Principles of Economics (BUS5POE) - Problem Sets 4 and 6 Analysis

This document presents solutions to two problem sets from a Principles of Economics course (BUS5POE). Problem Set 4 analyzes the impact of changes in production costs on supply and demand for goods like computers, typewriters, mobile phones, and gasoline-powered vehicles. It also explores the relationship between complementary and substitute goods, and the effects of income changes on demand. Furthermore, the problem set includes game theory scenarios, determining Nash equilibria. Problem Set 6 focuses on market structures, particularly perfect competition, discussing profit maximization, consumer and producer surplus, and deadweight loss. The document explains the conditions for perfect competition, the concept of economic profits, and the relationship between different cost curves. The solutions are detailed and include explanations of the economic principles at play.

PRINCIPLES OF ECONOMICS _ BUS5POE
PROBLEM SET NO 4

Part A
1)
Figure 1
A decrease in the cost of creating computer chips reflects a decrease in the cost of making a computer.
As a result, the supply of computers shifts to the right, as shown in Figure 1. The equilibrium price
decreases as the equilibrium quantity increases.
Figure 2
Because typewriters are computer replacements, the increasing equilibrium number of computers (from
figure 1) decreases the demand for typewriters. As seen in Figure 2, the effect is a decrease in both the
equilibrium price and the number of typewriters.
2)

Figure 3
When the price of mobile phones grows, so does the number of phones sold. People now prefer to buy
fewer headphones since headphones and mobile phones are complements. Headphone demand moves
to the left. Both the equilibrium price and quantity fall when the demand curve shifts to the left. As a
result, supply remains constant, demand lowers, the quantity provided falls, the quantity demanded
falls, and the price reduces (the exact opposite of what happens in the following graph where demand
increases)
3)
The question's assertion is untrue. Electric vehicles serve as replacements for gasoline-powered vehicles.
As a result, rising the price of electric vehicles will increase demand for gasoline-powered vehicles. The
equilibrium price of gasoline-powered autos will rise as a result.
4)
The answer is d
The growth in income will result in an increase in demand for daily necessities. As a result, the demand
curve moves to the right, and prices and quantities rise.

Income growth reduces demand for subpar items. As a result of the movement to the left in the demand
curve, prices and quantities decline.
Part B
5)
When the price of goods increases, the demand of the consumer will decrease. The pairs of parts a and c
are likely to be complements and the pairs of parts b and c are substitutes. When one of the goods of
the complements pair increase, the price of another good will increase. Vice versa, when one of the
goods of the substitute pair increase, the other good will decrease.
6)
a. Station waggons are a wonderful option for those who wish to have more kids since a large family
may think about getting a family vehicle. Indeed, as the demand for station waggons rises, prices and
supplies will rise.
b. Station waggons and minivans are suitable alternatives. As a result, the demand for station waggons
will rise as the price of minivans rises. Then both the price and the supply will go up.
c. Steel is required to produce waggons (a fundamental product). Consequently, when steelworkers go
on strike, the cost of it will rise and the availability of waggons would decline. Then the cost goes up and
the supply goes down.
d. Technology advancements may make it simpler to produce station waggons. As a result, the supply
will rise, shifting the supply curve to the right. Then the cost will drop and the supply will increase.
e. The demand for common items like station waggons would decline as a result of a stock market crisis
as people's wealth decreases. Prices will decrease, as well as supply.
g. As a result of part a, there will be a greater demand for station waggons as families have more
children, while part c will see a decrease in supply due to rising steel prices. The cost will in fact grow (D
increase and S decrease). To know about the change in amount, though, would require further
information.

7)
a. If I were Susan, I would make the best decision to play X. Furthermore, I would play L for the
best possible result if I were David.
b. The table above demonstrates that
 M is weakly dominated by K (0= 0; 1<2 and 2= 2).
 Y is strictly dominated by X (3, 0, 1 are smaller than 4, 3, 2 respectively).
 Z is weakly dominated by X (1< 4; 2< 3 and 2= 2).
c. Susan only has the option X remaining after ruling out the choices M, Y, and Z. In order to
achieve a better result, David will select L. [X, L] represents the game's sole equilibrium.
d. Following the answer above, the Nash equilibria of the game is [X, L].
e. My answer for this question is similar to part a
f. Assume David is the leader and Susan the follower, the game will be:
 David chooses K, Susan will play X [4, 0] for the best payoff.
 David chooses L, Susan will play X [3, 1] for the best outcome.
 David chooses M, Susan will play X [2, 0] for the best outcome.
Therefore, David's leadership is neither a benefit nor a drawback. David can profit more, equal,
or less than the concurrent game.

PRINCIPLES OF ECONOMICS _ BUS5POE
PROBLEM SET NO 6

Part A
1. In a market with perfect competition, all businesses would manufacture the exact same good
and would not have any pricing influence. There are numerous businesses, and they are free to
enter and leave the market. Although these prerequisites are seldom met in reality, certain
sectors come close. For instance, internet service providers, foreign currency markets,…
2. When profits do not cover total expenditures, losses arise. If revenues exceed variable costs but
not total costs, the business is better off producing in the short run than closing down, even if it
is losing money. The cause for this is that if the company goes down, it would be stuck with all of
its fixed costs and no income, therefore its loss will equal its fixed costs. Nevertheless, suppose it
continues to operate, and revenue exceeds variable expenses. In that case, the business can pay
for part of its fixed costs, resulting in a lower loss than if it stopped down.
3. True
Firms under perfect competition make zero economic profits in the long term due to free
entrance and departure, often known as 'normal' (accounting) profits. This is due to the fact that
the arrival of new businesses eats away any short-term economic profit.
4. E
Average variable and average fixed costs add up to the overall average price. Therefore, average
variable cost cannot ever exceed the average total cost. That prevents such a charge from
happening.
Part B
5.
a.
The Output is Qc, and the price is Pc
b. With this case, there is no deadweight loss
c. Because that is the advantage consumers are receiving without paying for it, the consumer
surplus is area A, which is always above the price and below the market demand curve. In this
instance, the producer surplus, which is defined as the space between price and marginal cost, is
zero.

6.
b. Z is weakly dominated by X and M is weakly dominated by K
c. When M and Z are eliminated, the remaining L is weakly dominated by the rest of K. So Dorothy
plays X since she knows Martin will play K. Thus, domination results in a unique result (X,K).
d. (X,K), (X,M)