BUSINESS ECONOMICS

BUSINESS ECONOMICS (BUECO5903)

ASSIGNMENT PART A - MICROECONOMICS

SEMESTER 1, 2015

COURSE COORDINATOR – PAUL MCPHEE

CHECKED BY – DAVID SPIERS

Assignment Part A (Microeconomics) Questions:

Semester 1, 2015

Worth 10% of total assessment:

Answer any five (5) of the following questions. Each question is worth 10 marks.

Question 1:

Which of the following are likely to be fixed costs and which variable costs for a chocolate factory over the course of a month? Explain your choice.

(a) The cost of cocoa (1 mark)..................................................................................................................

(b) Business rates (local taxes).(1 mark)....................................................................................................

(c) An advertising campaign for a new chocolate bar. (1 mark)………………………………........

(d) The cost of electricity (paid quarterly) for running the mixing machines (1 mark)……………..

(e) Overtime pay (1 mark).........................................................................................................................

(f) The basic minimum wage agreed with the union (workers must be given at

least one month’snotice if they are to be laid off) (2 marks)..................................................................

(g) Wear and tear on wrapping machines (1 mark)......................................................................................

(h) Depreciation of machines due simply to their age (1 mark)....................................................................

(i) Interest on a mortgage for the factory: the rate of interest rises over the

course of the month (1 mark)..............................................................................................................

Question 2:

(a) Complete the following table of costs for a firm. (Note: enter the figures in the MC column between outputs of 0 and 1, 1 and 2, 2 and 3, etc.) (6 marks)

Output (Units)	TC ($)	AC ($)	MC ($)
0 1 2 3 4 5 6 7 8 9 10	55 85 110 130 280 610	— 40 42	90 110 150

(b) How much is total fixed cost at:

(i) an output of 0 units ? (1/2 mark)

(ii) an output of 6 units? (1/2 mark)

(c) How much is average fixed cost at:

(i) an output of 5 units? (1/2 mark)

(ii) an output of 10 units? (1/2 mark)

(d) How much is total variable cost at an output of 5 units? (1 mark).........................................................

(e) How much is average variable cost at an output of 10 units? (1 mark)..................................................

Question 3:

Suppose the jeans industry is an oligopoly in which each firm sells its own distinctive brand of jeans, and each firm believes its rivals will not follow its price increases but will follow its price cuts.

Draw and explain the demand curve facing each firm, and given this demand curve, does this mean that firms in the jeans industry do or do not compete against one another?

(5 marks for the correct demand curve and 5 marks for the correct explanation)

Question 4:

(a) Explain the impact of external costs and external benefits on resource allocation; (2.5 marks)

(b) Why are public goods not produced in sufficient quantities by private markets? (2.5 marks)

(c)Which of the following are examples of public goods (or services)? Delete the incorrect option

(1 mark each).

(i) The Judicial system ......................................................................................... Yes/No

(ii) Pencils ............................................................................................................ Yes/No

(iii) The quarantine service ........................................................................................ Yes/No

(iv) The Great Wall of China.......................................................................................... Yes/No

(v) Contact lenses ................................................................................................ Yes/No

Question 5:

(a) Suppose the income elasticity of demand for pre-recorded music compact disks is +4 and the income elasticity of demand for a cabinet maker’s work is +0.4. Compare the impact on pre-recorded music compact disks and the cabinet maker’s work of a recession that reduces consumer incomes by 10 per cent. (2 marks)

(b) How might you determine whether the pre-recorded music compact discs and MP3 music players are in competition with each other? (2 marks)

(c) Interpret the following Income Elasticities

(d) of Demand (YED) values for the following and state

if the good is normal or inferior; (3 marks total, 1.5 marks per part)

YED= +0.5 and YED= -2.5

(d) Interpret the following Cross-Price Elasticities of Demand (XED) and explain the relationship between these goods. (3 marks total, 1.5 marks per part)

XED= + 0.64 and XED= -2.6

Question 6:

You are given the following data about two firms:

FIRM A

Quantity	0		1		2		3		4		5		6
Total revenue ($)	0		10		20		30		40		50		60
Average revenue ($)	___		___		___		___		___		___		___
Marginal revenue ($)		___		___		___		___		___		___
Total cost ($)	30		42		50		60		76		100		140
Marginal cost ($)		___		___		___		___		___		___
Average cost ($)	¥		___		___		___		___		___		___

FIRM B

Quantity	0		1		2		3		4		5		6
Total cost ($)	100		134		154		177		216		266		366
Average cost ($)	¥		___		___		___		___		___		___
Marginal cost ($)		___		___		___		___		___		___
Price ($)	140		130		120		110		100		90		80
Marginal revenue ($)		___		___		___		___		___		___
Total revenue ($)	___		___		___		___		___		___		___

(a) Complete the two tables above. (4 marks)

(b) Are these firms operating in the short or the long run? (1 mark) Firm A: short run / long run

Firm B: short run / long run

(c) Are these firms operating under perfect or imperfect competition? Firm A: perfect / imperfect

(1 mark) Firm B: perfect / imperfect

(d) What level of output will these firms produce in the short run? Firm A:..............................

(2 marks) Firm B:..............................

(e) How would you describe their profit positions? (2 marks)

Firm A:..............................................................................................................................................

Firm B:..............................................................................................................................................

Question 7:

(a) Discuss the following statement: ‘In the real world there is no industry which conforms precisely to the economist’s model of perfect competition. This means that the model is of little practical value’. (2.5 marks)

(b) Illustrate with a diagram and explain the short-run perfectively competitive equilibrium for both (i) the individual firm and (ii) the industry; (2.5 marks for diagram and 2.5 marks for explanation)

(c) Illustrate with a diagram and explain the long-run perfectly competitive equilibrium for the firm

(2.5 marks).

Question 8:

(2 marks each, 1 for explanation and 1 for the dialgram)

Using supply and demand analysis, explain and illustrate graphically the effect of the following situations.

(a) Population growth surges rapidly;

(b) The prices of resources used in the production of good X increases;

(c) The government is paying a $1 per unit subsidy for each unit of good Y produced.;

(d) The income of consumers of normal good X increases;

(e) The income of consumers of inferior good Y decreases;

Question 9:

(a) Explain and illustrate using a diagram why a monopolist would never produce in the inelastic range of the demand curve. (3 marks for explanation, 3 marks for diagram)

(b) In each of the following cases, state whether the monopolist would increase or decrease output:

(i) Marginal revenue exceeds marginal cost at the output produced; (2 marks)

(ii) Marginal cost exceeds marginal revenue at the output produced. (2 marks)