(a) Consider the following production possibilities frontier data in the table below. (5 marks)
A B C D E F
Capital goods 300 280 240 180 100 0
Consumer goods 0 10 20 30 40 50
i) Draw a diagram with appropriate labels. Indicate attainable, unattainable, efficient and inefficient areas on the diagram.
ii) Explain the concept of increasing opportunity costs using data provided.
iii) Using the data provided draw a new diagram showing decline in the resource base. Explain the changes to the production of both goods.
iv) Assume the decision is made to invest more in capital good than in consumption goods. Using the data provided draw a diagram and explain the impact of this decision on future production capacity.
(b) Suppose demand (QD ) and supply (QS) in a market can be expressed by these equations:
(i) Complete the table. What is the equilibrium price and quantity? If the prevailing market price is $800, what are the quantity demanded and the quantity supplied?
(ii) Draw the diagram and calculate the change in the equilibrium if supply changes to QD= 10q+820. Explain why the change could occur (with examples).
(c) Utilise the demand-supply market models (for each market below) to graphically illustrate and explain the following scenarios (in the short run). Identify for each scenario what the effects on price and quantity are likely to be and show the effects on the diagram. State your assumptions.
i) The market for used cars if there is an increase in households’ income. (3 marks)
ii) The market for electric appliances if there was an increase in electricity prices. (3 marks)
iii) The market for teaif the price of coffeeincreases. (3 marks)
iv) The market for leathershoes as the price of leatherdecreases. (3 marks)
Question 2 (22 marks)
(a) Complete the table. State when the coefficient is elastic, inelastic or unitary elastic.
Price Quantity demanded Total Revenue Elasticity coefficient Demand elasticity
i. Using the table above draw the diagrams illustrating price elasticity of demand ranges and total revenue curve related to the price elasticity demand ranges
ii. Briefly explain whether you advise the firm to raise the price from $30 to $40. Provide numerical justification of your advice.
iii. Briefly explain whether you advise the firm to raise the price from $70 to $80. Provide numerical justification of your advice.
(b) The table below shows the number of workers and output data.
Number of workers Total
product Marginal product Marginal returns
i) Complete the table.
ii) Using the numbers from the table above, draw a diagram showing total output, marginal product curves and identify marginal returns. (2 marks)
iii) Consider the following short run average total cost curves. Calculate the long run average cost. Draw the diagram showing the relationship between three SRATCs and the long run average cost curve. (2 marks)
Output SRATC1 SRATC2 SRATC3 LRAC
4 190 500
5 300 300
6 480 180
8 150 500
9 340 304
10 500 200
iv) Draw the long run average costs curve (based on the data provided) assuming an infinite number of plant sizes. State your assumptions.
c)The table below shows a cost schedule for a monopoly. Complete the table and draw the diagram. (4 marks)
Q P TC MC TR MR
0 250 30
1 230 60
2 210 100
3 190 170
4 170 270
5 150 420
6 130 650
7 110 1000
8 90 1500
i) Using the marginal approach to maximise profits, find the price that monopolist would charge to maximise its profit. What is the level of profit maximising output?(2 marks)
Please note that this question requires a substantial research and a real life case study
Explain why governments sometimes impose a price floor in a competitive market. Illustrate the effects with the diagram.
Choose a case study where a price floor has been used. Identify why the price floor was thought to be necessary in this market. Identify the results of the government intervention. Suggest a better way of dealing with the issue in your case study.
Explain the incidence of tax using the real case study.
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