BUS102 Intro to Microeconomics: Production Capacity of Newland

A1

1. a)Given the production capacity of Newland, the production possibility frontier (PPF) of cars and bicycle production is illustrated in the diagram below:

Figure : The PPF curve for the production of Cars and Bicycles

Source: (Authors creation)

1. b) The PPF depicts a curve that represents two products maximum possible output given the inputs including resources. It also assumes that each input is efficiently used in the production. Some variables including labor, technology influences the available resources and this dictates the point where the PPF lies (Sloman et al. 2013). This curve signifies two products production possibilities when there are fixed resources. This denotes that production capacity of one product increases owing to decrease in total production of another product. However, this curve helps in measuring efficiency of manufacturing two commodities at the same time.

The above figure reflects PPF of the manufacture of cars and bicycles. In this figure, point A and B on PPF curve indicates that the resources are efficiently allocated by the economy, while point Y represents inefficient utilization of resources. At point A, if the economy wants to manufacture large number of cars then it will have to give up those resources that are used for producing bicycles. On the other hand, point B denotes that if the nation starts to produce huge number of bicycles then it must divert the resources that are utilized in manufacturing cars (Taussig 2013). Therefore, shifting from point A  to point B, the nation will decline production of cars by negligible amount as compared to rise in output of bicycle. Point Y represents that the resources of the nation are not allocated efficiently. This means that the nation is not manufacturing large number of cars and bicycles given the resource potential.

The underlying assumptions of PPF are given below:

• Though the total amount of resources utilized in manufacturing products is fixed, it can be relocated for producing one good to another (Rios et al.2013).
• Technology used in the production of commodities is presumed to be fixed.
• Efficient utilization of resources
• The economy can utilize same amount of resources for producing both the products and hence is shifted freely.

The properties of PPF are given as under:

• PPF is negatively sloped – PPF is negatively sloped as change in total amount of one product is inversely related with the change in amount of other product.
• PPF is concave shaped- PPF curve is concave in shape owing to increase in marginal opportunity cost. This means that the nation sacrifices large amount of one product for gaining extra amount of another product.

1. c) In order to meetthe increase in demand for cars and bicycles, the three possibilities by which Newland meets the increased demand includes:

• It is predicted that Newland will introduce new technology for meeting the increased demand for these two types of products (Rader 2014). However, implementation of new technology will help the economy to increase the total production.
• Newland might increase the supply of these two products for meeting the needs of the customers. Moreover, technology also contributes to increase in supply of these products.
• In addition, import of goods will also help Newland in meeting the customers demand for cars and bicycles. Hence, its supply increases owing to import of these products.

A2.

1. a)Given the demand schedule for computer chips, the total revenue attained by the company is 57500 dollar.  Total revenue signifies the total receipts gained from the product sales throughout the year. If the price of computer chips falls from the data given in the table, the total revenue of the company also decreases. However, this reflects that fall in total revenue adversely impacts on the financial performance of the company (Nicholson and Snyder 2014). This is shown in the table below:

Table 1: Total revenue attained after the fall in price of computer chips

Source: (Authors creation)

1. b)

 Table 2: Total revenue test determining elasticity of demand for good

Source: (Authors creation)

Price elasticity of demand (E_d) refers to the sensitivity of demand for quantity of goods with respect to its price change. Therefore, E_d= Change in proportion of demand for quantity/Change in proportion of price. E_d=(Q2-Q1)/(P2-P1)*((P1+P2)/2)/((Q1+Q2)/2). The relationship between total revenue and elasticity of demand is defined with the help of total revenue test. In case of elastic demand, the price and revenue moves in the opposite direction (Mankiw 2014). On the contrary, the price and revenue moves in the same direction. However, rise in product price with inelastic goods demand, profit exceeds loss.  On the other hand, decrease in price with elastic product demand, loss exceeds gain (Hall and Lieberman 2012). This test shows that TR remains unchanged with rise or fall in price. With average price of $300, the elasticity of demand is shown in the table.

