above GHS 20 per lb.

i) What type of price control measure is this?

j) Following this decree, will there be excess demand or excess supply of Kelewele at
UGBS? Calculate the excess demand or excess supply?

k) Estimate the price elasticity of demand at equilibrium

QUESTION 4
Sompa’s utility function for good X and Y is given by U (X, Y) =X2Y3. PX, PY and I are the price
of good X, price of good Y and consumer income respectively.
a) Write the budget constraint of the consumer.
b) Derive the demand functions for good X and Y.
c) What combination of X and Y maximizes the consumer’s utility at I=200, PX=4, PY =6?
d) Calculate the marginal rate of substitution between X and Y at equilibrium and interpret your
results.

QUESTION 5
Consider a firm with the following Fixed Costs and Marginal Costs
Q TFC TVC TC MC AFC AVC ATC
0.00 25.00
1.00 5.00
2.00 4.00
3.00 1.00
4.00 3.00
5.00 6.00
 6.00 9.00

i. Fill in the blanks for TVC and TC

ii. Fill in the blanks for AVC, AFC and ATC
iii. Construct a graph that illustrates MC, AVC, and ATC
iv. What is the relationship between AVC and ATC? Why?

Question 6
a. The following table summarizes the short-run production functions for “All Needs Firms”.
The product of “All Needs Firm” sells for 5 GH₵ per unit, the cost of input X1 is 8 GH₵ per
unit, and the price of input X2 is 25 GH₵ per unit. Complete the following table, and then
answer the associated questions. Please show how you arrive at your answers.
(1) (2) (3) (4) (5) (6)
X1 X2 Q MPx1 APx1 APx2
0 5 0
1 5 10
2 5 30
3 5 60
4 5 80
5 5 90
6 5 95
7 5 95
8 5 90
9 5 80
10 5 60
11 5 30

Answer the following questions using information from the above table.
i. Which input is the fixed input? Which is the variable input?
ii. How much is the fixed costs?
iii. What is the variable cost of producing 30 units of output?
vi. Over what range of variable input usage does increasing marginal returns exist?
vii. Over what range of variable input usage does decreasing marginal returns exist?
viii. Over what range of variable input usage does negative marginal returns exists?
b. You are the manager of a firm that sells output at a price of 40ghc per unit. You are interested
in hiring a new worker who will increase your firm’s output by 2,000 units per year. Several
other firms also are interested in hiring the worker.
i. what is the highest annual salary you should be willing to pay this worker to come to your
firm?
ii. What will determine whether or not you actually have to offer this much to the worker to
induce him to join your firm?

QUESTION 7
Output Fixed Variable Total Cost Marginal Average Average Average
Cost Cost (VC) (TC) Cost Fixed Variable Total
(FC) (MC) Cost Cost Cost
0 50 50
1 100
2 128
3 148
4 162
5 180
6 200
7 225
8 254
9 292
10 350
11 435

a. Use the table above to answer the following questions.

i. Calculate the fixed costs, Variable Costs, Marginal Costs, Average Fixed Costs, Average
Variable Costs and Average Total Costs.
ii. At what level of output does diminishing returns set in?
iii. What shape will the Marginal Cost curve assume? Why will it assume that shape?

b. Sompa owns a painting company with the following schedule for total costs:
Quantity of 1 2 3 4 5 6 7
houses painted
per month
Total Costs 2000 4000 8000 1600 320000 64000 128000
(GH₵)
i) What is the efficient scale of the painting company?
C. Why will it be impossible to cultivate Ghana’s food supply in a flower pot?

Question 8
Determine whether the following statements are true or false. Explain your answer.
b) A freeze in Brazil’s coffee-growing region will lower the price of coffee.

c) “Protecting” American textile manufacturers from Chinese clothing imports will

lower clothing prices in the United States.

d) The rapid increase in college tuitions will lower the demand for college.

e) The war against drugs, with increased interdiction of imported cocaine, will lower
the price of domestically produced marijuana.

Question 9
Labour Capital TP MP AP TFC TVC TC MC ATC AVC
0 15 -
1 15 60
2 15 90
3 15 110
4 15 70
5 15 60
6 15 50
7 15 40

a) Compute the Total product (TP) and Average product (AP) for all units of the labour input.
Show all formulae and calculations.
b) In ordinary language explain the law of diminishing returns.
c) Does the production technology described in the table above exhibit the law of diminishing
returns? If yes, after what level of the labour input does diminishing returns set in?
d) In ordinary language explain the concept of economies of scale and diseconomies of scale

Assume that each unit of capital costs GHC 10 and each unit of labour costs GHC 50.
e) Compute that Total Fixed Cost (TFC), Total Variable Cost (TVC) and Total Cost (TC) for
each unit of the labour input.
f) Compute the Marginal cost (MC), Average Fixed cost (AFC), Average Variable Cost (AVC)
and Average Total Cost (AC) for each unit of the labour input.
g) In no more than two sentences, explain why short-run Average Cost curves are U-shaped.
h) In no more than two sentences, explain why long-run Average Cost curves are U-shaped.