Chapter 20, Problem 2CAQ:

Journey Type Hours Cost ($)

Airplane 3 300
Bus 28 50
Difference 250
Now,

1. If Mary Values her time at $12 per hour and it takes the airplane instead of bus then
she will save 25 hours.

Total time cost saved = $12 x 25 hours = $300

Since, Marys saving of time cost is more than the difference between the cost of bus
ticket and airplane ticket, therefore, she will take the plane for journey.

2. If Mary Values her time at $8 per hour and it takes the airplane instead of bus she
will save 25 hours.
Total time cost saved = $8 x 25 hours = $200
In this case, the saving derived for time cost is less than the difference of the cost and bus
bear by bus ticket and airplane.
As a result, she will prefer to take bus journey instead of airplane.

Chapter 20, Problem 4CAQ:

 Jeans T-Shirt
Price of Jeans = $30 Price of T-Shirt = $10
Marginal Utility = 60 utils Marginal Utility = 30 utils
Ratio of Price and Marginal Utility Ratio of Price and Marginal Utility
Ratio = MU of Jeans / Price of Jeans Ratio = MU of T-Shirt / Price of T-Shirt
Ratio = 60/30 = 2 Ratio = 30/10 = 3

In order to maximize the consumer utility, it is very important to know that there should be
following condition:

MUx/Px = MUy/Py = MUz/Pz

In this case, MUJ/PJ < MUT/PT, therefore, the consumer is not maximising his utility.

Further, in order to maximise the utility, the consumer should spent some units of Jeans and more
on T-shirts. Because, spending more on the T-shirt will lower the utility of the T-shirt and
consequently, the utility of Jeans will increase. In this way, we can maximize the utility.

Chapter 20, Problem 7CAQ:

The major determinates which decide that either the demand is elastic or inelastic or as followed:

1. Availability of Substitutes:
The most and very important determinants of the price elasticity of demand. Because, in
the particular market where the substitute of the product will be available, the demand
will be more elastic and vice versa.
2. Constitution of Expense on product:
According to this determinates, if the expense on product constitutes a major portion of a
consumers total expenditure then in that particular case the price elasticity of demand for
hat product will tend to be elastic. Whereas, if the expenses on the product constitutes a
low (minor) share of a consumers total expenditure then in that case price elasticity of
demand for the will tend to be inelastic.

In case of Florida oranges, Bayer Aspirin, and Watermelons, there demands are elastic
because there are many substitutes are available in the Florida markets. Whereas, in case
of demand for airfares to Europe is elastic due to airfares to Europe constitutes a
significant portion of the total expenditure of the consumer. Further, there are many
alternative or substitutes are also available in the market.
Chapter 20, Problem 12CAQ:

A. Calculating the price elasticity of demand between $2 and $4:

[(Q 2Q 1) /(Q 2+Q 1)]

Price elasticity of demand =
[( P 2P 1) /( P2+ P 1)]

Here,

Q1 = 50,
Q2 = 40
P1 = $2
P2 = $4
$ 4$ 2
[10 /90]
Price elasticity of demand = = [$ 2/$ 6 ]
[( 405 0)/(40+5 0)]

[0.111]
Price elasticity of demand = [0.333] = - 0.333 < 1 inelastic demand

B. Calculating the price elasticity of demand between $4 and $6:

(Q 2Q1) ( P2P1)
Price elasticity of demand = [ ]/[ ]
(Q2+Q 1) (P 2+ P 1)

Here,

Q1 = 40,
Q2 = 20
P1 = $4
P2 = $6
$ 6$ 4

[20/60]
Price elasticity of demand = = [$ 2 / $ 10]
[(2 04 0)/(20+ 4 0)]

[0.333]
Price elasticity of demand = [0.2]
= 1.665 > 1 elastic demand

Chapter 20, Problem 13CAQ:

A. Calculating the price elasticity of demand between $90 and $110:

 [(Q 2Q 1) /(Q 2+Q 1)]
Price elasticity of demand =
[( P 2P 1) /( P2+ P 1)]

Here,

Q1 = 100,
Q2 = 90
P1 = $90
P2 = $110
$ 110$ 90
[10 /190]
Price elasticity of demand = = [ $ 20 /$ 200]
[(90100)/(90+100)]

[0 .053]
Price elasticity of demand = [0.1]
= - 0.53 < 1 inelastic demand

B. Calculating the price elasticity of demand between $110 and $130:

(Q 2Q1) ( P2P1)
Price elasticity of demand = [ ]/[ ]
(Q2+Q 1) (P 2+ P 1)

Here,

Q1 = 90,
Q2 = 70
P1 = $110
P2 = $130
$ 130$ 110

[20 /160]
Price elasticity of demand = = [$ 2 0 /$ 24 0 ]
[(9 07 0)/(9 0+ 7 0)]

[0.125 ]
Price elasticity of demand = [0.083 ]
= 1.5 > 1 elastic demand

C. Increase in Total Revenue when prices increases from $110 to $130:

Total Revenue = Price x Quantity
a) Total Revenue when Price was $110.

