Micro Econ

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ECON1001  Assignment     This  assignment  is  worth  10%  of  your  grade.     Attempt  all  questions.         Type  your  answers  using  MICROSOFT  WORD.    Upload  the  file  to  the  course  website   by  the  deadline  date.     Alternatively,  you  may  write  your  answers  in  pen.        If  you  do  so,  then  you  will  have  to   scan   your   answers,   as   pdf   files   preferably,   and   upload   the   file   to   the   link   on   the   course  website.       Students  caught  plagiarising  or  copying  from  each  other  will  be  penalised  according   to  the  severity  of  offence.     DEADLINE:  Oct.  6  at  5:00  pm  ECT.        

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1.   a.   A  layperson  says  that  a  proposed  government  project  simply  costs  too  much   and  therefore  shouldn’t  be  undertaken.  How  might  an  economist’s  evaluation   be  different?                            [4  marks]  

    b.   Describe  three  major  virtues  of  a  market  system.                  [6  marks]             2.     A  production  possibilities  table   for  two  products,  corn  and  paper,   is   found  below.    

Usual   assumptions   regarding   production   possibilities   are   implied.     Corn   is   measured  in  tonnes,  and  paper  is  measured  per  unit.  

      Combination   Corn   Paper       A   0   6       B   18   5       C   33   4       D   45   3       E   54   2       F   60   1       G   63   0       a.       Construct  a  production  possibilities  curve  from  this  information  placing  corn  

on  the  vertical  axis  and  paper  on  the  horizontal  axis.     [10  marks]       b.       What  is  the  marginal  opportunity  cost  of  producing  the  second  unit  of  paper?    

What  is  the  marginal  opportunity  cost  of  producing  the  fourth  unit  of  paper?                         [4  marks]     c.       What   is   the   total   opportunity   cost   of   producing   the   second   unit   of   paper?      

What  is  the  total  opportunity  cost  of  producing  the  fourth  unit  of  paper?                     [4  marks]  

      3.   a.   Suppose   a   producer   sells   1,000   units   of   a   product   at   $5   per   unit   one   year,  

2,000  units  at  $8  the  next  year,  and  3,000  units  at  $10  the  third  year.    Is  this   evidence  that  the  law  of  demand  is  violated?    Explain.                [5  marks]  

    b.   Economist   Jones   defines   an   increase   in   supply   as   a   decrease   in   the   prices  

needed   to   ensure   various   amounts   of   a   good   being   offered   for   sale.     Economist  Brown  defines  an  increase  in  supply  as  an  increase  in  the  amounts   that  producers  will  offer  at  various  possible  prices.    Economist  Clark  defines   an   increase   in   supply   as   an   increase   in   the   amount   firms   will   offer   in   the   market  which  is  caused  by  an  increase  in  the  price  of  the  product.    Which,  if   any,  of  these  is  defining  an  increase  in  supply  correctly?    Explain.        [5  marks]  

       

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4.   Consider  the  schedules  given  below.             Quantity  demanded     Quantity  supplied         Price   (pounds  of  carrots)   Price   (pounds  of  carrots)         $1.50   10,000   $1.50   40,000         1.40   15,000   1.40   35,000         1.30   20,000   1.30   30,000         1.20   25,000   1.20   25,000         1.10   30,000   1.10   20,000         1.00   35,000   1.00   15,000                               a.   Plot  the  demand  and  supply  curves.                [14  marks]       b.   State  the  equilibrium  price  and  quantity  for  carrots.                [2  marks]       c.   If  the  government  decided  to  support  the  price  of  carrots  at  $1.40  per  pound,  

indicate   whether   there   would   be   a   surplus   or   shortage   and   how   much   it   would  be.                            [2  marks]  

    d.   Demonstrate  your  answer   to  part   (c)  on  your  graph  being  sure   to   label   the  

quantity  you  designated  as  the  shortage  or  surplus.                [2  marks]        

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5.   You   own   a   movie   theatre.   You   currently   charge   $5   per   ticket   for   everyone   who   comes   to   your   movies.   Your   friend   who   took   an   economics   course   at   the   Open   Campus  tells  you  that  there  may  be  a  way  to  increase  your  total  revenue.  Given  the   demand  curves  shown,  answer  the  following  questions.  

 

 

 

       

a.   What  is  the  total  revenue  for  each  group?  The  total  for  both  groups?            [4  marks]   b.   In  which  market  is  the  elasticity  of  demand  more  elastic?  Why?                    [3  marks]   c.   What   is   the   elasticity   of   demand   between   the   prices   of   $5   and   $2   in   the   adult   market?  Is  this  elastic  or  inelastic?                      [5  marks]  

d.   What   is   the   elasticity   of   demand  between  $5   and  $3   in   the   children's  market?   Is   this  elastic  or  inelastic?                          [5  marks]  

e.   Given   the   graphs   and  what   your   friend  knows  about   economics,   he   recommends   you   increase   the  price  of  adult   tickets   to  $8  each  and   lower   the  price  of  a  child's   ticket  to  $3.  How  much  could  you  increase  total  revenue  if  you  take  his  advice?  

                                 [5  marks]    

               

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6.   Use  the  information  in  the  table  below  to  identify  the  income  elasticity  type  of  each   of  the  following  goods,  A  to  E.                    [10  marks]  

              Percent  change       Income           Percent  change   in  quantity   Elasticity   elasticity         Good   in  income   demanded   Coefficient        type                       A   9   12   __________     __________         B   –6   6   __________     __________         C   3   3   __________     __________         D   6   –3   __________     __________         E   2   1   __________     __________               7.   Use   the   information   in   the   table   below   to   identify   the   type   of   cross   elasticity  

relationship  between  products  X  and  Y  in  each  of  the  following  five  cases,  A  to  E.                                        [10  marks]                 Percent  change           Percent  change   in  quantity   Elasticity   Cross  elasticity         Cases   in  price  of  Y   demanded  of  X            Coefficient            type                           A   5   7   ______________   ______________         B   9   6   ______________   ______________         C   5   –5   ______________   ______________         D   3   0   ______________   ______________         E   –2   10   ______________   ______________