Microeconomics and Macroeconomics Homework Assignment Analysis

This economics homework assignment delves into core microeconomic and macroeconomic concepts. It begins by analyzing economies of scale in specialized service industries, illustrating the concept with a graph and explaining why such services thrive in large markets. The assignment then examines the conditions of perfect competition, contrasting them with the real-world scenario of the large commercial airplane market, highlighting violations of the model. Further, the assignment addresses topics such as externalities, public goods, and the limitations of GDP as a measure of social welfare. It also explores the relationship between happiness and economic productivity, and analyzes the business investment multiplier and government fiscal balance. The assignment also examines the short-run and long-run Phillips Curve, the effectiveness of fiscal policy, and the impact of economic uncertainty on investment and currency exchange rates. Finally, the assignment considers the effects of monetary policy on currency values.

Running head: MICROECONOMICS AND MACROECONOMICS
Microeconomics and Macroeconomics
Name of the Student
Name of the University
Student ID

1MICROECONOMICS AND MACROECONOMICS
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer 3..........................................................................................................................................4
Answer 4..........................................................................................................................................4
Answer 5..........................................................................................................................................4
Answer 6A.......................................................................................................................................5
Answer 6B.......................................................................................................................................5
Answer 7..........................................................................................................................................5
Answer 8..........................................................................................................................................8
Answer 9..........................................................................................................................................9
Answer 10A.....................................................................................................................................9
Answer 10B...................................................................................................................................10
Reference.......................................................................................................................................11

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Answer 1
Figure 1: Economies of scale
in specialized service
Source: (Created by the Author)
The specialized service suppliers like financial consultants, lawyers and orthodontists are
found in big market because they always have economics of scale (Baumers et al. 2016). By
economies of scale, it is meant that with every unit increase in production the cost per unit
decreases. In case of above mentioned services there is no scope of reducing the time of service
by employing more resource to a particular client. In case of a legal proceeding the time required
is more or less more number of lawyers cannot reduce the time. Similarly, in case of orthodontist
completion period of service remains the same even after employing more manpower. Therefore,
employing more resource leads to fall in cost as with higher amount of resources more number of
clients can be served. Interesting case in this specialized services is that a single specialist can
handle more than one case at time since a single client does not take entire day. The services are
provided in session based structure. With more clients, more employees are required hence cost

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accrued for hiring employees remain more or less same but cost for fixed assets get reduced
higher number of clients. Therefore, the specialized service suppliers always operate under
economies of scale. Economies of scale exist in the downwards sloping part of average total cost
(Badunenko and Kumbhakar 2017). Therefore, as long as a firm operates in the downward
sloping part of average total cost there will be economies of scale for the firm. From theory of
microeconomics, it is known that oligopoly and monopoly firms always operate under
economies of scale and these market structure are found in the case of big markets only. Hence,
specialized service suppliers are found in big markets.
Answer 2
In a perfect competitive model, there are numerous sellers and numerous buyers. The
products that are sold in a perfectly competitive market structure are homogenous in nature and
without any uniqueness (Gerakos and Syverson 2017). All the products that are sold in the
market are sold at same price. The cost structure of the firms are similar. In addition to that,
firms under perfect condition earns normal profit.
In the given case, there are two firms in the large commercial airplane market and they
are Boeing and Airbus. Boeing sells its product Boeing 747, which can accommodate 568
passengers and its price is $317.5 million. On the other hand, Airbus sells is product Airbus
A380, which can accommodate 840 passengers and sold at price $375.3 million. From, the given
information it can be said that the large commercial airplane market violates three conditions of
perfect competition model. Firstly, existence of many firms which is not the case with the
airplane market as it has only two firms. Secondly, the airplanes are sold at different price by the
two firms whereas in case of perfect competition products are sold at same prices. Thirdly,

