Microeconomics: Business Decisions and Market Analysis Assignment

This document presents solutions to a microeconomics multiple-choice question (MCQ) assignment, covering core concepts such as implicit and explicit costs, profit maximization, market structures (perfect competition and monopoly), and business decision-making. The assignment analyzes scenarios involving individual business choices, including decisions about production, pricing, and market entry/exit. Questions explore the relationship between costs, revenues, and profits, as well as the impact of factors such as patents, competition, and demand changes. The solutions provide detailed explanations and calculations to support the answers, illustrating economic principles through practical examples. The assignment addresses topics like opportunity cost, accounting profit, economic profit, and deadweight loss, providing a comprehensive understanding of microeconomic concepts. The document helps students understand how businesses make decisions in various market conditions and how to apply economic principles to real-world scenarios.

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MCQ Assignment
Q1) Setting up Business:
Only 1 is True.
1) True. Implicit cost is not explicitly represented, while doing a business. Jared’s free
time to relax on Sunday, is one such cost. So, (1) is true.
2) False. If profit less than the normal is acceptable, the customers would buy only on
Sundays and the overall profits too, would decline. So, this is not a valid statement.
3) False. Since the market is known to be perfectly competitive, the market price cannot
be decided by any one supplier. Thus, Jared cannot be the price maker and therefore
this statement is false too.
Q2) Netball or basketball:
Netball fetches Luke $2000 - $400 = $1600 nett after the travel expenses. For basketball, he
would get only $1400 even if no travel is involved. Thus, Luke has taken an economically
sound decision.
First statement: False. Economist would agree with Luke. So, this is a wrong statement.
Second statement: True. The “normal” profit is defined as a condition when revenues equal
the costs. Luke makes more than costs, so, the profit is more than “normal”. Therefore, the
second statement is true.
Third statement: False. The “Accounting Profit” is surplus of revenues over costs, which is
$1600 not $200. Therefore, this statement is wrong.

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Fourth statement: True. Implicit cost in this context is “opportunity cost” of $1400 for not
playing basketball. So, this statement is true.
Q3) Seafood:
First question: 11. “Accounting Profit” is surplus of revenues over the costs, which is $2000 -
$100 = $1900. This is the 11th item in the list.
Second Question: 4. If Casey is making normal profit, she is definitely making an “economic
profit”, which accounts for her implicit costs too. This is item 4 in the list.
Third question: 9. The stall cost is directly payable, so it is an explicit cost. This is item
number 9 in the list.
Q4) Meat versus Milk:
The answer is 29187
Since the fixed costs remain same whether meat is produced or milk, the economic loss at
present is revenues from meat less revenues from milk (61355 – 32168 =) 29187.
Q5) Coffee in Australia:
a) X. The negative publicity would mean reduced consumption of coffee. Reduction in
demand would reduce prices and some suppliers would exit the market. So, the
answer is X.
b) 670. Previously Marco’s economic profit was revenues less total costs [($5 - $2)*300
=] $900 per day. Now, the economic profit is [($4 - $3)*230 =] $230 per day. So, the
decline is (900 -230 =) 670 (per day).
c) N. Bryan cannot recover total costs ($4.1 > price of $4) even if he can recover
variable costs ($3.90). He should not continue selling the coffee. The answer is N

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Q6) Fred’s patent:
First option: False. While patent is in force, nobody except Fred can manufacture and sell the
medicinal drug. So, this option is wrong.
Second option: False. Since Fred would be the only manufacturer, the market cannot be
competitive. So, this option is wrong.
Third option: False. Patent gives legal protection to Fred, that there would be no competition
for some period. So, this option is wrong.
Fourth option: True. Since, Fred would be the only manufacturer, he can decide his own price
for the medicine. So, this option is right.
Q7) “Rocky Road” Chocolate:
First statement: True. MR=MC is the valid condition for maximising profit.
Second statement: False. MR and MC are plotted on the $-Quantity graph. So, the optimal
quantity only can be determined from the two curves. To find the optimal price, (Price
versus) Demand curve is required additionally. So, this statement is False.
Third statement: True. This can be showed using price (P) = -aQ + b for some positive
numbers a and b. The revenues would be R = Q*P = -aQ2 + bQ. Differentiating gives,
dR/dQ = -2aQ + b. Thus, the slope of Revenue curve is -2a which is twice that of Demand
curve (-a).
Fourth statement: True. The quantity would decide price, demand, revenues and costs. Thus,
the total (accounting) profit.
Q8) Bottled Water:
First Question: 3. Economic Profits. Deadweight loss is reduction in economic surpluses or
profits of both the consumers and supplier(s) compared to free market.
Second Question: 8. Maximised. Monopolistic supplier tries to produce a quantity that would
maximise profit.

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Third Question: 9. Differentiated. Monopolistic competition involves selling differentiated
products by the different suppliers. So, there is no direct competition.
Q9) Ice-cream:
Answer 30
Pric
e
$/
tub
Demand
tubs
Profi
t
$/tub
Total Profit
$
30 10 12 120
28 20 10 200
26 30 8 240
24 40 6 240
22 50 4 200
20 60 2 120
Out of the given numbers, the profit maximizing, minimum quantity is 30 tubs. There are
three cases possible:
a) Sell 40 tubs: this does not make sense as a lower quantity would give the same profit.
b) Sell 35 tubs: the symmetry of profit function would imply that somewhat better profit
(more than $240) can be obtained at an intermediate quantity. However, marketing
data are not rigorous like deterministic mathematical functions and going beyond
available data would be risky.

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c) Sell 30 tubs: this looks like tested data point as it belongs to the given values. The
nice feature of this quantity is it would somewhat starve the market and people would
not get satiated with the product too soon. So, this appears to be the best option.
Q10) Cake-store:
a) Answer: 18
Revenues at $38 price = 38*84 = 3192
Revenues at $42 price = 42*70 = 2940
Marginal revenues (3192 – 2940)/(84 -70) = $18 per cake. Answer: 18
b) Answer: N
Profit at $38 price = (38 – 7)*84 = 2604
Profit at $34 price = (34 – 7)*100 = 2700
Thus, profit increases at higher quantity sold. Answer N
c) Answer: 34
Profit at $32 price = (32 – 7)*108 = 2700
Thus, the maximum profit occurs at a minimum quantity of 100 cakes, when the price
is $34/cake. (The detailed explanation is given in Q9). Answer 34