Question details

ECON-Fall 2015 A+ rated
$ 20.00


The following table represents the hourly output and cost structure for a local pizza shop. The market is assumed to be perfectly competitive, and the market price of pizza in the area is $10. Total costs include all opportunity costs.


Output of pizza per hour

(no. of pizza)


Total Costs ($)
























a)   Calculate the total revenue and total economic profit for this pizza shop at each level of output. (2 point)


b)  Calculate the pizza shops marginal cost and marginal revenue at each level of output.

Based on marginal analysis, what is the profit maximizing level of output for the pizza

shop? (2 point)


c)   Draw a diagram depicting the short-run marginal revenue and marginal cost curves for this pizza shop, and illustrate the determination of its profit-maximizing level of output. (2 points)


Question 2


Suppose the information in the following table is for a simple economy that produces only two goods: strawberries and cream.


2012                              2013                              2014




Price per


unit         Quantity


Price per

unit         Quantity


Price per unit


Strawberries                        100            $3.00            125            $4.00            150            $5.00

Cream                                 200            $2.00            400            $2.50            500            $3.00


a)   Use the information in the table to calculate nominal GDP, real GDP, and the GDP

deflator for each year, assuming that the base year is 2012. (4 points)


b)  What are the growth rates of real GDP between 2012 and 2013, and between 2013 and

2014? (2 points)



a)   Consider the following price indexes: 90 in 2009, 100 in 2010, 110 in 2011, and 121 in

2012. Answer the following questions. (4 points)


i)    What is the base year? How do you know?


ii)  What is the inflation rate from 2009 to 2010?


iii)  What is the inflation rate from 2011 to 2012?


iv) If the cost of the consumption basket in 2010 is $2,000, what is the cost of the same basket of goods and services in 2009? In 2012?


b)  Currently,  the  CPI  used  to  calculate  the  inflation  rate  is  equal  to  90.  The  general expectation throughout the economy is that next year the value of CPI will be 94.5. The current nominal interest rate is 4.75 percent. What is the real interest rate? (2 points)




Question 4


India is a ‘small country’ in the world car market. (3 points)


a)   Assume that world car price is below the price that prevails in India. Does India gain by engaging in international trade in car? Does it export or import? Draw a diagram to show the gains (or losses) from trade. Who gains and who loses?


b)  Suppose that a technological advance increases the domestic supply of cars in India. What effect does this advance have on the domestic price of car? Discuss a scenario in which the direction of trade changes. Using your graph from part (a), show the effect on consumer surplus, producer surplus, and total surplus in India. Who are the winners and losers? Does free trade provide an incentive to the domestic car makers in India to innovate?

Available solutions