SECTION “A”Answer the below questions. Each question carry 10 marks. 1. Draw a demand curve for music downloads. What happens to it in each of the following scenarios? Why?a) The p


Answer the below questions. Each question carry 10 marks.

1.         Draw a demand curve for music downloads.  What happens to it in each of the following scenarios?  Why?

a)      The price of iPods falls

b)      The price of music downloads falls

c)      The price of CDs falls

2.         A market failure occurs when the supply of a good or service is insufficient to meet demand. This results in an inefficient distribution of resources among market participants. Hence, government need to intervene to bring efficiencies. Explain any four tools available for government interventions to deal with the market failures and which one will be applicable in the given situation.

a)      Somewhere in the United States, there is a steel plant located next to a river. This plant produces steel products, but it also produces “sludge,” a by – product useless to the plant owners. To get rid of this unwanted by – product, the owners build a pipe out the back of the plant and dump the sludge into the river. The sludge produced is directly proportional to the production of steel; each additional unit of steel creates one more unit of sludge as well.

3.         Demand of a product is usually very sensitive to economic variables, such as the prices and consumer income. This responsiveness of demand is elasticity. Compute elasticity in the below scenarios:

a)      Suppose that you own a company that supplies vending machines. Currently, your vending machines sell soft drinks at $1.50 per bottle. At that price, customers purchase 2,000 bottles per week. In order to increase sales, you decide to decrease the price to $1, and sales increase to 4,000 bottles. Calculate Price elasticity of demand

b)      You are given market data that says when the price of burger is $5, the quantity demanded of burger is 50 slices and the quantity demanded of cheese bread is 100 pieces. When the price of burger is $2, the quantity demanded of burger is 80 slices and the quantity demanded of cheese bread is 70 pieces.

a.       Can the Price-Elasticity of Demand be calculated for either good?

b.      If so, calculate the PED.

c)      IMAGE Manufacturing is an electronics manufacturer and retailer. Its main products are Ultrabook computers, PCs and calculators.  The current price of the Ultrabook is $ 600, the PC is $700 and the calculator is $30. This year the firm sold 10,000 Ultrabook’s, 20,000 PCs and 1 million calculators. Calculate the PED

4.         Show in a diagram the effect on the demand curve, the supply curve, the equilibrium price, and the equilibrium quantity of each of the following events.

a. The market for newspapers in your town

Case 1: The salaries of journalists go up.

Case 2: There is a big news event in your town, which is reported in the newspapers.


Answer the below questions. Each question carry 25 marks.

1.         Production at Natasha’s call center shows the following relationship between the number of workers and the number of phone calls handled (per day).

Quantity of

Variable Input


Quantity of Output: Calls

Marginal Return to Additional


Fixed Cost ($)

Variable Cost ($)

Total Cost ($)

























a.      Calculate the marginal return gained from the addition of each worker, filling in the column in the table.

b.         Suppose Natasha has entered a long term lease for an office space and telephones, and this is her only fixed cost. The lease costs her $50 (per day). Fill in the Fixed Cost column in the table.

c.         Natasha pays each worker she hires $80 per day, and this is her only variable cost. Fill in the Variable Cost column in the table.

d.         Fill in the column for the Total Cost corresponding to each level of production.

e.         Draw the appropriate curves in each of the above questions.

2.         Cambrian Railways runs a daily container freight train between Cardiff and Birmingham. Its two major customers are British Steel and the Welsh Farming Co-operative. The demand for containers by each customer is given by the equations:

P1 = 500- 8Q1 for British Steel

P2 = 400-5Q2 for Welsh farming.

P; is the price charged by Cambrian per container, and Q; is the number of containers used by each customer.

Cambrian’s total cost function is given by the equation:

TC = 10 000+20Q where Q is the number of containers per trip.

a)       What are the necessary conditions for profitable price discrimination by Cambrian?

b)      What profit maximizing rule will Cambrian use if setting prices as a discriminator?

c)      Determine the profit maximizing quantity of freight service Cambrian will supply, show how this will be divided between steel and agriculture and find the prices charged in each market. Calculate Cambrian’s total profit.

Assume that Cambrian is prevented by law from price discrimination. Determine Cambrian’s price and output combination to maximize profit, and hence estimate the opportunity cost to Cambrian of the Anti-Price Discrimination law

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