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1393AFE Economics for Decision Making: Production Possibility Curve

Questions:

Note that when you are answering questions that require mathematical calculations, you should provide details as to how the answers were derived. In completing your answers, you should use graphs wherever possible. Always provide a brief explanation of each graph, including how it relates to your overall answer/argument.

1.

  1. Explain why a production possibility curve is usually bowed outward rather than being a straight line.
  2. Jane has been unemployed for nearly a year but finds a high-paying job with an international hotel firm. Does this mean that Jane will no longer experience the problem of ‘scarcity’? Explain the reasons for your answer.
  3. Every country has an economic system that has been established to address the problem of scarcity. Describe the economic system of a country other than Australia. Justify your assessment of the system by considering the major factors that determine an economic system within a country

2.

  1. The table below shows the demand and supply for ice creams.

Price of an ice cream

($)

Quantity demanded

(‘000)

Quantity supplied

(‘000)

0.00

19

0

0.50

16

0

1.00

13

1

1.50

10

4

2.00

7

7

2.50

4

10

3.00

1

13

  1. Graph the following demand and supply schedules.
  2. What is the equilibrium price and quantity in this market for ice creams?
  3. Calculate the consumer surplus and producer surplus at the equilibrium in this market.
  4. Assume that the demand schedule for ice creams outlined above is for summer. What do you think will happen to equilibrium price and quantity for ice creams during winter? Explain the reason for your answer.
  5. What do you think will happen to consumer and producer surplus as a consequence of the change in equilibrium price and quantity for ice creams during winter? Explain the reason for your answer.

3.

The government has decided that the free-market price for milk is too low.

  1. In an attempt to help dairy farmers increase their income the government imposes a price floor in the milk market. Use demand and supply diagrams to illustrate the impact of this policy on the price of milk and the quantity sold as well as the state of the market.
  2. Can dairy farmers be assured of an increased income? Explain your answer.
  3. Would it be a good decision for the government to purchase all the surplus product? Explain your answer.

4.

  1. Complete the table below. In your calculations use the midpoint methodto calculate the price elasticities.

Price

($)

Quantity demanded

Total revenue

($)

Percent change in price

Percentage change in quantity demanded

Elasticity

Assessment of Elasticity

2

10

20

 

 

 

 

3

8

24

 

 

 

 

4

6

24

 

 

 

 

5

4

20

 

 

 

 

 

  1. During a holiday period do you think the price elasticity of demand for airline tickets would be the same as in the off-season or would it become more elastic or more inelastic? Explain your answer.

5.

  1. a) Complete the cost schedule below for a gardening company:

Quantity of gardens

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

10

 

10

 

 

 

 

1

 

 

14

 

 

 

 

2

 

 

22

 

 

 

 

3

 

 

34

 

 

 

 

4

 

 

50

 

 

 

 

5

 

 

70

 

 

 

 

6

 

 

94

 

 

 

 

7

 

 

122

 

 

 

 

8

 

 

154

 

 

 

 

 
  1. If the firm is operating in a perfect market where the price for gardening at one house is $20 dollars, how many gardens should this company do in order to maximise profit? Explain your answer.
  2. Graph the average variable cost, average total cost and marginal cost and marginal revenue curves.

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