CORK INSTITUTE OF TECHNOLOGY
INSTITIÚID TEICNEOLAÍOCHTA CHORCAÍ
Autumn Examinations 2016
Module Title:
Intermediate Microeconomics
Duration:
2 Hours
Instructions:
Please answer THREE questions.
Please do not write, draw or underline in RED.
Please show all calculations IN FULL.
Module Code:
ECON 7001
School:
Business
Programme Title:
Bachelor of Business – Year 2
Programme Code:
BBUSS_7_Y2
BMRKT_8_Y2
External Examiner: Mr. Gerard Phelan
Internal Examiner: Mr. Ciaran Daly
Sitting:
Autumn 2016
Note to Candidates: Please check the Programme Title and the Module Title to ensure that you have received the correct
examination paper.
If in doubt please contact an Invigilator.
Q1.
Naomhóg Teo. produces kits for building model boats.
It sells the kits in Italy and Portugal.
Because these two submarkets are separate from each other, Naomhóg Teo.
is able to practice price discrimination.
(i) What two conditions must be fulfilled if Naomhóg Teo. is to earn the
maximum possible profit from selling its kits?
In the Italian submarket, the demand function is P1 = 80 – 2Q1,
where P1 is the price in euro that Naomhóg Teo. charges in Italy and Q1 is
the number of kits it sells per week in Italy.
In the Portuguese submarket, the demand function is P2 = 60 – 1.25Q2,
where P2 is the price in euro that Naomhóg Teo. charges in Portugal and Q2 is
the number of kits it sells per week in Portugal.
(ii) By plotting the graph of the Italian demand function on graph paper,
draw the demand curve for Naomhóg Teo.’s kits in Italy. On the same graph,
draw Naomhóg Teo.’s marginal revenue curve in the Italian submarket.
(iii) By plotting the graph of the Portuguese demand function on graph paper,
draw the demand curve for Naomhóg Teo.’s kits in Portugal. On the same graph,
draw Naomhóg Teo.’s marginal revenue curve in the Portuguese submarket.
(iv) Using graph paper, draw the combined marginal revenue curve for the two
submarkets. On the same graph, by plotting the graph of Naomhóg Teo.’s
marginal cost function, draw Naomhóg Teo.’s marginal cost curve
(Naomhóg Teo.’s marginal cost function is MC = 2Q + 4, where MC is its
marginal cost in euro and Q is the number of kits it produces per week).
(v) If Naomhóg Teo. wishes to earn the maximum possible profit, how many kits
should it produce per week?
If it produced this number of kits per week, what would its marginal cost be?
How many kits should it sell per week in Italy?
How many kits should it sell per week in Portugal?
In not more than one sentence, explain why it should sell this number of kits
in Portugal.
What price should it charge in Italy? What price should it charge in Portugal?
(20 marks)
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Q2. BikeTech Ltd. manufactures high-quality locks for bicycles.
The demand function for its locks is P = 48 – 0.3Q,
where P is the price in euro and Q is the number of locks sold per day.
BikeTech’s cost function is C = 270 + 18Q, where C is its total cost per day in euro.
(i) Complete the following table:
Quantity sold per day (Q)
Price in euro (P)
Total Revenue per day in euro
Total Cost per day in euro (C)
Profit per day in euro
0
25
40
75
100
(ii) Derive BikeTech’s total revenue function.
(iii) Using differentiation, calculate how many locks BikeTech should sell per day
if it wishes to earn the maximum possible total revenue per day.
To sell this number of locks per day, what price should it charge?
Calculate the maximum possible total revenue that it could earn per day.
(iv) Derive BikeTech’s profit function.
(v) Using differentiation, calculate how many locks BikeTech should sell per day
if it wishes to earn the maximum possible profit per day.
To sell this number of locks per day, what price should it charge?
Calculate the maximum possible profit that it could earn per day.
(vi) Determine the quantities sold at which BikeTech would just break even.
Calculate what BikeTech’s total revenue and total cost would be at each
of these two breakeven quantities.
(20 marks)
Note: At each breakeven point, Q = −𝑏±√(𝑏2 −4𝑎𝑐)
2𝑎
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Q3. (a) (i) In not more than one sentence, explain what a budget line shows.
(ii) Assume that the price of a litre of milk is €2 and the price of a loaf of bread is €1.50
Identify three different combinations of the two goods that could be purchased by a
consumer who has €24 available every week to spend on milk and bread.
Using graph paper, draw the budget line for this consumer.
(iii) Assuming that the price of a loaf of bread decreases to €1.20, draw the new budget
line for the consumer.
(iv) Assuming that the two prices remain as they were in part (ii) but that the amount
of money that the consumer has available every week to spend on the two goods
increases from €24 to €30, draw the new budget line.
(6 marks)
(b)
Using a diagram, explain (i) what an indifference curve shows
(ii) why no part of an indifference curve can have a positive slope.
(5 marks)
(c) (i) Using a numerical example, explain what is meant by the income effect of a
decrease in the price of a good.
(ii) A consumer spends his budget on two goods, Good A and Good B.
Using indifference curves and budget lines, analyse how a decrease in the price of
Good A will affect the quantity purchased of each good.
In your analysis, distinguish between the income and substitution effects of the
price change.
(iii) According to the diagram that you drew in part (i), is Good A a Giffen good?
Explain clearly the reason for your answer.
(9 marks)
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Q4. (a) The market for TV sets in Ireland is an oligopolistic market.
ViewTech Ltd. is one of the firms supplying this market.
For all prices greater than M euro, the demand function for ViewTech’s TV sets is
P = 82 – 0.2Q, where P is the price in euro and Q is the number of sets sold per day.
For all prices less than M euro, the demand function for ViewTech’s TV sets is
P = 120 – 4Q, where P is the price in euro and Q is the number of sets sold per day
(i)
Using graph paper, draw the demand curve for ViewTech’s TV sets.
(ii)
From the graph, determine the value of M.
(iii)
Explain why demand is elastic at prices greater than M euro and inelastic at
prices less than M euro.
(iv)
On the graph that you drew for part (i), draw the marginal revenue curve.
(v)
ViewTech’s marginal cost function is MC = 55 +0.5Q, where MC is marginal
cost in euro. Draw the marginal cost curve.
(vi)
What is the most profitable number of TV sets for ViewTech to produce and
sell per day? Explain why this is the most profitable output.
(vii)
ViewTech would reduce its output only if its marginal cost were to increase by
more than X euro. What is the value of X?
(viii)
ViewTech would increase its output only if its marginal cost were to decrease by
more than Y euro. What is the value of Y?
(10 marks)
(this question is continued on the next page)
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(b)
(i)
In not more than one sentence, explain what an isocost line shows.
(ii)
In not more than one sentence, explain what an isoquant shows.
A company uses two variable inputs, labour and machine time. One hour
of labour costs the company €20 and one hour of machine time costs it €25.
Diagram 1 shows the isoquants for a number of different levels of output.
Using this diagram, answer the following questions:
(iii) If the company had €300 available to spend on labour and machine time,
what is the largest output that it could produce? To achieve this output,
how many hours should it purchase of each of the two inputs?
(iv) What is the least cost at which an output of 70 units could be produced?
How many hours of each input would be required to achieve this?
(v) If the cost of one hour of labour were to increase to €25, how would this
change the answers to part (iii)?
(10 marks)
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