ECS2601 MEMO (OCTO/NOV 2019-MAY/JUNE 2015 ) SUITS MAY/JUNE ONLINE EXAMS 2020

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 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.

1.4 Goods X and Y:

1.4.1 Cross Elasticity

𝑄2 − 𝑄1 𝑃1 150 − 100 15
𝐶𝑥𝑦 = ∗ = ∗ = −0.625
𝑃2 − 𝑃1 𝑄1 3 − 15 100




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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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