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products are homogeneous in perfect competition model but in commercial airplane market, the
products are different and hence heterogeneous.
Answer 3
A. I, II and IV are correct.
Answer 4
B. Firms that engage in research and development may be able to lower their production cost.
Answer 5
a. In a group work when every member receives same grade then it is called a public good. This
is because it exhibits all the features that is present in a public good (Elliot and Golub 2019).
Public goods are non-excludable and non-rivalry. Non-excludable means that if a used by a
person it does not restrict other person from using it. Additionally, non-rivalry means if a person
gets benefitted from using a good then, it does not reduce it availability for other to gain the
same benefit. In this case, all the members of the group get the same grade and one’s grade did
not reduce grade of others (Shichijo and Fukuda 2019). This indicates existence of non-
excludability and non-rivalry and hence the group work is a public good.
b. A group consists of various type of student with different skill sets and knowledge. Every
group member is assigned with particular task and since everyone is doing their part separately,
it is highly possible that some part will be better than the other. However, is grading is done
based on the overall work and thus one might get above there expectation and one lower.
Therefore, the member or student that gets above their expectation would be happy but who gets
lower than expectation will complain about quality. Thus, the complaint is not consistent with

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the theory that group work is public goods since one might get worse off exhibiting rivalry
characteristics.
c. In a group work there are various member who work hard to make it good and there are others
who do not work and depends on others and do not participate actively. There are some person
who take the work seriously and are afraid of the consequences if the work kept undone or
failure for a poor work. Thus, even if one or two persons in a group do not work. The work will
be done by others who are afraid of the poor outcome (Nakazawa 2016). Hence, in a group due
to existence of members who are afraid of negative outcome, few members take the advantage
and free ride.
Answer 6A
Gross domestic product (GDP) is defined as total value of all the final goods and services
produced in the geographical area of country in a specified time period. From the definition, it
can be said that it only gives the idea of how much a country produced or it has earned in money
terms (Slesnick 2020). It cannot be inferred from the data of GDP that how healthy a citizen of a
country is, quality of education or accessibility of education in the country, the level income
distribution, availability of sufficient food for all, people under poverty level. All the factors
stated determines social welfare and none of them can be measured with the help of GDP. Thus,
GDP is imperfect index of social welfare.
Answer 6B
Yes, the government should focus on increasing happiness of its people because
happiness makes a more efficient, engaged, empathetic and productive. It has been observed that
happy people take their work much more seriously than other. They help people around them to

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achieve better things and higher quality of life. In addition to that, happy people make active
participation in making society better (Cheng et al. 2018). Therefore, it can be said that more the
number of happy people better will the socio-economic condition of a country.
Answer 7
A. There is no government sector in the economy, thus
Y =C +I
Where, C = Autonomous consumption (A) + {Marginal propensity to consume (MPC) ×Y}
Y = A +(MPC ×Y )+ I
¿ , Y =10000+ 0.8Y +30000
¿ , Y =£ 200000
Business investment multiplier is
¿ , ∆ Y
∆ I = 1
1−MPC
¿ , Business investment multiplier = 1
1−0.8
¿ , Business investment multiplier =5
B.
Y =C + I+ G+ TY
¿ , Y = A+0.8(Y −TY )+I+ G+TY
¿ , Y = A+ 0.8(Y −0.25Y )+ I +G+ 0.25 Y

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¿ , Y = A+ 0.6 Y + I+G+0.25 Y
¿ , 0.15 Y =10000+30000+50000
¿ , Y =£ 600000
To find business investment multiplier increasing business investment by £10000
Y = A +0.6 Y + I +G+ 0.25Y
¿ , 0.15 Y =10000+ 40000+50000
¿ , Y =£ 666666.67
Therefore, for £10000 investment increases by £ (666666.67-600000) or £66666.67
Therefore,
Businessinvestement multiplier= 66666.67
10000
¿ , Business investment multiplier =6.67
At Y=£600000, tax is
Tax=0.25× 600000
¿ , Tax=£ 150000
Government balance is balance when the difference between G and T is equal to difference
between S and I.
Private savings is
S=0.2(Y −0.25 Y )

