Eco10250 Economics For Decision Making: Assessment Answers

1.

1. Joan, who has been a university student for a year, has just started a new job. She realises that if she works more hours there will be an impact on her grades.  The following is Joan’s production possibility table for work and her average grades:

From the figures in the table above:

1. Plot the production possibility curve for Joan.
   
   
2. Explain the concept of increasing opportunity cost using the production possibility table and curve plotted in Q1ai above.
   
   
3. If the opportunity cost of Joan increasing her grade was constant regardless of how many hours she worked, what would be the shape of her production possibility curve?  Draw this graph.  Which of the two shapes would be more likely, and why?
   
   
4. What would be happening if Joan’s combination of her grades and hours of work per week were below the curve as plotted above in Q1ai?
   
   
5. How could Joan push her combination of her grades and hours of work per week past the current curve?

2.

In February 2018, it was reported that Australia’s solar power capacity could almost double in a year.

1. Use demand and supply curves to show the doubling of capacity.
   
   
2. Use demand and supply curves to show what is likely to happen to demand over time in response to the capacity increases (see Q2a above). 
   
   
3. Use demand and supply curves of the solar powered industry and coal-fired power electricity industry to show what is likely to happen to demand and supply of solar power if the government introduces a tax on coal-fired power electricity.

3.

1. Explain in your own words, using demand and supply curves, the concepts of consumer and producer surplus.
   
   
2. Using demand and supply curves describe and illustrate what would happen to consumer and producer surplus if solar power capacity is increased. 
   
   
3. The treasurer, Scott Morrison, has stated that business tax cuts will be good for business and workers. Is this a positive or a normative statement?

4.

1. Complete the table below outlining the demand for hot doughnuts in winter. In your calculations use the midpoint methodto calculate the price elasticities. 

1. Do you think the price elasticity of demand for hot doughnuts in summer would be the same as in winter or would it become more elastic or more inelastic? Explain your answer. 
   
   
2. What would you expect the price elasticity of demand for cigarettes to be? Explain your answer.

5.

a i. Complete the cost schedule below for a company operating in a free-market (remember that MC and MR values are placed midway between the output figures):

1. If the firm is operating in a perfect market where the market price for the good the company produces is $150, how many items should this company produce in order to maximise profit? Explain your answer.

• Graph the average total cost, marginal cost, average revenue and marginal revenue curves.

1. In your own words explain the concept of diminishing returns and describe what will happen to marginal product, total output and marginal cost when diminishing returns start to occur. 

1.

a

i)

Figure 1: Production possibility curve of Joan

ii)

Opportunity cost is said to be increasing when people has to sacrifice more and more units of one commodity to have one additional unit of other (Mankiw 2014). For Joan, increasing grades involves sacrifice of more and more hours of work per week. For example, first 20 percent grade has an opportunity cost of 5 work hours. The opportunity cost for grade of 40, 60, 80 are 10, 15 and 30 respectively which shows an increase in opportunity cost for a higher and higher grade.

iii)

A constant opportunity cost for grades produce a linear production possibility curve as shown in figure 2

Figure 2: Constant opportunity cost and production possibility curve

The first PPF of concave shape is more likely to be obtained in real world. As resources are not perfect substitute of each other moving resources from one alternative to another increases the opportunity cost and hence makes production possibility to be concave (Bumas 2015).

iv.

Points below the plotted curve represent feasible but inefficient allocation of Joan’s time between grades and work hours.

The only way to push combination of grade and work hours is to increase the available time for allocating more time for both grades and work hours by reducing time spent for leisure.

b 

Scarcity refers to the one of the fundamental problem of economics derived from limited resources. The limited means are used for fulfilling unlimited wants of humans. Society faces trade-off among available choices. Because of a goo growing weather, Australia produced huge amount of wheat crop. The plentiful production of wheat however does not address the scarcity problem of Australia in regards to wheat. Ample production is a short term phenomenon while scarcity is a much bigger aspect. One year production has nothing to do with scarcity problem (Friedman 2017).

