Chapter 5 Question 1 The table gives the supply schedules for jet-ski rides by three owners: Rick, Sam, and Tom, the only suppliers of jet-ski rides. Price (dollars per ride)| Quantity supplied (rides per week)| | Rick| Sam| Tom| 10. 00| 0| 0| 0| 12. 50| 5| 0| 0| 15. 00| 10| 5| 0| 17. 50| 15| 10| 5| 20. 00| 20| 15| 10| a. What is each owner’s minimum supply-price of 10 rides a day? At the minimum supply price of $15, Rick determines to supply 10 rides a day b. Which owner has the largest producer surplus when the price of a ride is $17. 50? Explain. Rick is the largest producer surplus from rides when the price is $17. 50 a ride.
At this price he sells 15 rides a day because the 15th ride costs him $17. 50 to produce but Rick is willing to produce the 10th ride for its marginal cost, which is $15, so Rick’s producer surplus on this ride is $5. L ook at below the each producer surplus of each producer: Rick’s producer surplus = (base x height)/2 = (15 x 7. 5)/2 = $56. 25 Sam’s producer surplus = (base x height)/2 = (10 x 5. 0)/2 = $25. 00 Tom’s producer surplus = (base x height)/2 = (5 x 2. 5)/2 = $6. 25 c. What is the marginal social cost of producing 45 rides a day? At the price of $20, three suppliers are willing to produce total of 45 rides per day to market.
Therefore, the market social cost is $20 d. Construct the market supply schedule of jet-ski rides. Price (dollars per ride)| Quantity supplied (rides per week)| Total of rides market supplied| | Rick| Sam| Tom| | 10| 0| 0| 0| 0| 12. 5| 5| 0| 0| 5| 15| 10| 5| 0| 15| 17. 5| 15| 10| 5| 30| 20| 20| 15| 10| 45| Chapter 6 Question 2 Chinese power plants have run short of coal, an unintended effect of government-mandated price controls — a throwback to communist central planning —– to shield the public from rising global energy costs. … Beijing has also frozen retail prices of gasoline and diesel. Oil refiners say they are suffering heavy losses and some began cutting production last year, causing fuel shortages in parts of China’s south. CNN, May 20, 2008 a. Are China’s price controls described in the news clip price floors or price ceilings? b. Explain how China’s price controls have created shortages or surpluses in the markets for coal, petrol, and diesel. c. Illustrate your answer to b graphically by using the supply and demand model. d. Explain how China’s price controls have changed consumer surplus, producer surplus, total surplus, and the deadweight loss in the markets for coal, petrol, and diesel. . Illustrate your answer to d graphically by using the supply and demand model. Question 3 The retail price of petrol in Australia includes the cost of producing petrol, the cost of distribution to service stations, and a tax. In the first half of 2008, it was proposed that the tax be cut by 5? a litre. Assume that the supply of petrol to Australia is perfectly elastic and that the distribution cost is a constant amount per litre. Also assume that the retail price, including the tax, is $1. 50 a litre and that the tax is 38? a litre. The quantity traded at a price of $1. 0 per litre is 18 billion litres a year. Answer the following questions. a. What is the effect of the reduction of the tax on the retail price? b. If the price elasticity of demand is 0. 10, calculate the effect of tax reduction on the quantity of petrol traded. c. What is the tax revenue collected before and after the tax is cut by 5? a litre? d. What is the change in deadweight loss from the petrol tax when it is cut by 5? a litre? e. Calculate the ratio of the change in deadweight loss from part (d) to the change in tax revenue in part (c). What does this ratio tell you?
Chapter 13 Question 4 ProPainters hire students at $250 a week to paint houses. It leases equipment at $500 a week. Suppose that ProPainters doubles both the number of students it hires and the amount of equipment that it leases. ProPainters experiences diseconomies of scale. a. Explain how the ATC curve with one unit of equipment differs from that when ProPainters uses double the amount of equipment. b. Explain what might be the source of the diseconomies of scale that ProPainters experience. Question 5 The table shows the production function of Bonnie’s Balloon Rides.
