ECON649/991 Assignment: Exploring Economic Principles (Parts 1-4)

This ECON649/991 assignment explores fundamental economic concepts across four parts. Part 1 examines private property, firm characteristics (including pirate ships), and the impact of the moving assembly line on the production of the Model-T Ford, including cost analysis, economic rent, and market dynamics. Part 2 focuses on production functions, the ceteris paribus assumption, and the relationship between study hours and grades, including the impact of technological improvements and the analysis of lifetime leisure. Part 3 covers incomplete contracts and incentives in university lecturer employment. The assignment requires diagrammatic illustrations, critical analysis, and application of economic principles to real-world scenarios. The assignment covers topics such as production, markets, contracts, and consumer behavior, analyzing their impact on prices, gains from trade, and efficiency. The assignment covers topics such as production, markets, contracts, and consumer behavior, analyzing their impact on prices, gains from trade, and efficiency.

ECON649/991
ASSIGNMENT (PARTS 1-4)
YOU MUST WRITE YOUR ANSWERS IN THIS DOCUMENT
THIS IS THE DOCUMENT YOU MUST SUBMIT FOR MARKING
IF YOU SUBMIT ANOTHER DOCUMENT WE WILL NOT MARK IT!
TOTAL MARKS FOR THE ASSIGNMENT = 210
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PART 1 (TOTAL MARKS PART 1 = 75)
EXERCISE 1: THE POOREST MAN’S COTTAGE (UNIT 1) (10 MARKS)
‘The poorest man may in his cottage bid defiance to all the forces of the Crown. It
may be frail, its roof may shake; the wind may blow through it; the storms may enter,
the rain may enter—but the King of England cannot enter; all his forces dare not
cross the threshold of the ruined tenement.’ – William Pitt, 1st Earl of Chatham,
speech in the British Parliament (1763).
1. What does this quote tell us about the meaning of private property? (50 words
maximum) (5 MARKS)
 This implies that the owner of private property as the absolute
right over the property. The Crown or the government excluded
from it within limits of the law.
2. Does it apply to people’s homes in the country where you were born? (50 words
maximum) (5 MARKS)
 This applies to India. All possessors, who have paid the right price and
lawfully acquired private property have complete ownership of property
within the law.
 India has private property rights and the government, within the law, is
excluded from the property. India has property rights index of 55
EXERCISE 2: FIRM OR NOT? (UNIT 1) (5 MARKS)
Use the definition of the firm from the textbook. Discuss whether or not an
eighteenth-century pirate ship can be classified as a firm. To answer this question,
you should research the characteristics of pirate ships online and investigate if they
satisfy the features that define a firm. (80 words maximum)(5 MARKS)
 The pirate ships paid for their efforts in kind on the ship. Every pirate
has some share in the plunder and pirates were profit maximizing
entities who also indulged in trading of goods some times. While they

were not legally denoted, they were profit maximizing firms, purely
based on the above characteristics.
EXERCISE 3: THE MOVING ASSEMBLY LINE: CHANGES IN THE MANUFACTURE
AND SALE OF CARS (UNITS 2 & 7) (60 MARKS)
1. In 1913 Henry Ford began to manufacture the Model-T Ford using the moving
assembly line. Technological improvements in the machine tools used to produce cars
accompanied the innovations in the production process. The introduction of this new
method of production was one of the great innovations in the manufacturing process.
These new processes dramatically decreased the time it took to make each car. Before
the introduction of the moving assembly line, it took 12 hours to produce one Model-T
car. After the innovations, the time to make one Model-T decreased to around 30
minutes. All these changes meant that manufacturing process used more capital and
less labour relative to the earlier more craft based production of cars.
You can watch the following 4-minute film clip of the significant innovations involved in
the production of the Model-T Ford.
https://www.youtube.com/watch?v=cTZ3rJHHSik
Other car manufacturers in the United States quickly adopted the production techniques
pioneered by Henry Ford.
One of the incentives that led to the introduction of the moving assembly line and other
technological innovations in the production of cars in the United States was the increase
in the wages of skilled workers required to produce cars using older production methods.
a) Show on a diagram the two different technologies used to produce one Model-T
car, i.e. the technology before (Technology A) and after the innovations by Henry
Ford (Technology B). On the horizontal axis put the number of workers employed
in the production process. (5 MARKS)

b) Are either of the two technologies (A or B) dominant? Explain. (30
wordsmaximum) (5 MARKS)
Technology B is the dominant technology since the total cost of production
is lower as well as the time required to produce goods is lower, thus
maximizing capacity utilization.
c) Use isocost lines to illustrate the costs of Technology A and B before the change
in relative prices. Illustrate the impact on the isocost lines arising from the
changes in relative prices caused by the increase in the wages of skilled workers.
(5 MARKS)

