Optimal Consumption Bundle Worksheet

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OPTIONAL QUESTIONS – makeup (10 points) Due April 21
1.
Show, using a sketch graph, a consumer who prefers a cash gift rather than a larger gift
of merchandise. [As a starting point use an optimal choice of a consumption bundle
containing an amount of good X and a composite good Y.]
2.
Show, using a sketch graph, income and substitution effects of a price decrease for an
inferior good. Fully label your diagram.
Optional assignment 2 (10 points)
1. A perfectly competitive firm has a short run total cost given by:
TC = 100+2Q+Q2
With a marginal cost MC = 2+2Q
a.
b.
c.
d.
Find average total cost and average variable cost as a function of output
If P=25, how much will the firm produce in the short run?
If P=20, how much will the firm produce in the short run?
Assuming that the firm has the same average total cost curve in the long run how much will
it produce in the long run?
2. A firm has marginal costs given by MC=10+Q and average variable costs AVC= 10+Q/2
If fixed costs are $5000 and the market price is $100 find firm’s maximum profit. Will the firm
continue to operate in the short run? Explain.
3. Sketch a natural monopoly firm under marginal cost pricing regulation. Label its price, quantity,
and profit. What is the deadweight loss (loss in consumer and producer surplus) if regulation is
effective?

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