1. c)Widgets demand function is given as:

Q^D=100-5P

Q^S=5P

The market equilibrium occurs when the product’s demand curve intersects with its supply curve. Therefore, Q^d=Q^s

100-5P=5p

100=5p+5p

100=10P

P=100/10=10,  Q^D=100-5*10=100-50=50

1. d) Consumer surplus signifies measurement of welfare that every individuals wants to gain from the consumption of products. It is estimated from the difference between the amount of commodity for which the consumers are eager to pay and the amount he actually pays. Consumer Surplus is calculated as-

CS= ½ *(Base *Height)

Producer surplus refers to the excess amount that producers gain from selling their commodities in the marketplace (Gans et al. 2012). Therefore, it is assessed from the difference between the quantity of products that is received by the producer and the amount that they eager to accept. Producer surplus is also evaluated in the same way as that of the consumer surplus.

Total surplus is estimated by the summation of consumer as well as producer surplus.

TS=250+250=500

15. e) Maximum sold quantity of the product is 25 and the price of the product is assumed to $15. Therefore, the consumer surplus is estimated as:

In this case, producer surplus is evaluated as:

Deadweight loss refers to total welfare loss owing to various reasons like price ceilings, taxes etc. Therefore, deadweight loss is calculated as:

Deadweight loss=1/2*(P2-P1)*(Q1-Q2)

=125

Now if the price is set at $5, Consumer surplus is

Producer surplus is evaluated as-

Deadweight loss=132.5

f) Using both the equations, the demand and supply cure is drawn and market equilibrium is shown at point E with equilibrium price at 10 and equilibrium quantity at 50.

Figure 1: Demand and supply curve

Source: (Author’s creation)

A3.

1. a)The result of the government imposition of tax on Alcops is definitely surprising. As excessive consumption of Alcops leads to various health problems, the Australian government took the right step in imposing the tax on Alcops for reducing teenage drinking. According to the economic theory, price of any product is inversely proportional to its quantity demanded (Friedman 2017). However, increase in tax on alcohol leads to rise in its price, which results to decrease in its consumption. Though the motive of the government was to increase the tax revenue earned from Alcops , the earnings was 6% less than it was predicted. This is because demand for higher alcohol products reduces owing to imposition of sin tax and hence this results to supply surplus (Baumol and Blinder 2015). This is a condition of price flooring where higher price influences the market by reducing its demand. However, it is given that no reduction in teenage drinking occurred at the end of financial year leads to contradictory statement. This can occur if the cheaper products are purchased instead of higher priced products. Therefore, demand for Alcops does not change irrespective of change in its price.

Figure 2:  Demand and supply model for Alcops

Source: (Authors creation)

1. b) The sellers bears greater burden of tax because they produces both higher and cheaper products but higher products are less purchased than cheaper ones. However, suppliers attains lower profitability and hence bears huge tax burden (Bauer 2014). Therefore, the outcome was not tax efficient.
2. c) Imposition of tax is not the effective means of reducing binge drinking and health hazards. Other policies by which the Australian government might implement with this aim are restrictions in its advertisement, regulating alcohol availability in the market by licensing and policing such as breath testing.

References

 Bauer, M.J.R., 2014. Principles of microeconomics.

Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.

Friedman, L.S., 2017. The microeconomics of public policy analysis. Princeton University Press.

Gans, J., King, S. and Mankiw, N.G., 2012. Principles of microeconomics. Cengage Learning.

Gans, J., King, S., Stonecash, R. and Mankiw, N.G., 2012. Principles of economics. Cengage Learning.

Hall, R.E. and Lieberman, M., 2012. Microeconomics: Principles and applications. Cengage Learning.

Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.

Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application. Cengage Learning.

Rader, T., 2014. Theory of microeconomics. Academic Press.

Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.

Sloman, J., Norris, K. and Garrett, D., 2013. Principles of economics. Pearson Higher Education AU.

Taussig, F.W., 2013. Principles of economics (Vol. 2). Cosimo, Inc..