d) Discuss the impact on the incentives for firms arising from this change in relative
prices. Incorporate the concept of economic rent into your discussion. (50
wordsmaximum) (5 MARKS)
 The economic rent of capital will be wages paid to labour and vice
versa. Hence, if the relative prices change, then the economic rent
will change both inversely and proportionately.
2. Henry Ford said that he wanted to make cars at a price that meant any middle-class
American could afford to buy them. He achieved his goal with the price of Model-Ts
declining from around $800 to less than $300 between 1908 and 1923. The lower price
increased annual sales of the Model-T from around 10,000 to more’s than 2 million cars
across the period.
Assume that the Ford company in this example has similar cost curves to the firm that
manufactured Beautiful Cars (Unit 7 of the textbook).
a) Illustrate diagrammatically the impact of the Ford company’s profit maximising
choice of price and quantity arising from the innovations in the manufacturing
process. (5 MARKS)
b) Explain any assumptions you may have made in drawing this diagram/s. (40
words maximum) (5 MARKS)
 The assumption made here is that the car market is a non-collusive
oligopolistic market.

3. Continue to assume the firm faces a similar cost curves to the firm that manufactured
Beautiful Cars (Unit 7 of the textbook). At the end of World War 2, car companies were
able to sell to the highest bidder because the demand for cars was greater than U.S car
manufacturers could supply. In the United States in 1958, the problems for consumers
caused by this bidding war led to the introduction of a law that mandated that car yards
place a price on the car.
a) Discuss the impact of the bidding war between consumers, on prices that car
yards were able to charge customers. Outline the impact on the size and
distribution of the gains of trade between the customers and the firm. Illustrate on
the appropriate diagram. (40 wordsmaximum) (5 MARKS)
 Bidding wars allow the gains of traders to maximise. The consumers’
can gain a premium product, if they have the ability and willingness
to pay thus, helping maximize their utility. It is like Pure Competition
if bissing is not secret/
b) Discuss the impact of the law that forced car yards to place a price on the car.
This discussion should include the impact on prices and the size and distribution
of the gains of trade between the customers and the firm. Illustrate on the
diagram. (40 wordsmaximum) (5 MARKS)

 The consumers will have to take the price without bidding. The
monopolist will get monopoly price and maximize gains while some
customers may be priced out.
Discuss the impact of the internet on the size and distribution of the gains from
trade between the sellers of cars and its customers. Illustrate on the appropriate
diagram. (40 wordsmaximum) (5 MARKS)
 The internet allows the market size to grow to a larger area. The
market size grows and the revenues are distributed among larger
number of sellers while buyers can acquire the product at lower
prices, in a perfect competition.

c) Which of the situations in the car market outlined in a) b) and c) are Pareto
efficient? Explain. (50 wordsmaximum) (5 MARKS)
 Situation c) is Pareto efficient since neither the consumers’ welfare
is sacrificed and neither is the buyers’ welfare sacrifices. In situation
a) sellers are better off at the cost of consumer welfare and in
situation b) buyers’ are well off at sellers’ welfare. In situation C, both
buyers and sellers are better off.
4. In the previous question, we assumed that car firms had a particular set of cost
curves. However, the cost curves for car manufacturers using mass production
techniques could be different.
a) Draw a set of alternative cost curves (total cost, average cost and marginal cost)
for car manufacturers that use mass production techniques. (5 MARKS)

b) Explain the reasons behind your representation of the cost curves. (40
wordsmaximum) (5 MARKS)
 Mass scale production has both economies and diseconomies of
scale. Also, mass scale production is an addition of various small
scale production costs. Here ATC is a sum of smaller AVCs
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PART 2 (TOTAL MARKS PART 2 = 35)
EXERCISE 1 (UNIT 3) CETERIS PARIBUS ASSUMPTION(5 MARKS)
Read Section 3.1 “Labour and Production” in the textbook. You have been asked to
conduct a research study at your university, just like the one at Florida State
University. In addition to study environment, outline two factors that you think should
ideally be held constant in a model of the relationship between study (leisure) hours
and final grade? (30 words maximum)(5 MARKS)
 The means of studying (e.g the text book used, the classes taken) are
the same.
 The age of student.
EXERCISE 2 (UNIT 3) YOUR PRODUCTION FUNCTION(15 MARKS)

Read Sections 3.1-3.6 in the textbook. Use the model that examines Alexei’s
choice between his final grade & free time.
a) What could bring about a technological is improvement in your production
function (the relationship between study hours and your marks) and those of
your fellow students? Outline two of these potential changes that could
improve the relationship between hours spent studying and the marks gained.
(40 words maximum)(5 MARKS)
 Using a computer device to watch a video lesson instead of a text
book could be one technological factor.
 Choosing a text book
b) Analyse what might happen to your optimal choice of free time and final
grade, and the choices that your peers might make. (50 words maximum). (5
MARKS)
If studying from a video would save time, then:
 students can cut back the number of hours they study
 students can gain more leisure activity
c) Illustrate on a diagram (feasibility frontier and indifference curves) the impact
on YOUR choice arising from the technological improvement associated with
your studies. (5 MARKS)
EXERCISE 3 (UNIT 3) LONG TERM LEISURE (15 MARKS)
“The high-income economies will continue to experience a major transformation: the
declining role of work in the course of our lifetimes. We go to work at a later age,

