ECS2601 MEMO (OCTO/NOV
2019-MAY/JUNE 2015 ) SUITS
MAY/JUNE ONLINE EXAMS 2020
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SECTION A [60 MARKS]
QUESTION 1
1.1 Demand Equation:
Family Member De...
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SECTION A [60 MARKS]
QUESTION 1
1.1 Demand Equation:
Family Member Demand
Michael 𝑄 = 0.1 − 0.2𝑃
John 𝑄 = 0.06 + 0.03𝑃
Haley 𝑄 = 0.001
Katy 𝑄 = 0.9 − 𝑃
David 𝑄 = 0.02
Family 𝑄 = 0.1 − 0.2𝑃 + 0.06 + 0.03𝑃 + 0.001
+ 0.9 − 𝑃 + 0.02
∴ 𝑸 = 𝟏. 𝟎𝟖𝟏 − 𝟏. 𝟏𝟕𝑷
1.2 Two classifications of goods in terms of income:
Normal Goods: These goods display a positive relationship with the level of income, an
increase in the consumer’s income, increases their demand. They are sub classified into
necessities and luxury goods.
Inferior Goods: These goods display a negative relationship with the level of income, when
incomes are low or the economy contracts, inferior goods become a more affordable substitute
for a more expensive good.
1.3 Maximum vs minimum price:
A minimum price also called a price floor, is the lowest price that can be legally set by the
authorities. An example of a minimum price is the minimum wage. A maximum price also
known as a price ceiling, on the other hand refers to a situation when the authorities set a
maximum legal limit of the price of a particular good. An example is rent controls.
To be effective, a minimum price should be set above equilibrium and a maximum price should
be set below equilibrium.
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1.4.2 Nature of goods
A negative sign implies that commodities X and Y are complements, since an increase in the
price of X lowers the quantity demanded of the other good.
QUESTION 2
2.1 Budget Constraints:
A budget constraint acts as a limit to what basket of goods and services a consumer can afford
given a certain level of income.
2.2 Utility Approach
A consumer will in equilibrium when the equal marginal principle is satisfied. This is expressed
algebraically as:
𝑀𝑈𝑥 𝑀𝑈𝑦 𝑀𝑈𝑥 𝑃𝑥
= 𝑜𝑟 =
𝑃𝑥 𝑃𝑦 𝑀𝑈𝑦 𝑃𝑦
2.3 Given: 𝑻𝑪 = 𝟓𝟎𝟎 + 𝟔𝟎𝒒
2.3.1 Fixed cost (FC):
𝑭𝑪 = 𝟓𝟎𝟎
Remember: FC is that component of TC that does not vary with the level of output.
2.3.2 @ 𝑞 = 100 , AVC:
𝑇𝑉𝐶 60(100)
𝐴𝑉𝐶 = ⟹ = 60
𝑄 100
∴ 𝑨𝑽𝑪 = 𝟔𝟎
2.3.3 Marginal Cost:
𝛿𝑇𝐶
𝑀𝐶 =
𝛿𝑄
Differentiating Total Cost gives:
𝑴𝑪 = 𝟔𝟎
2.3.4 AFC:
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𝑻𝑭𝑪 𝟓𝟎𝟎
𝑨𝑭𝑪 = =
𝑸 𝑸
2.3.5 New cost curve:
𝑻𝑪 = 𝟓𝟓𝟎 + 𝟓𝟓𝑸 + 𝟑𝒊
QUESTION 3
3.1 Calculating quantity:
Profit maximisation occurs when: 𝑃 = 𝑀𝐶 = 𝑀𝑅 = 𝐴𝑅 for a competitive market
@ 𝑃 = 100 & 𝑀𝐶 = 4𝑄
100 = 4𝑄
∴ 𝑸 = 𝟐𝟓
3.2 Calculating profit:
𝑃𝑟𝑜𝑓𝑖𝑡(𝜋) = 𝑇𝑅 − 𝑇𝐶
𝜋 = 𝑃𝑄 − 𝑇𝐶
𝜋 = 100 (25) − (100 + 2(25)2 )
𝜋 = 2500 − 1350
𝝅 = 𝟏𝟏𝟓𝟎
3.3 Minimum price:
The minimum price is the one that covers only AVC in the Short Run for a perfectly
competitive firm.
𝑇𝑉𝐶 2𝑄 2
𝐴𝑉𝐶 = = = 2𝑄
𝑄 𝑄
∴ 𝑷 = 𝟐𝑸 = 𝟐 (𝟐𝟓) = 𝑹𝟓𝟎
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