Economic Assignment

Business economics

The diagrams should be provided where necessary and explanation should be provided as each part carries marks

thanks

Question 1:

(a) Explain the impact of external costs and external benefits on resource allocation; (2.5 marks)

(b) Why are public goods not produced in sufficient quantities by private markets? (2.5 marks)

(c) Which of the following are, or are not examples of public goods (or services)? Please explain your reason.

(1 mark each which includes ½ marks for each reason).

(i) The Judicial system Yes/No

(ii) Pencils Yes/No

(iii) The quarantine service Yes/No

(iv) The Great Wall of China Yes/No

(v) Contact lenses Yes/No

Question 2:

(a) Suppose the income elasticity of demand for pre-recorded music compact disks is +5.0 and the income elasticity of demand for a cabinet maker’s work is +0.5. Compare the impact on pre-recorded music compact disks and the cabinet maker’s work of a recession that reduces consumer incomes by 10 per cent. (2 marks)

(b) How might you determine whether the pre-recorded music compact discs and MP3 music players are in competition with each other? (2 marks)

(c) Interpret the following Income Elasticities of Demand (YED) values for the following and state

if the good is normal or inferior; (3 marks total, 1.5 marks per part)

YED= +0.7

YED= -3.4

(d) Interpret the following Cross-Price Elasticities of Demand (XED) and explain the relationship between these goods. (3 marks total, 1.5 marks per part)

XED= + 0.75

XED= -2.5

Question 3:

You are given the following data about two firms:

FIRM A

Quantity	0		1		2		3		4		5		6
Total revenue ($)	0		10		20		30		40		50		60
Average revenue ($)	___		___		___		___		___		___		___
Marginal revenue ($)		___		___		___		___		___		___
Total cost ($)	30		42		50		60		76		100		140
Marginal cost ($)		___		___		___		___		___		___
Average cost ($)	(		___		___		___		___		___		___

FIRM B

Quantity	0		1		2		3		4		5		6
Total cost ($)	100		134		154		177		216		266		366
Average cost ($)	(		___		___		___		___		___		___
Marginal cost ($)		___		___		___		___		___		___
Price ($)	140		130		120		110		100		90		80
Marginal revenue ($)		___		___		___		___		___		___
Total revenue ($)	___		___		___		___		___		___		___

(a) Complete the two tables above. (4 marks)

(b) Are these firms operating in the short or the long run? (1 mark) Firm A: short run / long run

Firm B: short run / long run

(c) Are these firms operating under perfect or imperfect competition? Firm A: perfect / imperfect

(1 mark) Firm B: perfect / imperfect

(d) What level of output will these firms produce in the short run? Firm A:

(2 marks) Firm B:

(e) How would you describe their profit positions? (2 marks)

Firm A:

Firm B:

Question 4:

(a) Suppose you own a coffee shop. List some of the fixed inputs and variable inputs you would use in operating the shop. (4 marks)

(b) Baubles and Beads manufacturing produces 100 pendants per day. The total fixed cost for the plant is $4000 per day and the total variable cost is $13,000 per day. Calculate the average fixed cost, average variable cost, average total cost and total cost at the current output level. (4 marks)

(c) An owner of a firm estimates that the average total cost is $6.71 and the marginal cost is $6.71 at the current level of output. Explain the relationship between this marginal cost and average total cost figures. (2 marks)

Question 5:

(a) Discuss the following statement: ‘In the real world there is no industry which conforms precisely to the economist’s model of perfect competition. This means that the model is of little practical value’. (2.5 marks)

(b) Illustrate with a diagram and explain the short-run perfectively competitive equilibrium for both (i) the individual firm and (ii) the industry; (2.5 marks each)

(c) Illustrate with a diagram and explain the long-run perfectly competitive equilibrium for the firm (2.5 marks).

Question 6:

(a) Explain the concept of a concentration ratio. Is the concentration ratio in a monopolistically competitive industry likely to be higher than for a perfectly competitive industry? Explain your answer (6 marks)

(b) Suppose the minimum point on the Long-run Average Cost (LRAC) curve of a soft drink firm’s lemonade is $1 per litre. Under conditions of monopolistic competition, will the price of a litre bottle of lemonade in the long-run be above $1, equal to $1, less than $1 or impossible to determine. (2 marks)

Illustrate your answer using a diagram (2 marks)

Question 7:

What will happen to the equilibrium price and quantity of butter in each of the following cases? Illustrate with a diagram and explain whether demand or supply (or both) have shifted and in which direction. (In each case, assume ceteris paribus).

(a) A rise in the price of magarine; (1 mark)

(b) A rise in the demand for yoghurt; (1 mark)

(c) A rise in the price of bread; (1 mark)

(d) A rise in the demand for bread; (1 mark)

(e) An expected rise in the price of butter in the near future; (1 mark)

(f) A tax on butter production; (2.5 marks)

(g) The invention of new, but expensive, process for removing all cholesterol from butter, plus the passing of a law which states that all butter producers must use this process. (2.5 marks)

Question 8:

The diagram below illustrates a firm under monopolistic competition.

(a) Label the following curves: Curve I, Curve II, Curve III, Curve IV (1 mark)

(b) Does the diagram represent the short-run or long-run position? (1 mark)

(c) Is P3 the long-run equilibrium price? Explain your answer.( 1 mark)

(d) What are the profit maximising output and price? (1 mark)

(e) On the diagram, shade in the amount of profit made at the maximum-profit output (2 marks).

(f) Draw new average and marginal revenue curves on the diagram to illustrate the long-run equilibrium that will occur after the entry of new firms into the industry (2 marks)

(g) Explain the relationship between the AC, MC, AR and MR curves at this long-run equilibrium position?

(2 marks)

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