Economic Principles and Decision Making Question Answer 2022

Running head: ECONOMICS 1
Economic Principles and Decision Making
Name
Institution

ECONOMICS 2
Economic Principles and Decision Making
ANSWERS
Question 1
Quantity demanded is the total amount of goods and services that a consumer is able and
willing to purchase at a given time and price. An income of a consumer a significant determinant
of the demand for goods and services in the market. As a result, when an individual's income is
relatively low, i.e., increase of the income from $250 to $500 per week, an individual prefers to
increase the consumption of noodles than when the income level was $250. In the normal good
scenario, as the income of an individual increases, the demand for the same good also increases,
and a fall in income level also leads to a decrease in the demand for goods (Becker, 2017). As a
result, there will be a distribution effect due to an increase in the income level tha accelerate
consumption for the normal goods as shown in the figure below;
Figure 1.0: Shift in the demand curve due to a change in income

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From the figure above, when the consumer's income was at $250, the quantity demanded
was at Q=50 and price at $5. However, since there was an increase in the income of the
consumer, the demand for noodles increased from Q=50 to Q=75 at a constant price level. It,
therefore, shows that other than a change in the price of goods, other factors, including change in
income level, will only shift the demand curve either to the right or to the left (Varian, 2014).
But since the consumer got employment, the wage rate will, therefore, increase, thus increase the
disposable income to a value higher than the initial one. It, therefore, shows that an increase in
the income of a consumer will lead to a rise in the consumption of noodles, given that it is a
normal good.
Question2
Production possibility frontier (PPF) is a curve that shows the maximum possible output
combination for two goods that an economy can effectively produce with available scarce
resources (Tyagi, 2013). To reallocate the limited resources set aside for the production of one
commodity to another good requires an opportunity cost principle where one has to forgo
production of good X to increase the production of good Y. Within the PPF, there is a
combination of output that a consumer is willing and able to produce with a given capital.
Outside the PPF, there is an unattainable output that only needs increased factors of production,
including the capital, labor, and technological advancement to attain (Kolmar & Hoffmann,
2018). As a result, using the two goods provided Roadsters per day and the Convertibles per day,
we can find the combination level to produce the goods and services as shown in figure 2.0
below;

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Figure 2.0: The PPF curve showing production combination for Roadster and Convertible per
day
From figure 2.0 above, points A, B, C, D, and E are the attainable points showing the
combination of roadster and convertible produced per day. Any location within the PPF, for
example, point F, is achievable since the scarce resources can be used to produce the combined
convertible and roadster per day. However, a point outside the PPF curve, say point G attainable
since the available scarce resources are only able to be used in the production of output within
the PPF. Any point outside the PPF, for instance, point G, requires an additional factor of
production that includes advanced technology, increased capital, and labor. As a result, the figure
above shows that for the economy to produce convertible and roadster per day, the scarce
resource must be fully utilized to minimize the underutilization of the available resources.
Question 3
1.

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a. A firm's accounting profit is the difference between the total revenue earned by the firm
and the total accounting costs inform of explicit costs. Explicit costs are those that
involve a physical outlay of financial expenditure that the firm reported on its financial
statements during the financial year-end (Pratt, 2016). The formula for calculating
Accounting profit is therefore as follows;
Accounting Profit = Total Revenue – Accounting Cost
From the data given, Total Revenue (TR) = A$150,000
Explicit costs are raw material at $20,000, wages at $50,000, Rent at $10,000, electricity at
$5000, and interest on machinery at $25,000
Accounting Profit = $150,000-($20,000+$50,000+$5000+$25,000)
Accounting Profit = $150,000-$100,000
=$50,000
The figure above shows that the firm has an accounting profit. However, the total revenue of the
firm must be greater than the explicit costs, or else the firm will be experiencing accounting loss.
But, the value calculated of $50,000 shows that the firm's net income after subtracting explicit
costs is stable, and the firm is at liberty to continue operating with the given costs.
b. Implicit costs are costs that the firm incurred without physical, financial transactions. It is
also known as opportunity costs. Economic profit is less the same as the accounting profit
except that it involves the opportunity costs (Kirlioglu & Altinkaynak, 2016). Since the

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Total Revenue is $150,000 and the implicit costs include forgone pay at $50,000.
Forgone interest at $5,000, and forgone rent at $25,000.
Economic Profit =Total Revenue-Accounting Cost/Explicit costs-Opportunity Cost/Implicit
costs
Economic Profit = $150,000-$100,000 – ($50,000+$5,000+$25,000)
Economic Profit = -$30,000
As a result, the firm is not financially sound since it makes an economic loss of $30,000. In
the long run, the firm will be forced to close shut-down its operation. This is because a firms'
operation should be based on maximizing profits to sustain their operation and pay for the wages
(Parenti et al., 2017). However, from the calculation above of a negative value of $30,000, the
firm's management should consider reducing its implicit costs and or explicit costs to make an
economic profit. This is because the firm's economic costs are the total explicit and implicit
costs, thus reduction in both or either of the costs will redeem the firm's stability.
2. Externality mostly occurs due to environmental effects by the economic agents that
influence the costs incurred by the third parties in the market transaction. Since the
vehicles are over seven years old in New South Wales, the environmental pollution,
which is in the form of costs, will be having a direct effect on the well-being of the
public.
As a result, prices for road maintenance might not directly reflect the social costs
incurred by the public. These costs include road damage, air pollution, and sound
pollution which the public will incur as a result of negative environmental externalities
(Libecap, 2014). This can be shown using the diagram below;

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Figure 3.0: Negative Externality caused by Vehicles on the road
The social marginal cost (SMB) is the private benefits that consumers receive from costs
associated with the destruction of roads by the vehicle owners. Marginal damage is the reduction
of the public environmental benefit with one extra unit as a result of the private marginal benefit
received by the vehicle owners in the New South Wale road. On the other hand, the private
marginal benefit is the increase of the private gain by an extra unit as a result of benefits received
from the use of the New South Wale Road by the drivers. It is always calculated as the private
marginal cost plus the marginal damage. It, therefore, shows that in case of destruction of the
roads and environment pollution, the public will have to incur extra costs to pay for road
maintenance and environmental pollutions.From the diagram above, negative externalities
incurred by the government or the citizens are higher than the private marginal benefits received
by the vehicle owners. This is in terms of roadworthiness and environmental pollution.

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References
Becker, G. S. (2017). Economic theory. Routledge.
Kirlioglu, H., & Altinkaynak, F. (2016). Economic profit analysis of capital’s preservation on
scope of IFRS and recommended proposition with an application.
Kolmar, M., & Hoffmann, M. (2018). Workbook for Principles of Microeconomics. Springer
International Publishing.
Libecap, G. D. (2014). Addressing global environmental externalities: Transaction costs
considerations. Journal of Economic Literature, 52(2), 424-79.
Parenti, M., Ushchev, P., & Thisse, J. F. (2017). Toward a theory of monopolistic
competition. Journal of Economic Theory, 167, 86-115.
Pratt, J. (2016). Financial accounting in an economic context. John Wiley & Sons.
Tyagi, K. (2013). Principles of Microeconomics Part-1. Available at SSRN 2330254.
Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach: Ninth International
Student Edition. WW Norton & Company.