University Economics Assignment: Decision Making and Market Structures

This economics assignment solution addresses several core concepts in microeconomics. It begins with an analysis of Joan's production possibilities, exploring opportunity cost and the shape of the production possibility curve (PPC) under different scenarios, including constant opportunity cost. The assignment then delves into market dynamics, examining the effects of supply and demand shifts on solar-powered and conventional car markets, including the impact of government-set minimum prices. The analysis extends to price elasticity of demand, evaluating its application to ice cream and cigarettes. Further, the assignment explores cost structures, profit maximization, and the short-run operational decisions of firms. Finally, it compares market structures, focusing on monopoly and oligopoly within the Australian banking industry, evaluating their implications for consumer surplus and social welfare.

Running head: ECONOMICS OF DECISION MAKING
Economics of Decision Making
Name of the Student
Name of the University
Student ID

1ECONOMICS OF DECISION MAKING
Table of Contents
Answer to question 1..................................................................................................................2
Answer to question 2..................................................................................................................5
Answer to question 3..................................................................................................................7
Answer to question 4..................................................................................................................8
Answer to question 5..................................................................................................................9
References................................................................................................................................10

2ECONOMICS OF DECISION MAKING
Answer to question 1
(a) (i)
Choices
Production
possibilities
Grade (%) Work
(hours per week)
A
B
C
D
E
0
20
40
60
80
60
55
45
30
0

3ECONOMICS OF DECISION MAKING
Figure 1: Production Possibility Curve of Joan
Source: (Created by the Author)
(ii)
According to the theory of opportunity cost, constant rate of opportunity cost gives
straight PPC and increasing opportunity cost gives curved PPC (Holtz-Eakin and Lovely
2017). From the PPC in figure 1 it can be observed that for every 20% increase in grade Joan
has to give up work hours at increasing rate, that is, for first 20% giving up 5 hours, next 20%
giving up 10 hours and it increases to 30 hours for increasing the percentage from 60% to
80%.
(iii)
Figure 2:
Constant opportunity cost of increasing grade %
Source: (Created by the Author)
For constant opportunity cost of increasing Joan’s grade percent, the shape of PPC
would be straight line as shown in figure 2 (Chodorow-Reich and Karabarbounis 2016).
Straight line shape of PPC is more suitable for constant opportunity cost as for every 20%

4ECONOMICS OF DECISION MAKING
increase in grade Joan have to give up 15 hours of week and thus the PPC takes a straight-line
shape.
(iv)
A combination point of grades and work hours, which is below (inside) the PPC, is an
inefficient point and by operating at that point, Joan would make loss in both the work hours
and grade percentage.
(v)
A point above (outside) the PPC is known as not feasible point or the point of
operation that have not been attained yet. Thus, to pull the combination of work hour per
week and grade to such a point Joan needs to improve her skill of the work or she should find
other ways to increase her grade by taking help of others (tuition from an expert that prepares
her in less time for the exams) (Gillespie 2014).
(b)
After a year of unemployment when Joan returned to a high-paying job, then also he
will face scarcity problem because her daily hours is limited and she has to manage between
her work and other activities within that limited daily time (Hoekstra 2014). Hence, Joan
might have got a job but along with that, she has to give her time for other activities.
Therefore, time is the scarce object for Joan.

5ECONOMICS OF DECISION MAKING
Answer to question 2
(a) (i)
Figure 3: Demand and supply solar motor vehicle
Source: (Created by the Author)
The improvement in the manufacturing of the solar-powered motor vehicles reduces
the production cost. Thus, both the demand and supply for solar-powered vehicles will rise
and the demand curve shifts to the right to D1 from D and the supply curve shift to S from
S1. As a result, the number of solar-power vehicles supply increases to Q1 from Q and
thereby the price decreases from P to market price P*.
(ii)

6ECONOMICS OF DECISION MAKING
Figure 4: Fall in supply and demand of conventional cars
Source: (Created by the Author)
The decrease in price of solar-powered cars shrinks the market of conventional car
market because people are buying more solar-powered cars as it addresses the environment
problem. Hence, the equilibrium quantity of the conventional cars fall to Q from Q* as both
the demand and supply curve shifts to left. It should be noted that the manufacturers reduce
the supply due to market contraction.
(b)
Figure 5: Government set minimum price
Source: (Created by the Author)
In figure 5 shown above the government set a minimum price for the solar-powered
vehicle at Pm, which is lower than the competitive market price P* to boost the sales of solar-
powered vehicles and thereby support he industry to grow (Morimoto and Serizawa 2015).
However, as P* is the free market price, price would not fall below P* as any price below it
pushes the industry into loss and thus production is not feasible at price Pm and Q*. At Pm