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¿ , S=£ 180000
Therefore,
S−I =180000−30000
¿ , S−I =£ 150000
T −G=15 0000−5 0000
¿ , T −G=£ 1 00000
Hence, the amount S-I> T-G, thus government balance is not balanced.
Answer 8
In the short run, the inflation rate and unemployment rate shares an inverse relationship.
It means that with rise in unemployment the inflation rate decreases. It can be explained by the
example of expansionary monetary policy (Ndou and Mokoena 2019). With cut in interest rate
by the central bank, the business borrowing increases and thus more investment occurs in the
market. Thus, firms need to produce more goods and services and thus they hire more number of
employees. Consequently, the unemployment rate falls. With more investment and rise in
employment, the income of the economy increases. As a result, the disposable income of
individuals increase causing rise in consumption and thereby aggregate demand increase in the
economy. Owing to this reason, the inflation rate increases. Therefore, this relation of inflation
and unemployment rate is given by the short run Phillips Curve (Coibion, Gorodnichenko and
Kamdar 2018). However, in the long run employment sector acts differently. This is because the
after the increase in inflation rate the consumers expect that with increase in their consumption
the inflation rate would further increase in future and thus reduces consumption to control the

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amount of rise inflation rate. Due to this aggregate demand falls and as a result aggregate supply
falls. Subsequently, there is no fall in inflation rate but increase in unemployment rate. This rate
unemployment rate remains the same in the long run. This gives a vertically straight long run
Phillips Curve. The unemployment at this point is called Non-Accelerating Inflation Rate of
Unemployment (NAIRU). (Cusbert 2017) Unemployment rate below NAIRU increases the
inflation rate.
Answer 9
Fiscal policy is the policy to control economic output and money supply in the economy.
There, it is either used to reduce money supply or increase money supply. When money demand
is not sensitive to interest rate, the fall or rise in interest rate there is no change in money
demand. At this condition, when tax rate increased and money supply in the economy decreases
and as a result, the amount of interest rate decreases too. But as the price are predetermined the
money demand remained constant and thus whatever be the interest rate the amount of money
demand does not change and resulting in ineffectiveness of fiscal policy (Gumata and Ndou
2019). In case economy operating at the full employment level. The money demand remains
constant, no further improvement is possible in the economy, thus lowering tax rate would not
increase the aggregate demand, and thereby no change in money demand as economy is
operating at the full employment. Thus, fiscal policy remains ineffective in these two cases.
Answer 10A
The uncertainty of the UK and EU deal has depressed the investment in the UK. With
fall, investment there will be less business activity in the UK. Less business activity means there
is less amount of business confidence. Therefore, there will be low amount of foreign direct

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investment in the economy. As a result, the domestic currency value in UK will fall and thus
sterling pound – euro exchange rate will fall.
Answer 10B
(a) Monetization of rich vein of gold will increase supply of money in the economy and thus
causes the domestic currency to depreciate and thus the sterling pound - US dollar exchange rate
would lower.
(b) With sterilization, the domestic currency of the UK will appreciate and thus the sterling
pound – US dollar exchange rate will rise.

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Reference
Badunenko, O. and Kumbhakar, S.C., 2017. Economies of scale, technical change and persistent
and time-varying cost efficiency in Indian banking: Do ownership, regulation and heterogeneity
matter?. European Journal of Operational Research, 260(2), pp.789-803.
Baumers, M., Dickens, P., Tuck, C. and Hague, R., 2016. The cost of additive manufacturing:
machine productivity, economies of scale and technology-push. Technological forecasting and
social change, 102, pp.193-201.
Cheng, H., Chen, C., Li, D. and Yu, H., 2018. The Mystery of Chinese People’s
Happiness. Journal of Happiness Studies, 19(7), pp.2095-2114.
Coibion, O., Gorodnichenko, Y. and Kamdar, R., 2018. The formation of expectations, inflation,
and the phillips curve. Journal of Economic Literature, 56(4), pp.1447-91.
Cusbert, T., 2017. Estimating the NAIRU and the Unemployment Gap. RBA Bulletin, June,
pp.13-22.
Elliott, M. and Golub, B., 2019. A network approach to public goods. Journal of Political
Economy, 127(2), pp.730-776.
Gerakos, J. and Syverson, C., 2017. Audit firms face downward-sloping demand curves and the
audit market is far from perfectly competitive. Review of Accounting Studies, 22(4), pp.1582-
1594.
Gumata, N. and Ndou, E., 2019. The Output Gap–Inflation Trade-off and the Policy
Ineffectiveness. In Capital Flows, Credit Markets and Growth in South Africa (pp. 353-364).
Palgrave Macmillan, Cham.