Bonnie’s pays $500 a day for each balloon it rents and $25 a day for each balloon operator it hires. | Output (rides per day)| Labour(workers per day)| Plant 1| Plant 2| Plant 3| Plant 4| 10| 4 | 10| 13| 15| 20| 10| 15| 18| 20| 30| 13| 18| 22| 24| 40| 15| 20| 24| 26| 50| 16| 21| 25| 27| Balloons| 1| 2| 3| 4| a. Graph the ATC curve for Plant 1 and Plant 2. Total cost (TC) = Total Fixed cost (TFX) + Total Variable cost (TVC) As $500 a day for each balloon is fixed cost so total fixed cost a day of Plant 1 = $500 x No. of balloon TFX = $500 x 1 = $500 25 a day for each balloon operator it hires, total variable cost a day of Plant 1 = $25 x No. of workers (balloon operator) TVC = $25 x No. of workers Total cost (TC) = TFX + TVC From each total fixed cost, we have average fixed cost (AFC) = Total fixed cost divided by number of outputs From each total variable cost, we have average variable cost (AVC) = Total variable cost divided by number of outputs The formula of average total cost (ATC) = sum of average fixed cost (AFC) and variable cost (AVC) Based on the formulas above, the figures for each Plant of Bonnie’s Balloon Rides that has been worked out as the following tables:
Labour| Plant 1| (workers per day)| Output (rides per day)| Total fixed cost (TFC) ($500 per balloon| Total variable cost (TVC) $25 a day for per balloon operator| Total cost (TC)| Average fixed cost (AFC)| Average variable cost (AVC)| Average total cost (ATC)| 10| 4 | 500| 250| 750| 125. 00| 63| 188| 20| 10| 500| 500| 1000| 50. 00| 50. 00| 100. 00| 30| 13| 500| 750| 1250| 38. 46| 57. 69| 96. 15| 40| 15| 500| 1000| 1500| 33. 33| 66. 67| 100. 00| 50| 16| 500| 1250| 1750| 31. 25| 78. 13| 109. 38| Balloons| 1| | | | | | | | | | | | | | | | | | | | | | |
Plant 2| Labour (workers per day)| Output (rides per day)| Total fixed cost (TFC) ($500 per balloon| Total variable cost (TVC) $25 a day for per balloon operator| Total cost (TC)| Average fixed cost (AFC)| Average variable cost (AVC)| Average total cost (ATC)| 10| 10| 1000| 250| 1250| 100. 00| 25. 00| 125. 00| 20| 15| 1000| 500| 1500| 66. 67| 33. 33| 100. 00| 30| 18| 1000| 750| 1750| 55. 56| 41. 67| 97. 23| 40| 20| 1000| 1000| 2000| 50. 00| 50. 00| 100. 00| 50| 21| 1000| 1250| 2250| 47. 62| 59. 52| 107. 14| Balloons| 2| | | | | | | | | | | | | | | | | | | | | | |
Plant 3| Labour (workers per day)| Output (rides per day)| Total fixed cost (TFC) ($500 per balloon| Total variable cost (TVC) $25 a day for per balloon operator| Total cost (TC)| Average fixed cost (AFC)| Average variable cost (AVC)| Average total cost (ATC)| 10| 13| 1500| 250| 1750| 115. 38| 19. 23| 134. 61| 20| 18| 1500| 500| 2000| 83. 33| 27. 78| 111. 11| 30| 22| 1500| 750| 2250| 68. 18| 34. 09| 102. 27| 40| 24| 1500| 1000| 2500| 62. 50| 41. 67| 104. 17| 50| 25| 1500| 1250| 2750| 60. 00| 50. 00| 110. 00| Balloons| 3| | | | | | | | | | | | | | | | | | | | | | Plant 4| Labour (workers per day)| Output (rides per day)| Total fixed cost (TFC) ($500 per balloon| Total variable cost (TVC) $25 a day for per balloon operator| Total cost (TC)| Average fixed cost (AFC)| Average variable cost (AVC)| Average total cost (ATC)| 10| 15| 2000| 250| 2250| 133. 33| 16. 67| 150. 00| 20| 20| 2000| 500| 2500| 100. 00| 25. 00| 125. 00| 30| 24| 2000| 750| 2750| 83. 33| 31. 25| 114. 58| 40| 26| 2000| 1000| 3000| 76. 92| 38. 46| 115. 38| 50| 27| 2000| 1250| 3250| 74. 07| 46. 30| 120. 37| Balloons| 4| | | | | | | . On your graph in a, plot the ATC curve for Plant 3 and Plant 4. c. On Bonnie’s LRAC curve, what is the average cost of producing 18 rides and 15 rides a day? d. Explain how Bonnie’s uses its long-run average cost curve to decide how many balloons to rent. Question 6 A Bakery on the Rise Some 500 customers a day a line up to buy Avalon’s breads, scones, muffins, and coffee. Staffing and management are worries. Avalon now employs 35 and it will hire 15 more. Payroll will climb by 30% to 40%. Avalon will move to a larger space. Avalon’s costs will soar.
