Microeconomics: Supply, Demand, and Taxes
Added on 2020-02-24
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Question 1a.The production posibility frontier (PPF) is as follows. b.A PPF is the locus of combination of two goods that can be produced in an economy with available resources and technology. The latter form the core of its assumptionsResources are fixed, in terms of quantity and efficiency/productivity levelTechnology is given as static. For all points on a PPF the technology that produces the goods remains unchanged. As per data given Newland can produce 30000 cars and zero bicycles OR 5000 bicycles and zero cars. It can also produce a combination of goods as given in the data. PROPERTIES:Any point inside the PPC implies resources are unused. This is an inefficient point as resources are idle/ UNUTILISED.Any point outside the curve is not achievable, though desirable. Given the resources and technology available such a point is unattainable.
Any point on the curve is EFFCICIENT, as all resources are used. A typical PPC is shaped like a bow. It is concave to the origin. This is due to the concept of increasing opportunity costs. To produce an additional car, some resources have to be freed up from bicycle production as resources are fixed. As we make more cars the amount of resources that need to be freed up rises, implying that we have to give up more and more of bicycles. c.We need 1000 more bicycles and 2000 more cars as shown by point A.(3000 to 4000 bicycles and 18000 to 20000 cars). As per the data if Newland makes 4000 bicycles then it can make only10000 cars. It can’t make 20000 cars as required with the given resources and technology. A lies beyond the PPC. The requirement of increasing both cars and bicycles is not possible as the economy is already on the PPC- it is efficient. Unless the resources and/or technology improves we cant make more of both. This is possible if PPC shifts out by:1.An increase in resources.2.An efficiency improvement /productivity rise among resources.3.Trade with other economies can shift out PPC.
Question 2:a.At a price of $400 the demand is 30 millions. Revenue = 30*400 = 12000 million or 12 billion.At a price of $350 the demand is 35 million. Revenue = 35*350 = 12250 million or 12.25 billion. So revenue has increased. b.The total revenue test says that when demand will be inelastic, then any rise in price will lead to higher revenues. When demand is elastic then a price rise will lead to lower revenues. When price is 300 the revenues = 300*40= 12000 million or 12 billionWhen price rises to 350 the revenues become 12.25 billion. This rise implies that demand is inelastic. If price were to fall to 250 then revenues = 250*45 = 11250 million or 11.25 billion. As price falls revenues have fallen. Either ways it is clear that demand is inelastic.PART IIQd= 100-5P Qs = 5P c.Equilibrium is where demand equals supply. 100 – 5P = 5P10P = 100P= 10 and Q= 5*10=50d.Consumer surplus = ½ *50*(20-10) = 250Producer surplus = ½ *50*10 = 250Total surplus = 500e.As shown in the diagram when P= 15 the consumer surplus is = ½*25*(20-15) = 62.5. Producer surplus = (15-5)*25 + ½ *5*25 = 212.5 total = 275. Deadweight loss = ½ *(15-5)*25 = 125 When price = 5 then consumer surplus = = (15-5)*25 + ½ *5*25 = 212.5. producer surplus = ½ *5*25 = 62.5. Total = 275. Deadweight loss = ½ *(15-5)*25 = 125 .f.Part a
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