BUSINESS ECONOMICS ASSIGNMENT -

Microeconomics Questions - Answer any five (5) of the following questions.

Question 1: (a) Explain and illustrate using suitable diagrams, the impact of external costs and external benefits on resource allocation;

(b) Why does a good or service become a public good or service?

(c) Explain why each of the following examples are either public goods or services, or private goods or services?

(i) A privately owned enginerring and material research laboratory undertaking contractual research on weapons development;

(ii) The quaranteen service;

(iii) A toll road originally financed through government debt;

(iv) Courses offered by a fee charging privately owned teaching institution that receives some government funding;

(v) Contact lenses.

Question 2: (a) Suppose the income elasticity of demand for pre-recorded music compact disks is +6.0 and the income elasticity of demand for a cabinet maker's work is +0.6. 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.

(b) How might you determine whether the pre-recorded music compact discs and MP3 music players are in competition with each other?

(c) Interpret the following Income Elasticities of Demand (YED) values for the following and state if the good is normal or inferior;

YED = + 0.8

YED = - 3.8

(d) Interpret the following Cross-Price Elasticities of Demand (XED) and explain the relationship between these goods.

XED = + 0.79

XED = - 3.5

Question 3: You are given the following data about two firms:

(a) Complete the two tables above.

(b) Are these firms operating in the short or the long run?

(c) Are these firms operating under perfect or imperfect competition?

(d) What level of output will these firms produce in the short run?

(e) How would you describe their profit positions?

Question 4: (a) Suppose you own a jewellery making workshop and store. Classify the following items as either fixed or variable inputs for this store over the course of a month, and explain your reason.

(i) The cost of solder;

(ii) The basic minimum wage rate as agreed with the union (workers must be given at least one month's notice if they are to be laid off);

(iii) A Valentines day advertising campaign;

(iv) Overtime pay;

(v) Electricity cost for running the machines for one month;

(vi) Interest on a mortgage for the factory: the rate of interest rises over the course of the month;

(vii) Depreciation of machines due simply to their age;

(viii) Business rates (local government taxes);

(ix) The cost of electricity for running the machines and drills paid quarterly;

(x) Wear and tear on machines;

(b) Illustrate and explain using three diagrams, the law of diminishing returns and how it relates to the behaviour of cost and hence marginal cost (3 marks for 3 diagrams plus 2 marks for linking explanation);

Question 5: (a) Illustrate with diagrams and explain how a monopolistically competitive firm and a perfectly competitive firm differ in the allocation of resources;

(b) Illustrate with diagrams and explain how a perfectly competitive firm and monopolist differ in their allocative efficiencies;

(c) Illustrate with diagrams and explain how the individual firm and the industry differ in their short-run perfectively competitive resource allocations;

(d) Illustrate with a diagram and explain the long-run perfectly competitive equilibrium for the firm.

Question 6: Assuming perfect competion:

(a) Illustrate and explain using two diagrams the long-run supply of a contstant cost industry for both the individual firm and the industry.

(b) Illustrate and explain using two diagrams the long-run supply of an increasing cost industry for both the individual firm and the industry.

(c) Illustrate and explain using two diagrams the long-run supply of a decreasing cost industry for both the individual firm and the industry.

Question 7: What will happen to the equilibrium price and quantity of margarine in each of the following cases? Illustrate with a diagram and explain whether demand or supply (or both) have shifted and in which direction. (In each case, assume ceteris paribus).

(a) A rise in the price of magarine;

(b) A rise in the demand for yoghurt;

(c) A rise in the price of bread;

(d) A rise in the demand for bread;

(e) An expected rise in the price of butter in the near future;

(f) A tax on butter production;

(g) The invention of new, but expensive, process for removing all cholesterol from butter, plus the passing of a law which states that all butter producers must use this process.

Question 8: The diagram below illustrates a firm under monopolistic competition:

(a) Label the following curves: Curve I, Curve II, Curve III, Curve IV.

(b) Does the diagram represent the short-run or long-run position? Explain your answer.

(c) Is P3 the long-run equilibrium price? Explain your answer.

(d) What are the profit maximising output and price?

(e) On the diagram, shade in the amount of profit made at the maximum-profit output.

(f) Draw new average and marginal revenue curves on the diagram to illustrate the long-run equilibrium that will occur after the entry of new firms into the industry.

(g) Explain the relationship between the AC, MC, AR and MR curves at this long-run equilibrium position?

Question 9: (a) Suppose that oil prices rise sharply for years as a result of a war in the Middle East. Illustrate with a diagram what happens to the:

(i) Demand for automobiles?

(ii) Demand for home insulation?

(iii) Demand for coal?

(iv) Demand for tyres?

(v) Demand for bicycles?

(b) Why are public goods not produced in sufficient quantities by private markets?

Question 10: (a) Explain why scarcity forces individuals and society to incur opportunity costs. Give specific examples.

(b) Suppose a chocolate bar manufacturer promotes its products by advertising and opportunity to win a 'free car'. Is this car free because the winner pays zero dollars for it?

(c) Why is the production possibility frontier bowed outwards?