1. Use supply and demand curves to illustrate how each of the following events would affect the price of butter and the quantity of butter bought and sold: (a) An increase in the transportation cost. (b) An increase in the price of milk; (c) A decrease in average income levels. 2. Suppose the government regulates the prices of beef and chicken and sets them below their market clearing levels. Explain why shortages of these goods will develop and what factors will determine the sizes of the shortages. What will happen to the price of pork? Explain briefly. 3. Use supply and demand curve shifts to illustrate the effect of the following events on the demand for Oranges. Make clear the direction of the changes in both price and quantity sold. a. The price of apple triples. b. A drought shrinks the Oranges crop to one-third its normal size. c. Thousands of college students abandon the academic life to become Oranges growers. 4. S.K Burger, a Gourmet hamburgers outlet, sells approximately 10000 onehundred-gram hamburgers in a given week. To meet that demand, S.K needs 1000 kilograms of ground beef delivered to its premises every Saturday morning by 8:00 a.m. a. As the manager of a S.K franchise, what problems would you anticipate if you acquired ground beef using spot exchange? b. As the manager of a firm that sells ground beef, what problems would you anticipate if you were to supply meat to SK through spot exchange? 5. a. What are the main characteristics of a perfectly competitive market? b. Explain the importance of free entry and exit in the perfectly competitive market. c. What impact would this have on the ability of firms to earn? Above-normal profits overtime? d. Explain why the demand curve facing a perfectly competitive 2 Firm is assumed to be perfectly elastic. 6. Discuss the optimal method for procuring 3 modest numbers of standardized inputs sold by many firms in the marketplace. What are the primary advantages and disadvantages of using this method to acquire inputs? 7. Suppose you are the manager of a chain of computer stores, and have just learned that the government has passed a program designed to enhance the computer industry's position in the global economy. The legislation provides, increased funding for computer education in primary and secondary schools. As a result of this legislation, what do you predict will happen to the equilibrium price and quantity of software? 8. In the short run, firms that seek to maximize their market share will tend to charge a lower price for their products than firms that seek to maximize their profit. Do you agree with this statement? Explain? 9. Assume a computer firm's marginal costs of production are constant at $1000 per computer. However, the fixed costs of production are equal to $10,000. a. Calculate total cost curves. b. If the firm wanted to minimize the average total cost of production, would it choose to be very large or very small? Explain. 10. You manage a plant that mass produce engines by teams of workers using assembly machines. The technology is summarized by the production function Q = 4KL Where Q is the number of engines per week, K the number of assembly machines, and L the number of labor teams. Each assembly machine rents for r = $12,000 per week and each team costs w = $3000 per week. Engine costs are given by the cost of labor teams and machines, plus $2000 per engine for raw materials. Your plant has a fixed installation of 10 assembly machines as part of its design. a. What is the cost function for your plant, namely, how much will it cost to produce Q engines? What are average and marginal costs for producing Q engines? How do average costs vary with output? b. How many teams are required for producing 80 engines? What is the average cost per engine? c. You are asked to make recommendations for the design of a new production facility. What would you suggest? In particular, what capital/labor (K/L) ratio should the new plant accommodate? If lower average cost were your only criterion, should you suggest that the new 3 plant have more or less production capacity than the plant you currently manage? 11. Caterpillar Tractor, one of the largest producers of farm machinery in the world, have hired you to advise them on pricing policy. One of the things the companies like to know is how much a 5-percent increase in price is likely to reduce sales. What would you need to know to help the company with this problem? Explain why these facts are important. 12. A manager hires labour and rents capital equipment's in a very competitive market. Currently the wage rate is $6 per hour and capital is rented at $12 per hour. If the marginal product of labour is 50 units of output per hour and the marginal product of capital is 75 of output per hour, is the firm using the cost-minimizing combination of capital used in its production process?