Task: Elasticity

1. Explain the economic concept of price elasticity of supply. What are the 5 key determinants of price elasticity of supply. Use examples to explain your answer.

2. For each pair of items below, determine which product would have a higher price elasticity of demand (in absolute value) and which one a lower price elasticity of demand. Explain your answer.
2a. Blood pressure medicine for someone who has high blood pressure and the purchase of Clairol hair colouring product
2b. A holiday to Fiji or a tank of petrol for your car
2c. Arnott's shortbread biscuits or biscuitsin general

3. Watch the following video clip (BTN takes a look at the factors behind the rise in price of bananas) and answer the following questions.
3a. Using supply and demand curves explain how the cyclone would affect the price and quantity of bananas. Make sure you explain in your answer if you expect the change in price to be small or large.
3b. The bananas were called luxuries in the video. Do you think that this is strictly true? If bananas were luxuries what would this mean for the supply and demand curves? In turn what would this mean for the price and quantity of bananas following the cyclone compared to the case in 3a?
3c. What would be the impact on elasticity of supply if it were possibly to increase the imports of bananas?

Task: Costs of Production

1. What is the difference between explicit costs and implicit costs? List three examples each of explicit costs and implicit costs that may be experienced by a small business.

2. Explain how the listed events, a) to d), would affect the following at the Ford Motor Company (make sure you explain and justify your answer):
(i) marginal cost
(ii) average variable cost
(iii) average fixed cost
(iv) average total cost
a) Ford signs a new contract with the unions that requires the company to pay higher wages.
b) The federal government starts to levy a $1,500 per vehicle tax on new cars
c) The company decides to give its senior executives a one-time $100,000 bonus.
d) Ford decides to increase the amount it spends on designing new car models.

3. State the law of diminishing marginal returns. Explain why the marginal cost of production must increase if the marginal product of a variable resource is decreasing

Task: Market Power and Business Strategy

1. A) How might advertising reduce economic wellbeing? How might advertising increase economic wellbeing? Given an example of each case and explain.

2. B) A sceptic says, ‘marketing research and brand management are redundant. If a company wants to find out what customers want, it should simply look at what they are already buying'. Do you agree with the comment? Explain (hint under what conditions are firms able to earn economic profits).

3. Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide whether to increase its advertising spending to compete for customers. The following figure shows the payoff matrix for this advertising game.

3a. Is there a dominant strategy for Godrickporter and, if so, what is it? Explain.
3b. Is there a dominant strategy for Star Connections and, if so, what is it? Explain.
3c. Let's suppose the game starts with each firm adhering to its original budget so that Godrickporter earns a profit of $6000 and Star Connections earns a profit of $12 000. Is there an incentive for any one firm to increase its advertising budget? Explain
3d. What is (are) the Nash equilibrium(s) in this game? Explain

4. Read the following excerpt and answer the following questions

CSR and Boral have announced the intention to form a joint venture of Australian east coast brick operations, citing reduced brick usage as a major cause for consolidation. The companies have proposed to combine brick operations in New South Wales, Victoria, Queensland, South Australia, Tasmania and the ACT. The move is subject to clearance by the Australian Competition and Consumer Commission (ACCC). A joint statement from the companies explains brick demand in Australia has experienced a sustained structural decline, with bricks becoming an increasingly smaller component of the broader cladding market. Despite a general increase in construction activity over this period, total brick production in Australia has fallen by 46 per cent from its peak in 1981, according to Boral and CSR.

AuthorDavid Wheeldon

4a. Using the concept of economies of scale to explain the two companies' argument that it is now necessary for CSR and Boral to merge. For this question assume that CSR and Boral are the only two companies in the market and form an oligopoly (Hint: think about the cost curves and the market demand curve)? A graph is likely to be helpful in explaining this question.

4b. If the joint venture is allowed to proceed, how would you describe the new market? What would be the impact on price, quantity and profit? Explain.
4c.
If the government allows the merger to go ahead two options are available for regulating the price. What are the two options and which would be the better option? Explain

Task: GDP, economic growth and unemployment

1. Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next? Give reasons why measured GDP does not reflect total production in an economy.

2. For each of the following, indicate if the person would be classified as employed, unemployed, or not in the labour force and why: (i) a 65-year-old man who left his job and is now working as a volunteer for 10 hours a week; (ii) a university graduate who has not been able to find a position using her skills and is working as a wait-person for 30 hours a week; and (iii) a manufacturing worker who is out of a job and has given up searching for a job.

3. Suppose 180 000 people are employed, 20 000 people are unemployed, and an additional 50 000 people are not in the labour force but are of working age. Calculate the labour force participation rate.

4. Read the following excerpt and answer the following questions
Macroeconomics and Economic Development: Informal Work and Dead Capital
"Dead capital" is Hernando de Soto's term for an asset that cannot easily be bought, sold, valued or used as an investment. Despite obvious poverty in the informal sector in Peru, de Soto's work shows that even those who live in slums possess far more capital than anyone realizes. In fact, the informal economy is so large in Peru that almost 70 percent of the working population work in informal arrangements. ... Possessions ... are not represented in such a way as to make them fungible (i.e. easily exchangeable) assets. Dead capital cannot, therefore, create value for the poor. What you're really leaving behind is the world of legally enforceable transactions and property rights. The developed world has devised a formal property system of titles, title registries, and inclusive property law that includes real estate used for homes or businesses. De Soto shows that this is in a large part why some nations are rich while others remain in poverty. He says:

With titles, shares and property laws, people could suddenly go beyond looking at their assets as they are - houses used for shelter - to thinking about what they could be-things like security for credit to start or expand a business.

The moment Westerners were able to focus on the title of a house and not just the house itself, they achieved a huge advantage over the rest of humanity. When purchasing a home, an open records system enables buyers and sellers not only to gauge the value of homes in nearby areas, but to set reasonable prices based on comparative values. Clear titles and title insurance give buyers the confidence they need to complete a purchase. No clear title? No sale. The system also gives banks the assurance they need to offer a mortgage. It represents a real house (house, land, a factory, a car, etc.)

Source: Excerpts from : "Informal Work and Dead Capital".

4a. Explain how "Dead Capital" is related to the informal economy? Define these terms and explain what they mean in the context of DeSoto's ‘dead capital'.
4b. Many of the owners of houses in ‘shanti towns' in the outskirts of Peru's capital Lima, are happy that they do not have to pay land taxes, or municipal rates, as we do in Australia. Is this an advantageous situation to be in for the poor in Peru? Explain your answer.
4c Would the informal economy hinder or promote economic growth in Peru? Explain your answer. Hint: look at "New Growth Theory" and the case study on Botswana on p. 380-381 to answer this question.