MICROECONOMICS ASSIGNMENT
Question One:
What is meant by the phrase: 'Quality is not free'? In your answer, use the concept of 'opportunity cost'. Also use a Production Possibility Frontier diagram to show how achieving quality in a product has a tradeoff. Explain your diagram.
Question Two:
Assume that there is an improvement in the technology used for manufacturing ice cream, while at the same time there is increased demand for ice cream in Newcastle in 2017 due to a long hot summer. Using demand and supply analysis, draw the appropriate diagram and predict what will happen to equilibrium price and quantity demanded for the Newcastle ice cream market in 2017 as a result of these two changes.
Question Three:
The Vice Chancellor of a university is concerned about increasing costs, and decides to raise tuition fees in an attempt to increase university revenue. Using market analysis, both the ideas and the appropriate diagrams, examine this rationale. Explain whether you think this move will accomplish the Vice Chancellor's objective.
Question Four:
Market researchers have studied the market for green tea. Their estimates for the supply of and demand for green tea per month are as follows:
|
Price per kilo
|
Quantity demanded (millions of kilos)
|
Quantity supplied (millions of kilos)
|
|
$25
|
100
|
500
|
|
20
|
200
|
400
|
|
15
|
300
|
300
|
|
10
|
400
|
200
|
a) Using the accompanying data, graph the demand for green tea and the supply of green tea. Identify the equilibrium point as E and use dotted lines to connect E to the equilibrium price on the price axis and the equilibrium quantity on the quantity axis.
b) Suppose the government enacts a green tea support price of $20 per kilo. Indicate this action on your graph and explain the effect on the green tea market.
c) Why would the government establish such a support price? What problems could occur?
d) Now assume the government decides to set a price ceiling of $10 per kilo. Show and explain how this legally imposed price affects your graph of the green tea market.
e) What objective could the government be trying to achieve by establishing such a price ceiling? What problems could occur?
Question Five:
(Note: there are five parts to this question: a), b) & c) are related; d) & e) are separate.
Assume that Belinda is currently computer consultant earning $100, 000 per annum. She is considering opening her own hot bread shop. To do so she must invest $500, 000 of her own savings for which she is currently receiving 5% per annum interest.
After one year of operation, Belinda's Hot Buns has total sales of $300, 000 and her major costs consists of her staff's wages of $60, 000, inputs of $40, 000 and other costs of $10, 000.
a) Calculate Belinda's accounting profit after one year.
b) Calculate Belinda's economic profit or loss after one year.
c) What was Belinda's opportunity cost? Has Belinda has made a sound economic decision? Why or why not?
Note that d) and e) are separate to the Belinda questions above.
d) If the cross-price elasticity of demand for Products A and B is -2.0, how are Products A and B related? Give an example of the types of goods these might be.
e) If the cross-price elasticity of demand for Products C and D is + 3.0, what can you conclude about how Products C and D are related? Give an example of the types of goods these could be.
Question Six:
a) Using the following table, construct the cost schedule for a firm operating in the short-run.
|
Total product (Q)
|
Total fixed cost (TFC)
|
Total variable cost (TVC)
|
Total cost (TC)
|
Marginal cost
(MC)
|
Average fixed cost (AFC)
|
Average variable cost (AVC)
|
Average total cost (ATC)
|
|
0
|
$70
|
$0
|
$70
|
$-
|
$-
|
$-
|
$-
|
|
1
|
|
|
90
|
|
|
|
|
|
2
|
|
|
105
|
|
|
|
|
|
3
|
|
|
115
|
|
|
|
|
|
4
|
|
|
120
|
|
|
|
|
|
5
|
|
|
130
|
|
|
|
|
|
6
|
|
|
150
|
|
|
|
|
|
7
|
|
|
185
|
|
|
|
|
|
8
|
|
|
235
|
|
|
|
|
|
9
|
|
|
295
|
|
|
|
|
b) Graph the average variable cost, average total cost and marginal cost curves. Note you can hand- draw but use a ruler for the axes. With the vertical cost axis, a suggestion is to start at $50 and go to $350, with 1 centimeter equal to 20 units.
c) How do you think the long-run average total costs curves would be different for a small app designer firm compared with a large coalmine? Sketch the diagrams and write a sentence or two explanation for each.