What is your opportunity cost of running the business?

Microeconomics by Geoffrey

Q1

Consider the market for orange juice. In this market, the supply curve is given by QS = 100PJ −20PO and the demand curve is given by QD = 1000−150PJ +100PC, where J denotes orange juice, O denotes Orange, and C denotes coffee.

  • Assume that PO = 10 and Pc = 8. Calculate the equilibrium price and quantity in the Orange juice market. (1 mark)
  • Suppose that a poor harvest season raises the price of oranges to Po = 15
  1. Is it possible to reach a market equilibrium if the price of orange juice PJ remains unchanged? Why? How much quantity of orange juice will finally be exchanged on the market? (2 marks)
  2. Find the market price necessary to restore equilibrium. Deduce the equilibrium quantity of orange juice. (2 marks)

 

  • Draw a graph to illustrate your answers. (1 mark)

 

Answer:-

 

Q2

Suppose the price elasticity of demand for the market of mobile phones is 0.90.

 

  1. If all mobile-phone companies simultaneously increased their prices, will total revenue in the industry increase or decrease? (1 mark)
  2. If a single mobile-phone company increased its price, would you expect the company’s total revenue to increase or decrease? Explain. (2 marks)
  3. Suppose that the price in the market is initially $10 and the quantity demanded is 100 units. If the price in this market increases by 10%, what will be the percentage change in the quantity demanded? (2 marks)

 

Answer:-

 

Q3

If you have SAR 50,000 to start a new business, you can earn 10 percent interest on money in a bank account.  Your business expenses are SAR 22,000 per year on rent, SAR 18,000 per year on supplies, and SAR 5,000 per year on part time help. As for your personal expenses, your apartment costs you SAR 12,000 per year and your personal bills are an extra SAR 6,000 per year. What is your opportunity cost of running the business? (4 marks)