SMU Classification: Restricted Singapore Management University School of Economics COR2100 Economics and Society Spring 2024 Problem Set #1 • • • This assignment is worth 5 percent in final grade. Due at 11:59pm February 11. Late submission will be accepted but suffer 5-point penalty. Please scan your assignment in pdf format and upload it at the course website on eLearn. You may use scanner apps on smartphones as long as your scans are clear to read for marking. Question 1 (7 points) Neo owns a Toyota Camry. Such a car can be typically leased for $500 per month but Neo bought his own in cash because he does not like to be committed to a lease. Neo can easily make $6,000 per month as an engineer. However, he decided to not work as an engineer but as a Grab driver full-time. In the months he works, his monthly revenue from Grab is around $7000. Neo has also calculated the cost of fuel and maintenance for the car to be around $1000 per month. (a) Calculate Neo’s accounting profit and economic profit per month and explain why they are not necessarily the same thing. (b) Explain how Neo’s accounting and economic profit will be affected if the salary for an engineer drops to $5000 per month. (c) Should the change in the salary of engineer affect Neo’s employment decision? Question 2 (6 points) How would the demand curve be affected in the following situations? (a) Taylor Swift talks about her favorite makeup line on TV. (b) NTUC FairPrice decides to take 20% off the prices of their grocery products. (c) People are afraid that the price of crude oil next month will rise because of tensions in the Middle East. Question 3 (6 points) How would the supply curve of new houses be affected in the following situations? (a) The price of land increases. (b) There is a major advance in construction technology. (c) The government starts to subsidize developers. Question 4 (4 points) Suppose the price of coffee increases by 20% because of the lack of rain. (a) What is the most that the quantity demanded of coffee can fall if coffee does not have an elastic demand? (b) If the quantity consumed of bagels decreases by 15% as a result, what can you say about the relationship between coffee and bagels? 1 SMU Classification: Restricted (c) Would you expect the demand for coffee to be more elastic or less elastic than the demand for Starbucks coffee? Why? Question 5 (5 points) Suppose that the elasticity of demand for a good is −0.5. What happens to total consumer expenditures when the price increases by 10 percent? Show your calculations. Question 6 (12 points) Consider a perfectly competitive industry with many firms. Suppose that a firm has a cost function given by 𝐶 = 20 + 0.5𝑞 + 0.05𝑞! . For this total cost function, the marginal cost can be derived as 𝑀𝐶 = 0.5 + 0.1𝑞. (a) What is the fixed cost and variable cost? (b) Calculate the average cost, average fixed cost, and average variable cost. (c) Find at which quantity AC is minimum. (d) Suppose the market price is 𝑝 = 3. How much would the firm produce? The firm’s owner decides to produce at the level where AC is minimized, claiming that it would achieve a higher profit due to lower cost per unit. Do you think the owner is making a rational decision? Why or why not? (e) Will the firm shut down in the short run? Long run? Question 7 (10 points) A market faces demand 𝑝 = 10 − 2𝑄" , and marginal cost of production is 𝑀𝐶 = 2. (a) If the market is populated by a large number of identical firms, what will be the price and the quantity sold in equilibrium? (b) If the market is dominated by a single firm, at what price will this firm be selling and how much is produced? (c) Calculate the consumer surplus, producer surplus, total surplus, and deadweight loss when the market is dominated by a single firm. 2