Descriptive Question No.2:

In this case option (c) reflects a sound economics thinking. Since, the person owns about 100
shares of a firm as an investment, thus it is logical for him to sell them when the returns from his
investment are more than what he has originally invested. But, this is viable only when faces no
urgency to obtain money. In that case has will have to sell off the shares even at losses.

Descriptive Question No.4:

Principal-agent problem is a very common in modern economy. In earlier days, human needs
were simple and unused resources were available in plenty. But modern age is much developed
and complex. It is not possible to satisfy all needs without taking the help of other. So a person
has to take the help of others against monetary consideration. This complexity has created the
principle-agency problem. The severity of Principal-agent problem arises in the economy, when
principal try to get work done at minimum cost in order to get maximum benefits / satisfaction
but the agent has different objective which are often conflicting in nature.

In the large corporation shareholder are principle and the manager and directors are working as
the agent. Hence, in large organization the principal-agent relation arises due to the conflict in
the distribution of dividends and taking may strategic decision on the behalf of shareholder.

Descriptive Question No.9:

Law of diminishing returns and diseconomies of sales, both are responsible for the decrease in
output but with different approach. The Law of diminishing returns is applicable in short run
approach whereas diseconomies of scale are long run concepts.

Because, in short run a firm cannot change its all factor of production as per requirement. Hence,
in order to increase the output, firm has to increase the supply of labour or other factors then the
output will be increased but the rate of increase in the output will gradually come down due to
application of law of diminishing return.

Suppose, there is a hectare of agriculture land on which the farmer wants to increasing the
production of crop, farmer has decided to introduced more and more labour along with fertilizers
and seeds. By increasing the supply of variable factors initially the benefit will get the benefit.
Production will sufficiently increase if variable factor will introduce. But, the situation gradually
arises when the increase in the factor will affect the output.
In diseconomy of scale is long run phenomenon, this situation is arising when the company
experience continued decreasing costs and increasing output. Hence, in order to achieve the
economy of scale, firm increase its output and in order to reduce its per unit cost (i.e. fixed cost)
company is adding more and more labour or machines involved. Than a situation arises when the
company is unable to manage the operation. Hence, the greater level of operational waste due to
lack of poor coordination and the mismatch between the optimum level of output between
different operations.

Suppose, if a product is made up of two components, gadget A and gadget B, diseconomies of

scale might occur if gadget B is producing at lower rate than product B. This forces the company
to slow the production of Product A, increasing its per unit cost.

Descriptive Question No.14:

Descriptive Question No.19:

VI TP MP AP PI TVC AVC TFC TC ATC MC

0 0 0 0.000 1 0 0.000 2 2 0.000 0.000
1 6 6 6.000 1 1 0.167 2 3 0.500 0.167
(0.033
2 15 9 7.500 1 2 0.133 2 4 0.267 )
(0.022
3 27 12 9.000 1 3 0.111 2 5 0.185 )
(0.003
4 37 10 9.250 1 4 0.108 2 6 0.162 )
5 45 8 9.000 1 5 0.111 2 7 0.156 0.003
6 50 5 8.333 1 6 0.120 2 8 0.160 0.009
7 52 2 7.429 1 7 0.135 2 9 0.173 0.015
 8 50 (2) 6.250 1 8 0.160 2 10 0.200 0.025

a. When the total production of t unit of variable inputted is less than the total production
of (t-1), the marginal productivity can be negative. This shows that next unit of variable
input will give decreased the output.
b. When the marginal production is greater than average product, it means the Average
product is rising till the increasing the marginal product over average product.
c. Whenever, the marginal product is less than the average product. Then average
production will be decrease. This shows that by increasing the additional unit of the
variable input, the production will be decreased.
d. According to the Law of diminishing return, the marginal product first of decrease with
increasing rate, then decline with constant rate and at the end decreased with deceasing
rate. In this case, on the 4th unit, the marginal production was going to decline.
e. At the initial stage the increase in the marginal production will be more than the increase
in the output level.
f. Marginal product is the change in total production due to one unit change in the quantity
variable, whereas, in marginal cost is change in the total cost due to unit change in the
total product. Hence, the mutual effect of both Marginal Cost and Marginal Product will
be the resulted in the change in the Total variable cost over the variable input.
g. The marginal cost will be negative when the total production will be fall. As, in this table
at unit 52 when the total production falls the marginal cost was negative.
h. Whenever, the marginal cost and average cost will be equal, the average variable cost will
be minimum. It means at this stage we can get optimum production be decreasing the
variable cost.
i. In this table, marginal cost was equal to average variable cost in between output level 37
and 45 units. At 37 output level, the marginal cost was less than the variable cost and at
unit 45 output level, marginal cost exceeding the average variable cost.
j. When marginal cost curve intersects the average cost curve, the total cost will be
minimized. As, aforementioned that variable cost at this point decreased.
k. In this table, Marginal cost is equating the average cost between the rage of 45 units to 50
units range.