Its monthly rent, for example, will leap to $10,000, from $3,500. a. Which of Avalon’s decisions described in the news clip is a short-run decision and which is a long run decision? b. Why is Avalon’s long-run decision riskier than its short run decision? c. By how much will Avalon’s short-run decision increase its total variable cost? d. By how much will Avalon’s long-run decision increase its monthly total fixed cost? e. Draw a graph to illustrate Avalon’s short-run cost curves before and after the events described in the news clip. Chapter 14
Question 7 Quick Copy is one of the many copy shops near the campus. Figure 12. 5 shows Quick Copy’s cost curves. If the market price of copying a page is 10 cents, calculate Quick Copy’s a. Marginal revenue = Price = $10 b. Profit-maximising output as MR = MC = P = $10 c. Economic profit. Question 8 Pacific Brands Set to Sack 2,000 Workers The Australian clothing manufacturer, Pacific Brands, has stunned both the federal government and the unions by announcing that it will shut down seven factories across eastern Australia and sack almost 2,000 workers.
The company’s big-name brands include Bonds, Holeproof, and King Gee and it says it’s taken the decision because of falling demand and a half-year profit loss of nearly $150 million. a. The news clip went on to explain that the company has decided to stop producing some of its brands that have smaller sales volumes and to close the factories that produce those brands. Is this a shutdown or an exit decision? This is a shutdown as demand decreased that no produce of outputs and loss by fixed cost incurred. b. Under what conditions will this decision maximise the profit of Pacific Brands?
Pacific Brands must try to minimize as much losses as possible and adjust the output level. c. Many clothing products sold in the Australian clothing market are produced in China, including in factories owned by Pacific Brands but located in China. How will the closure of some Australian factories affect the economic profit of other Australian producers of clothing products? As the supply changes, decrease in quantity supplied, the supply curve shifts to the left. Thus, price of clothing products will rise that is resulting the demand in quantity falls down.
Properly, the less economic profit is gained by producers. Question 9 Mobile Phone Sales Up 6% in 2008, 4th Qtr Weak Mobile phone sales grew by six percent in 2008 over the previous year but fell nearly five percent in the fourth quarter as the global economy weakened, market research firm Gartner said on Tuesday. Worldwide mobile phone sales totalled 1. 22 billion units in 2008, up from 1. 15 billion in 2007, Gartner said. a. Explain the effects of an increase in demand for mobile phones on the market for mobile phones and individual mobile phone producers in the short run.
As demand increases, the demand curve shifts to the rights, certainly price goes up and profits will increase either because producers maximise profits by increasing production of outputs. b. Draw a graph to illustrate your explanation in part (a). c. Explain the effects of the global increase in demand for mobile phones on the market for mobile phones in the long run. Increase in demand, there are more producers of mobile phones enter the market that is leading to increase in supply. Hence, the quantity produced goes up but price will gradually fall down to encourage consumption in the long-run.
