Problems on Microeconomics - Paper Example

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Answer any 7 of the following 9 questions. Be concise. A paragraph will do. I do not want a novel. Download this document, complete questions and upload on the Blackboard.

Consider your decision about whether to go skiing for the weekend. Suppose that transportation, lift tickets, and accommodation for the weekend costs $350. Suppose also that restaurant food for the weekend will cost $90, which is twice the amount normally spent on weekend meals. Finally, suppose that you have a weekend job that you will have to miss if you go skiing, which pays you $150 (after tax) per weekend.

What is the opportunity cost of goingskiing? Do you need any other information before computing the opportunity cost?

Solution

Opportunity cost of going skiing is $ 150. In this case we do not need any other information to calculate the opportunity cost. This is because opportunity cost is the cost foregone for choosing one good over the other.

2. Suppose that the market for frozen orange juice is in equilibrium at a price of $2.00 per can and a quantity of 4,200 cans per month. Now suppose that at a price of $3.00 per can, the quantity demanded falls to 3,000 cans per month and the quantity supplied increases to 4,500 cans per month.

Calculate the price elasticity of demand for frozen orange juice between the price of $2.00 and $3.00. Is the demand elastic or inelastic?

Solution

Elasticity is given by change in price/change in quantity multiplied by the equilibrium quantity/ price i.e DQ/DP.P/Q

Equilibrium price = $2

Equilibrium quantity demanded 4200

New price $3

New quantity 3000

2/4200.1200/1= -0.57

Since the elasticity for demand of frozen orange juice is less than 1 then its demand is said to be inelastic.

Calculate the price elasticity of supply for frozen orange juice between the price of $2.00 and $3.00. Is the supply elastic or inelastic?

Solution

New quantity supply = 4500; change in quantity +300

New price =3 change in price =+1

Elasticity 2/4200.300/1 = 1/7

since the elasticity of supply is less than 1, supply is inelastic

3. From the following quotations, what if, anything, can you conclude about elasticity of demand.

Good weather resulted in records wheat harvest and sent wheat prices tumbling. The result has been disastrous for many wheat farmers.

Answer

The elasticity of demand will be inelastic, this is because good weather will increase harvest for all people thus the demand will be low or it will decrease.

Ridership always went up when bus fares came down, but the increased patronage never was enough to prevent a decrease in overall revenue.

Answer

Patronage is inelastic with revenue because increase in the number of riders does not increase the revenues.

As the price of cell phones fell, producers found their revenue soaring.

Answer

Elasticity of demand for mobile phones will be said to be elastic as a decrease in price which increase the demand for mobile phones in the market.

4. Explain the three economic concepts illustrated by the production possibilities boundary. Support it with a suitable example.

5. The following supply and demand schedules describe a hypothetical market for potash

Price

($ per tonne) Quantity Supplied

(million tonnes) Quantity Demanded

(million tonnes)

280 5.5 10.0

305 6.5 9.5

330 7.5 9.0

355 8.5 8.5

380 9.5 8.0

405 10.5 7.5

a. What is the equilibrium price of potash?

solutionEquilibrium price is given by the price where quantity supplied equal to the quantity demanded . in this case the quantity is 8.5 tonnes and the equilibrium price is 355

b. How much potash would actually be purchased if the price was $280per tonne?

Solution

since at the equilibrium price of $ 355 one can purchase 8.5 tonnes then with $ 280 6.7 tonnes of potash are purchased.

355=8.5

280=x thus 280.8.5/355=6.7 tonnes.

c. How much potash would actually be sold if the price was $380 per tonne?

Solution

$355 = 8.5 tonnes

380=x we get 9.09 tonnes

d. At a price of $280 per tonne, is there excess supply or demand? How much?

Solution

F. From the schedule there is an excess demand of 3.3 tonnes. i.e demand is 10 tonnes but the equilibrium demand is 6.7 thus 3.3 tonnes above the equilibrium demand.

e. At a price of $380per tonne, is there excess supply or demand? How much?

Solution

At $380 there is excess quantity supplied of 0.6 tonnes

6. The following table shows the demand schedule for PlayStation video games.

Price Quantity Demanded Total Expenditure

(millions$)

A $35 400,000 $14,000,000

B $40 390,000 $15,600,000

C $45 350,000 $15,720,000

D $50 320,000 $16,000,000

E $55 300,000 $ 16,500,000

F $60 260,000 $15,600,000

G $65 230,000 $14,950,000

H $70 190,000 $13,300,000

a. Compute total expenditure for each row in the table. Solution in the table

b. Compute the price elasticities of demand between points A and B, B and C, C and D, and so on.

Solution

Elasticity between A and B

Price (p)of A = $35, Quantity demanded (qd) A= 4000,00

(p) B=$40, (qd)= 390,000

Thus elasticity will be given by

35/400,000.10,000/ 5= -0.175

B and C

New p at C $45, new qd 350, 000

40/390,000.-40000/5=-0.821

Elasticity of C and D

New P at D, $ 50, new qd 320,000

45/350,000.-30,000/5= -0.7714

Elasticity of E and D

P at E $55 , qd at E 300,000

50/320,000.-20000/5= -0.625

Elasticity and of E F

P at F $60, qd at F 260,000

55/300,000.-40,000/5= - 1.47

Elasticity of F and G

P at G $65, qd at G 230,000

60/260,000.-30,000/5= - 1.38

Elasticity between G and H

Price at H $70 Quantity 190,000

65/230,000.-40,000/5= -2.26

d. Over what range of prices is the demand for video games elastic? Explain.

Solution

Prices between the range of $ 55- $60, and $ 60- $65and $65-$70. They give an elasticity value that is greater than 1

e. Over what range of prices is the demand for the video games inelastic? Explain.

Solution

At the price ranging between $ 35- $40,$40-$45, $45-$50 and $50- $55, demand for play station video game is in inelastic. This is because they give an elasticity value which is below one (1).

7. Visit the website of a newspaper or a news agency such as cbc.ca, and look for the news items concerning government policy or business decisions that involve the basic economic concept of opportunity cost. Write a brief explanation of the opportunity cost of the decision that you selected.

8. Housing building contractors start building new houses in response to trends in buyers market. Visit the Statistics Canada link below:

http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/manuf05-eng.htmwhich provides housing data from 2012-2016.Answer following questions.

What has been the trend in the demand for new housing in Canada over the past five years, and what might explain this trend?

Has the trend in your province differed significantly from the Canadian trend? If so, what might explain any differences?

9. Supply consists of sellers offering products for sale. Visit www.amazon.com and find a book that is of interest to you. Then click in New and Used beside rhe picture of the books cover and see the various offerings of copies of that book in the marketplace. Does this market appear to be very competitive? Why/Why not?

Solution

Astrophysics for people in a hurry by Neil deGrasse Tyson is the book of my interest. However, in the market, the available books are slightly differentiated thus the level of competition is not high extremely high. This is because most of the books are differentiated and there written by different authors thus the decision to choose one book over the other depends on the concepts aims at attaining.

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