economic assignment question

Topics: Supply and demand, Economics, Cost Pages: 5 (1009 words) Published: October 13, 2014

JANUARY SEMESTER 2014
BMME5103 MANAGERIAL ECONOMICS
ASSIGNMENT

Question 1
a. Explain the production possibilities frontier (PPF).
[2 marks]

b. Analyse what it means for the PPF to be bowed out from the origin (curved), and what it means for the PPF to be a straight line. [3 marks]

c. State the Law of Increasing Opportunity Cost and explain why it holds. [3 marks]
[TOTAL: 8 MARKS]

Question 2
a. “As the price of oranges rises, the demand for oranges falls, ceteris paribus.” Explain. [3 marks]

b. “The price of a bushel of wheat was $3.00 last month and $2.50 today. The demand curve for wheat must have shifted leftward between last month and today.” Discuss. [4 marks]

c. Some goods are bought largely because they have ‘snob appeal.’ For example, the residents of Beverly Hills gain prestige by buying expensive items. In fact, they would not buy some items unless they are expensive. The law of demand, which holds that people buy more at lower prices than at higher prices, obviously does not hold for the residents of Beverly Hills. The following rules apply in Beverly Hills: high prices buy; low prices, don’t buy.” Do you agree? Discuss. [6 marks]

[TOTAL: 13 MARKS]

Question 3
The minimum wage in year 1 is $1 higher than the equilibrium wage. In year 2, the minimum wage is increased so that it is $2 above the equilibrium wage. We observe that the same number of people is working at the minimum wage in year 2 as in year 1. Does it follow that an increase in the minimum wage does not cause some workers to lose their jobs? Explain your answer. [TOTAL: 6 MARKS]

Question 4
Widgets are provided by a competitive constant-cost industry where each firm has fixed costs of $30. The following chart shows the industry-wide demand curve and the marginal cost curve of a typical firm:

INDUSTRY-WIDE DEMAND
FIRM’S MARGINAL COST CURVE
Price
Quantity
Quantity
Marginal Cost
$5
1500
1
$5
10
1200
2
10
15
900
3
15
20
600
4
20
25
300
5
25
30
200
6
30
35
140
7
35
40
50
8
40

a. What is the price of a widget?
[2 marks]

b. How many firms are in the industry?
[2 marks]

For the remaining four parts of this question, assume that the government imposes an excise tax of $15 per widget.

c. In the short run, what is the new price of widgets?
[6 marks]

d. In the short run, how many firms leave the industry?
[2 marks]

e. In the long run, what is the new price of widgets?
[ 2 marks]

f. In the long run, how many firms leave the industry?
[6 marks]

[TOTAL: 20 MARKS]

Question 5
a. Consider public policy aimed at smoking;
i. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs $2 and the government wants to reduce smoking by 20 percent, by how much should it increase the price? [4 marks]

ii. Studies also find that teenagers have higher price elasticity than do adults. Why might this be true? [2 marks]

b. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:

Price
Quantity Demanded
(business travelers)
Quantity Demanded
(vacationers)
$150
2,100 tickets
1,000 tickets

Price
Quantity Demanded
(business travelers)
Quantity Demanded
(vacationers)
$200
2,000 tickets
800 tickets
$250
1,900 tickets
600 tickets
$300
1,800 tickets
400 tickets

i. As the price of tickets rises from $200 and $250, what is the price elasticity of demand for (i) business travellers and (ii) vacationers? (Use the midpoint method in your calculations) [4 marks]

ii. Why might vacationers have a different elasticity from business travellers? [2 marks]

[TOTAL: 12 MARKS]

Question 6
a. General Mills and Kellogg are two of the biggest players in the market for...
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