stop working at an earlier age of our longer lives, and spend fewer hours at work
during our working years. Robert Fogel, an economic historian, estimated the total
working time, including travel to and from work and housework, in the past. He made
projections for the year 2040, defining what he called discretionary time as 24 hours
a day minus the amount we all need for biological maintenance (sleeping, eating and
personal/home hygiene). Fogel calculated leisure time as discretionary time minus
working time.” (Unit 3, Section 3.9)
Use the constrained optimization model outlined in Unit 3 (Sections 3.1-3.6) to
analyse the increase in lifetime leisure in high-income countries, which is shown in
the diagram below.
Source: Unit 3, Section 3.9
Outline the reasons for the increase in (lifetime) discretionary hours in high
income countries between 1880-1995. (40 wordsmaximum)(5 MARKS)

The availability of better technology (machines) in the latter periods
allows people to save time on non-discretionary jobs such as
maintaining home etc. The saved time adds to the discretionary time.
a) Illustrate the impact of technological innovation on discretionary hours, and
the choice between leisure and annual earnings in 1880, 1995 and the

predicted changes for 2040. (5 MARKS)
b) Outline the reasons for the outcomes in 1880, 1995 and 2040 that you have
illustrated on your diagram. (50 words maximum) (5 MARKS)
 Technology has improved productivity of labour at home or for personal
work. Hence, more disposable time is available for leisure or work ,
leading to a higher level of indifference curve.
PART 3(TOTAL MARKS PART 4 = 40)
EXERCISE 1 INCOMPLETE CONTRACTS (SECTION 6.1-6.3 & 6.10)(10 MARKS)
a) What would you include in a university lecturer’s employment contract, if you
want to influence the effort put into teaching? (40 words maximum)(5
MARKS)
 I would offer the teacher 5% increase in the salary if the total
number of students who take the class increase by at least 15%
every year, besides any other promotions or increases in salary.”
b) What can’t or would be difficult to include in the contract? (40 words
maximum)(5 MARKS)
 The quality of class teaching would be difficult to measure since it
is difficult to quantify. Additionally, the perception of quality of
teaching would differ from student to student.

EXERCISE 2 ECONOMIC RENTS (SECTIONS 6.4-6.5)(10 MARKS)
Rip Curl is an Australian company that began operations in 1969. It was originally
involved in the manufacture of surfboards but it expanded the scope of its business
so that is now one of the biggest companies involved in the design, manufacture,
and sale of surf and snow wear.
Ripcurl in the 1970s manufactured all its products in Australia. In 2017 there is only
one Ripcurl factory left in Australia. Joe is employed in this factory, which makes
clothing for Ripcurl. He earns $25/hour and works 40 hours each week. The job is
repetitive and boring. He values the hourly disutility of work at $5. If he were to lose
his job he would qualify for unemployment benefits and receive $535.60 every 2
weeks. There is no time limit on the receipt of unemployment benefits in Australia.
Joe is 47 years old and the average length of unemployment in Australia for those
aged 45 to 54 years is 63 weeks.
a) Calculate the economic rent for Joe.(5 MARKS)
 Economic rent = benefit from option taken - benefit from next best option.
Joe Chooses to work for 25$ per hour. However, discounting Joe’s disutility (-
$5/hr)
Joe’s weekly earnings are 20X40 = 800.
The next best options is $535.60 X 2 =1071.2
Subtracting the next best option from Joe’s Bi-weekly earnings (800 X2)
= 1600-1071
= $528.8
Since , the unemployment benefit can be claimed for only 63 days, the
economic rent would be 33, 314.4. After that, the economic rent would be
$800 per week.
In 2016, Ripcurl was heavily criticised for outsourcing some of its clothing production
to a factory in North Korea, located near the border with China. The criticism centred
on the pay and work conditions of people in the factory. This included being forced
to work 7 days per week (without additional compensation), averaging more than 70
hours per week. In fact, workers are paid very little in cash. Most of their wages in
this factory are received as food coupons that can only be used at government run
stores to purchase rice and corn. Workers who do not obey orders can be
imprisoned in labour camps where there is no pay and the conditions are much
worse.
b) Discuss the size of the economic rent received by the North Korean workers
in the Ripcurl factory. Your answer must include a reference to the
relationship between the hourly wage, the disutility of effort and their
reservation wage. (100 words maximum)(5 MARKS)
 There is no minimum hourly wage and there is no reservation
price since the next best option is zero hourly wage as well as
imprisonment. With the assumption of rational behaviour, workers
would not choose imprisonment over paid work and freedom.
Hence, there is zero disutility of their effort. If this logic were to be
extended, they may gain utility for the freedom.
Therefore, all salary paid in cash and kind is economic rent.