Costs and Public Goods

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BUECO5903 BUSINESS ECONOMICS ASSIGNMENTS A Semester 1, 2013
Due dates for each section are provided in the Course Description. Part A – Microeconomics – Worth 10% of total assessment: Answer any five (5) of the following questions. Each question is worth 10 marks;

Question 1:

(a) Explain the impact of external costs and external benefits on resource allocation; (2.5 marks) Ans : Resources are over - allocated when negative externalities exist because the equilibrium price is too low. Resources are under - allocated when positive externalities exist because the equilibrium price is too high

(b)Why are public goods not produced in sufficient quantities by private markets? (2.5 marks) Ans :The main reason is that of free rider problem. Pure public goods have characteristics such as non excludability and non - rivalry. These characteristics gives rise to the free - rider problem.

(c)Which of the following are, or are not examples of public goods (or services)? Please explain your reason. (1 mark each which includes ½ marks for each reason).

(i)The Judicial system Yes/No
Ans : Yes, it is a public service which is for public interest litigation

(ii)Pencils Yes/No
Ans: No, it not a public good but if it is distributed freely and especially if the government is handing them out it can argued that it is a public goods.

(iii)The quarantine service Yes/No
Ans:Yes, it is a public service because its for the the public and to check that there are no pests and disease come into the country.

(iv)The Great Wall of China Yes/No
Ans: Yes, it is a public goods because its free for everyone and everyone in china can go there and visit.

(v)Contact lenses Yes/No
Ans: No, it is not a public goods because public goods are goods which are free to everyone and everyone can use it eyeglasses can come under public goods but not contact lenses.

Question 2:

(a)Suppose the income elasticity of demand for pre-recorded music compact disks is +5.0 and the income elasticity of demand for a cabinet maker’s work is +0.5. Compare the impact on pre-recorded music compact disks and the cabinet maker’s work of a recession that reduces consumer incomes by 10 per cent. (2 marks)

Ans : Music compact disks are normal good and income elastic because it is >1.0 Cabinet makers work is also normal good but income inelastic because it is 1.0 This is an inferior good because the demand decreases with income as indicated by the negative sign.

(d) Interpret the following Cross-Price Elasticity of Demand (XED) and explain the relationship between these goods. (3 marks total, 1.5 marks per part)

Ans : XED= + 0.75

XED= -2.5
XED = +0.75 = +.75/100 = 2.4/4
Cross elasticity of demand= % change in quantity demand of goods A
% change in price of goods B
The good is inelastic because the absolute value is 1.0.
Therefore, A decreases % in goods leads to B increases by 2.5% in goods. Both are complements and this good is –VE in XED

Question 3:

You are given the following data about two firms:
FIRM A
Quantity |0 | |1 | |2 | |3 | |4 | |5 | |6 | |Total revenue ($) |0 | |10 | |20 | |30 | |40 | |50 | |60 | |Average revenue ($) |___ | |___ | |___ | |___ | |___ | |___ | |___ | |Marginal revenue ($) | |___ | |___ | |___ | |___ | |___ | |___ | | |Total cost ($) |30 | |42 | |50 | |60 | |76 | |100 | |140 | |Marginal cost ($) | |___ | |___ | |___ | |___ | |___ | |___ | | |Average cost ($) | ( | |___ | |___ | |___ | |___ | |___ | |___ | | FIRM B

Quantity |0 | |1 | |2 | |3 | |4 | |5 | |6 | |Total cost ($) |100 | |134 | |154 | |177 | |216 | |266 | |366 | |Average cost ($) | ( | |___ | |___ | |___ | |___ | |___ | |___ | |Marginal cost ($) | |___ | |___ | |___ | |___ | |___ | |___ | | |Price ($)...
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