Economic profit of each mobile phone company decreases. d. What factors will determine whether the price of mobile phones will rise, fall, or stay the same in the new long-run equilibrium? Firstly, demand is element to be determined. Decrease in demand, the demand curve shifts to leftward. Thus, the price of mobile phone falls down and the quantity supply decreases shift the supply curve rightward. Increase in demand brings a higher price, increase in economic profits. Secondly, it’s supply. The quantity in supply increases, the price decreases and less profit gained. Chapter 10 Question 10
Hot Air Balloon Rides, a single-price monopoly, has the demand schedule shown in columns 1 and 2 of the table and the total cost schedule shown in columns 2 and 3 of the table. a. Construct Hot Air’s total revenue and marginal revenue schedules. Price (P) (dollars per ride)| Quantity demanded (Q) (rides per month)| Total cost (TC) (dollars per month)| Marginal cost (MC=TC/Q)| Total revenue (TR) (TR=PxQ)| Marginal revenue (MR=TR/Q)| Economic profit (TR – TC) ($)| | | | | | | | 220| 0| 80| | 0| | -80| | | | ——– 80| | ——– 200| | 200| 1| 160| | 200| | 40| | | | ——- 100| | ——– 160| | 180| 2| 260| | 360| | 100| | | ——- 120| | ——– 120| | 170| 2. 5| 320| | 425| | 105| | | | ——- 120| | ——– 130| | 160| 3| 380| | 480| | 100| | | | ——- 120| | ——– 110| | 140| 4| 520| | 560| | 40| | | | ——- 160| | ——— 40| | 120| 5| 680| | 600| | -80| b. Draw a graph of the demand curve and Hot Air’s marginal revenue curve. c. Find Hot Air’s profit-maximising output and price and calculate the firm’s economic profit. Profit is maximised when producing the output at which marginal revenue (MR) equals marginal cost (MC), so 2. 5 (at mid-point between 2 and 3 rides) rides per month are produced at $170 a ride.
Total cost (TC)= ($260 + $380)/2 = $320 Total revenue (TR)= 2. 5 x $170 = $425 Economic profit= TR – TC = 425 – 320 = $105 d. If the government imposes a tax on Hot Air’s profit, how does its output and price change? If the government imposes a tax on Hot Air’s profit while total revenue and total cost remain, properly profit will be decreased after tax. Therefore, its output will be decreased and the price will be increased. e. If instead of taxing Hot Air’s profit, the government imposes a sales tax on balloon rides of $30 a ride, what are the new profit-maximising quantity, price, and economic profit?
Price (P) (dollars per ride)| Quantity demanded (Q) (rides per month)| Total cost (TC) (dollars per month)| Total cost added sales tax on balloon rides ($30 per ride)| Marginal cost (MC=TC/Q)| Total revenue (TR) (TR=PxQ)| Marginal revenue (MR=TR/Q)| Economic profit (TR – TC) ($)| | | | | | | | | 220| 0| 80| 80| | 0| | -80| | | | | ——- 110| | ——– 200| | 200| 1| 160| 190| | 200| | 10| | | | | ——- 130| | ——– 160| | 180| 2| 260| 320| | 360| | 40| | | | | ——- 120| | ——– 120| | 170| 2. 5| 320| 395| | 425| | 30| | | | | ——- 96| | ——– 130| | 160| 3| 380| 470| | 480| | 10| | | | ——- 51| | ——– 110| | 140| 4| 520| 640| | 560| | -80| | | | | ——- 190| | ——— 40| | 120| 5| 680| 830| | 600| | -230| As sales tax of $30 is imposed on per ride, total cost increases while total revenue is unchanged, therefore, the new profit-maximising at: Quantity is 2 rides per month Price is $180 Economic profit is $40. 00 Question 11 Telecoms Look to Grow by Acquisition A multibillion-dollar telecommunications merger announced Thursday … shows how global cellular powerhouses are scouting for growth in emerging economies while consolidating in their own, crowded backyards.
France Telecom offered Thursday to buy TeliaSonera, a Swedish-Finnish telecommunications operator … Within hours, TeliaSonera rejected the offer as too low, but analysts said higher bids—either from France Telecom or others— could persuade [TeliaSonera] to accept a deal. Meanwhile, in the United States, Verizon Wireless agreed to buy Alltel for $28. 1 billion, a deal that would make the company the biggest mobile phone operator in the country.
A combination of France Telecom and TeliaSonera would create the world’s fourth-largest mobile operator smaller only than China Mobile, Vodafone and Telefonica of Spain. a. Explain the rent seeking behaviour of global telecommunications companies. They are trying to capture a consumer surplus, or an economic profit mainly. b. Explain how mergers may affect the efficiency of the telecommunications market. The merge or combination of telecommunications companies are the way to create monopoly and expand market segment as they want to protect and maintain their profits from competitors.
