ECN201_Theory_Questions.txt

[MAX]10[/MAX] [QUESTIONS] Justify the following statements, using well labeled diagram and/or mathematical exposition where necessary.

1. The analysis of the fairness of a tax policy is related to positive economics.
2. Minimum price legislation is only effective when the price is set below equilibrium price.
3. The United States is an example of countries which operate a socialist economic system as against the capitalist economic system
4. An individual demand curve takes into account all factors which affect demand
5. A Cobb – Douglas production function describes constant returns to scale.
6. For a negative slope linear demand function, marginal revenue (MR) and average revenue (AR, i.e. price) are equal at every point.
7. The perfectly competitive firm will shut down in the short run if its price is less than average total cost.
8. The value of price elasticity varies over range of a linear demand curve.
9. The marginal product (MP) is rising when the total product is maximum and reaches zero when the TP is falling.
10. Every point along an isoquant constitutes the attainment of equilibrium. Distinguish between the following concepts

a. Stable and dynamic equilibrium
b. Budget line and isocost line
c. Short run and long run of firm
d. Return to scale and economies of scale
e. Price and income elasticity of demand. Write short notes on the following using graphical and/or mathematical analysis where necessary

i. Three assumption of perfect competition
ii. Three assumption of monopoly
iii. Short run equilibrium of the perfectly competitive firm (using TR and TC approach)
iv. Short run equilibrium of a profit maximizing monopolist
v. Excess capacity 1. Highlight the criteria for judging the validity of a model.
2. With a well labeled diagram, differentiate between maximum and minimum price.
3. A theory is said to express a causal relationship between cause and effect in economics. How would you go about constructing any theory in economics? a) With the aid of appropriate illustrations, differentiate between complement and substitute goods.
b) Given the demand function below P = 144 – 12Q
c) Obtain the total revenue (TR) and marginal revenue (MR) functions
d) Graphically illustrate the demand, TR and MR functions
e) At what output is TR maximized
f) Determine the price elasticity of demand at the output where TR is at maximum and hence, interpret your result
g) Mathematically, show the relationship between marginal revenue and price elasticity of demand Using diagrams where necessary, explain the following concepts;
i. Returns to scale and Economies of scale
ii. Expansion path
iii. Substitution and Income effects of a fall in the price of a commodity
iv. Marginal Rate of technical substitution
v. Output elasticity a. Explain with the aid of graphical illustration how the effect of increase in both demand and supply will affect equilibrium price and quantity.
b. Suppose the demand schedule in the soft drink market is given by the equation P = 100 – 5QD, where p represents price, and QD represents quantity demanded. If the supply schedule is given by the equation p = 40 + 10QS. What is the equilibrium price and quantity in this soft drink market?
c. (i) Under what form of market organization is equilibrium determined exclusively by the forces of demand and supply? (iii) How could interferences with the operation of the market mechanism prevent the attainment of equilibrium? a. What constraints or limitations does the consumer face in seeking to maximize the total utility from personal expenditure? (ii) Express mathematically the condition
for consumer equilibrium (iii) Explain the meaning of your answers to part (ii).
b. Suppose the marginal utility of Taiye Taiwo of product x is defined by the function MUx = 10-x, where x is the number of units produced. For Y, MUy = 21 – 2Y, where Y is the number of units of Y produced. Assume that the price of X = price of Y = ₦1. How much of X and Y would Taiye Taiwo buy if he had ₦7?
c. Why is it that a profit-maximizing businessman would never lower prices when facing an inelastic demand curve and might not lower price when facing an elastic demand curves? a. State the law of diminishing returns in terms of labour one returns in forms of labour one land; and with the aid of diagram, clearly show the 3 stages of production process and provide reasons why a firm would not operate at stage 1 and 3.
b. Explain what is meant by (a) constant returns to scale (b) increasing returns to scale, and (c) decreasing returns to scale. Given that Q = 0.9k 0.2 L0.6, what is the returns to scale to this production function where Q is output, K is capital and L is unit of labour.
c. What is meant by efficient or optimum factor combination in production? Explain with the help of isoquants and isocost lines how a producer achieve this combination of factors. a. A perfectly competitive firm faces p = ₦4 and TC = Q3 -7Q2 + 12Q + 5, determine the best level of output of the firm by the marginal approach (b) find the total profit of the firm at this level of output.
b. What are the conditions that give rise to monopoly?
c. Given the following graph for a firm in monopolistic competition, explain why it is not advisable to produce at the most efficient point if profit maximization is desired. [/QUESTIONS]