7ECONOMICS OF DECISION MAKING
there will be producer loss too (Okawa 2015). On the other hand, price P* is determined by
the free market factors, thus every seller would charge P* and customers buys the cars at that
price since it is the perfect competition equilibrium price.
Answer to question 3
(a)
Price
($)
Quantity
Demanded
Total
Revenue
($)
Percent
change
in price
Percent
Change in
quantity
demanded
Elasticity
value
Assessment
of Elasticity
1 40 40
1.5 34 51 50% -15% -0.41 Inelastic
2 28 56 33% -18% -0.68 Inelastic
2.5 22 55 25% -21% -1.08 Elastic
3 16 48 20% -27% -1.74 Elastic
3.5 10 35 17% -38% -3.00 Highly
elastic
(b)
In summer, people consumes more ice cream compare to winter, thus the demand for
ice cream is more in summer. People are less likely to opt for substitute products of ice cream
due to its increase in price during summer and thus the value of price elasticity of demand is
less elastic in summer (Grossman 2017). In winter, people usually avoid eating ice cream and
thus demand is low, therefore any increase in price of ice cream will lower its demand by
more than proportionate. Thus, the price elasticity of demand of ice cream is less in summer
than in winter.
(c )

8ECONOMICS OF DECISION MAKING
Cigarette is a demerit good and in case of demerit goods price elasticity of demand is
highly inelastic. Customer base of cigarette is the smokers only and are addicted to cigarettes.
Thus, addiction does not change with increase in price of products. Therefore, increase in
price or imposition of tax on cigarette cannot discourage the smokers from consuming
cigarette effectively. Thus, price elasticity of cigarette in highly inelastic.
Answer to question 4
(a)
Worker
s
Output Total
Variable
Cost
(TVC)
($)
Total
Cost
(TC)
($)
Average
Total Cost
(AVC)
($)
Marginal
Cost
(MC)
($)
Total
Revenu
e (TR)
($)
Avergae
Revenue
(AR)
($)
Margina
l
Revenue
(MR)
($)
Profit
($)
0 0 0 2000 0
1 25 500 2500 2500 20 3750 150 150 1250
2 50 900 2900 1450 16 7500 150 150 4600
3 85 1600 3600 1200 20 12750 150 150 9150
4 130 3000 5000 1250 31.11 19500 150 150 14500
5 160 5500 7500 1500 83.33 24000 150 150 16500
6 180 8500 1050
0
1750 150 27000 150 150 16500
7 195 11800 1380
0
1971.43 220 29250 150 150 15450
(b)
In short, run a firm will keep on operating even when it is making losses because of
two reasons; one is that it expects to become profitable in long run. In the other case, the
price of the product is below average total cost but above average variable cost, thus by
operating the firm can avoid its average variable cost. However, if the firms price fall below
average variable cost then by shutting down the firm can avoid all the losses.
(c )

9ECONOMICS OF DECISION MAKING
Price taking profit maximizing firms determine their output by equating marginal
cost and marginal revenue. The amount of output at which the profit is maximized then
producing any extra unit would increase its marginal cost and reduces the amount of profit.
The below diagram, show the profit maximizing output (Q*) and its condition (MR=MC).
Figure 6: Profit maximizing condition
Source: (Created by the Author)
Answer to question 5
In monopoly market structure, there is only one seller and numerous buyer and thus
the seller has the complete control over the price and it determines the price that gives
maximum profit. On the other hand, in perfectly competitive market, there is numerous seller
and buyer and thus free market forces determine price (Pindyck and Rubinfeld 2014). In case
of Australian banking industry, there are only five major dominating banks. Thus, the number
of banks is very less to consider it as perfectly competitive. The banks can act together to set
the price and thus can form a market structure that is close to monopoly. From the

10ECONOMICS OF DECISION MAKING
perspective of the consumers, it is harmful as it reduces the consumer surplus. As the major
banks has the power and can set the price to maximize their profit. The consumers apart from
losing surplus lose the amount of quantity of product or service and also deadweight loss
occur at monopoly market structure and thus there is loss of social welfare too. The market
structure of the Australian banking industry is not a pure monopoly structure as there is more
than one seller; therefore, the structure of the industry is oligopoly. However, if the firms in
oligopoly market structure collude then they can form market like monopoly and earns
supernormal profit.
References
Chodorow-Reich, G. and Karabarbounis, L., 2016. The cyclicality of the opportunity cost of
employment. Journal of Political Economy, 124(6), pp.1563-1618.
Gillespie, A., 2014. Foundations of economics. Oxford University Press, USA.
Grossman, M., 2017. The demand for health: a theoretical and empirical investigation.
Columbia University Press.
Hoekstra, A.Y., 2014. Water scarcity challenges to business. Nature climate change, 4(5),
p.318.
Holtz-Eakin, D. and Lovely, M.E., 2017. Scale economies, returns to variety, and the
productivity of public infrastructure. In international economic integration and domestic
performance (pp. 73-91).
Morimoto, S. and Serizawa, S., 2015. Strategy‐proofness and efficiency with non‐quasi‐linear
preferences: A characterization of minimum price Walrasian rule. Theoretical
Economics, 10(2), pp.445-487.
Okawa, K., 2015. Market and Trade Impacts of Food Loss and Waste Reduction.

11ECONOMICS OF DECISION MAKING
Pindyck, R. and Rubinfeld, D., 2014. Microeconomics GE. Pearson Australia Pty Limited.