1ECONOMICS FOR DECISION MAKING Table of Contents Answer to question 1.......................................................................................................................2 Answer to question a...................................................................................................................2 Answer to question b...................................................................................................................4 Answer to question 2.......................................................................................................................4 Answer to question a...................................................................................................................4 Answer to question b...................................................................................................................6 Answer to question 3.......................................................................................................................6 Answer to question a...................................................................................................................6 Answer to question b...................................................................................................................7 Answer to question c...................................................................................................................8 Answer to question 4.......................................................................................................................8 Answer to question a...................................................................................................................8 Answer to question b...................................................................................................................8 Answer to question c...................................................................................................................9 Answer to question 5.......................................................................................................................9 References......................................................................................................................................11
2ECONOMICS FOR DECISION MAKING Answer to question 1 Answer to question a i) 0102030405060708090 0 10 20 30 40 50 60 70 A B C D E Production Possibility Curve Grade (%) Work (hours per week) Figure 1: Production Possibility Curve ii) The concept of increasing opportunity cost can be explained with the help of above table. The table above shows opportunity cost of grade for work hours. The estimates suggest that opportunity cost increases along the PPC meaning in order to obtain more grades Joan must sacrifice more and more hours of work.
3ECONOMICS FOR DECISION MAKING iii) If the opportunity cost that Joan faces for increasing her grade in terms of work hours become constant the PPC would have a constant slope. The PPC would then be a straight line. The concave shape of PPC (Figure 1) is more likely to occur rather than straight line (McConnell et al.2013). This is because opportunity costs in real world in mostly increasing in nature rather than being constant. Figure 2: Straight line PPC (constant opportunity cost) iv) Resources (here time) would not be used optimally if combination of grades and work hours of Joan were inside the PPC. v) In order to attain a combination of grades and hours of work per week Joan should study more efficiently such that more grades can be obtained along with devoting more time for works.
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4ECONOMICS FOR DECISION MAKING Answer to question b Getting a job with an international hotel does not mean Joan would no longer experience the problem of scarcity. Scarcity is a primary economic problem soured from limited means and unlimited ends (Kreps 2019). Money income cannot solve the scarcity problem of Joan because with the limited money income Joan will still have limitless desires resulting in scarcity problem. Answer to question 2 Answer to question a i) Figure 3: Equilibrium price and quantity of solar powered motor vehicles Research in the field of solar power generation helps the manufacturers of solar powered vehicles by reducing cost of producing solar powered vehicles. As manufacturers face a lower cost they can now produce more solar powered vehicles. This will increase market supply of
5ECONOMICS FOR DECISION MAKING these vehicles. The favorable change in supply cause the supply curve to move right from the initial. Given the market, the increased supply causes equilibrium price to fall and equilibrium quantity to increases as shown in the above figure. ii) Figure 4:Equilibrium price and quantity of conventional motor vehicles The relation between solar power motor vehicles and that of conventional motor vehicles is like substitute goods. Demand of a particular good and price of its substitutes are positively related. Therefore, low price of solar powered vehicles due to increase in available supply reduces demand for solar powered vehicles. Decline in demand of solar powered motor vehicles causes demand curve of these vehicles inward (McConnellet al.2013). In the market of conventional motor vehicles, there is a resulted decline in both equilibrium price and equilibrium number of vehicles.
6ECONOMICS FOR DECISION MAKING Answer to question b Figure 5: Non-binding minimum price When government attempts to set a minimum price for solar-powered vehicles, then price in the market has to be at least that level. In economic terms the policy of determining a minimum price is termed as price floor. This policy is effective if minimum price is above the price at which the market clears. Given the scenario that to support solar power motor vehicles industry government sets minimum price for vehicles below the market price, there is no change in industry. The autonomous forces of demand and supply moves the price towards equilibrium (Kreps 2019). Suppliers of solar powered vehicles are more benefitted by selling vehicles at equilibrium price rather than selling it at the minimum price. The analysis therefore suggests this is not a good idea. Answer to question 3 Answer to question a
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7ECONOMICS FOR DECISION MAKING Answer to question b Elasticity of ice cream demand depends on flexibility of demand to change in response to price. Demand of ice cream and attitude of people to change their demand for ice cream depend on seasonal condition. In summer, people generally have more craving for ice cream rather than in winter. The hot weather condition in summer induces people to eat more ice cream and make demand less flexible toward an increase in price. People still continue to buy ice cream even if price increases (Kreps 2019). The situation however is different in winter. In winter people are in a position to adjust their demand in accordance to price. People can readily cut back their consumption of ice cream when prices become too high. It can therefore be said that elasticity of demand for ice cream in winter is relatively more elastic in winter in comparison to the same in summer.
8ECONOMICS FOR DECISION MAKING Answer to question c Demand of cigarette is highly inelastic in nature. As consumption of cigarette is a habit that is hard to kick demand responses very little to price change. Large change in price of cigarette only makes slight changes in demand indicating inelastic kind of demand for ice cream. Answer to question 4 Answer to question a Answer to question b A firm can make loss in the short run and still continue operation. A price taking firm makes loss whenever price falls short of average cost. At such a price the firm is unable to meet total cost incurred for the production. Total cost though cannot be met out of the total revenue, firm can compensate for the variable cost and some of its fixed cost involved in production if
9ECONOMICS FOR DECISION MAKING price is above the variable cost (McConnellet al.2013). The firm however is left with no other option but to shut down once price is as low as it is even below the minimum of average variable cost. Answer to question c Firm’s objective is to maximize profit by choosing profit maximizing level of output. Profit of a firm is maximized corresponding to the quantity where revenue earned from the last unit sold is exactly the same as the cost incurred to the firm for producing that unit. Now if the firm is a price taker in the market then marginal revenue of the firm is same as the market price. For this firm, profit is maximized where marginal cost equals the market price. At the profit maximizing output level, marginal cost curve of the firm should cut the marginal revenue at the increasing part. Figure 6: Price taking firm and profit maximization Answer to question 5
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10ECONOMICS FOR DECISION MAKING Identification of market structure of a particular firm depends on number of market players in the market. In the Australian banking industry, there is huge dominance of four large banks (Westpac, Commonwealth Bank, ANZ and National Australia bank). These dominant players hold more than three fourth of total industry share (Kreps 2019). As the industry offers an important service there is a huge customer base. Large number of consumers and few dominating players indicate the industry is more of a monopoly. In a seller dominated industry like Australian banking, firm is a price maker. The dominant firm determines price in such a way that it can earn maximum surplus (McConnellet al.2013). This harms public interest as common people have to pay price more than the fair price. Grocerysupermarketisanotherindustrythatpossessessimilarcharacteristicsas Australianbanking does. Two dominantplayersoccupyinglion sharein the marketare Woolsworth and Coles.
11ECONOMICS FOR DECISION MAKING References Kreps, D.M., 2019.Microeconomics for managers. Princeton University Press. McConnell, C.R., Brue, S.L., Flynn, S.M. and Grant, R.R., 2013.Microeconomics: Brief Edition. McGraw-Hill/Irwin.