2.

a. 

Figure 3: Evaluation of an increase in productive capacity

Doubling the capacity of solar power almost doubles the ability to supply power. The increase in supply cause supply curve to shift outward to S’S’. Given the demand the increased supply increase equilibrium supply of solar power while reduces equilibrium price.

b 

The lower price of solar power resulted from increased capacity increase demand for solar power in the long run. This shifts the demand curve to the right (demand curve shifts from DD to D’D’). Three possible changes can occur in the market depending on magnitude of change in demand and supply.

Figure 4: Demand change in greater than supply change

Figure 5: Demand change in smaller than supply change

Figure 6: Change in demand equals change in supply

c 

Figure 7: Impact of tax in coal-fired industry

A proposed tax in coal-fired industry reduces the effective supply leading to a leftward shift in the supply curve to S’S’ (Gillespie 2014). Because of tax price of coal-fired electricity now increases to P’ while market quantity reduces to Q’.

Figure 8: Evaluation of tax in solar power industry

In response to increased price of coal fired electricity because of imposed tax, demand for solar powered electricity increases. This causes demand curve in the solar power industry to shift outward leading to an expansion of both price and quantity in the industry.

3.

a

The difference between maximum willing price of a consumer actual price that the consumer pays for the good is called consumer surplus. Surplus earned by producers because of the difference between market price and minimum supply price is called producer surplus.  

Figure 9: Consumer and Producer Surplus

b 

If the solar power capacity increases, then market price of solar power decreases. The lower price increases consumer surplus as shown by the bigger triangle A’P’E’. Increase in productive capacity implies a greater efficiency (Waldman and Jensen 2016). This results in a greater cost efficiency leading to an increase in production surplus E’P’C’.

Figure 10: Change in productive capacity and surplus

c 

The objective statement based on testable and reliable facts is called positive statement. The positive economic statement can be proved or disproved with support of the theories and factual evident. Normative statement on the other hand is subjective and requires a value judgement. These are based upon opinion of individual and cannot be validated with factual or theoretical support (Tresch 2014).

The statement that business tax cut will be good for business and worker can be considered as a positive statement. Imposition of tax reduces incentive to hard work as a significant proportion of earned reward has to be paid for paying tax. Reduction in tax thus increases welfare of business and workers and is good for both of them

4 

a

b

The price elasticity of demand for hot doughnut is likely to be more elastic in summer as compared to that in winter. Because of lesser demand of hot doughnuts in summer people can easily adjust their demand for hot doughnuts in summer than that in winter. This makes demand more elastic in summer (Moulin 2014).

c

For addictive product like cigarette, people generally have a relatively inelastic demand because of their inability to alter demand habit in response to price.

5 

a

i.

In a perfectly competitive market, the company should sell number of items lying between 4 and 5. This is obtained from the profit maximizing condition in a perfectly competitive market which state optimum output should corresponds to the level where price and marginal cost equalize.

iii.

Figure 11: Average total cost, marginal cost, average revenue and marginal revenue curve

b 

In the production process diminishing return indicates stage of production where addition of one unit of variable results in a smaller marginal increase in output. Corresponding to diminishing return total output still increases but at a decreasing rate, marginal product decreases and marginal cost increases (Maurice and Thomas 2015).

References

Bumas, L.O., 2015. Intermediate Microeconomics: Neoclassical and Factually-oriented Models: Neoclassical and Factually-oriented Models. Routledge.

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

Gillespie, A., 2014. Foundations of economics. Oxford University Press.

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

Maurice, S.C. and Thomas, C., 2015. Managerial Economics. McGraw-Hill Higher Education.

Moulin, H., 2014. Cooperative microeconomics: a game-theoretic introduction (Vol. 313). Princeton University Press.

Tresch, R.W., 2014. Public finance: A normative theory. Academic Press.

Waldman, D. and Jensen, E., 2016. Industrial organization: theory and practice. Routledge.