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ECON247v11 Assignment 1B
Microeconomics (Athabasca University)
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ECON 247: Assignment 1B
Due Date: After you have completed Unit 5
Credit Weight: 10% of your final grade
1.
Which economic principle is applicable in each of the following cases? Justify your
answer.
(2 marks each)
a.
David is a sportsperson who makes an annual average salary of $1 million.
He started his professional career right after completing high school. David’s
father wanted him to get a four-year university degree. The total annual cost of
attending university is $15,000. After long discussion with his father, David
decided not to go to university.
The Cost of Something is
What You Give Up to Get
It. This is
an example of
opportunity cost because
he chose to work instead
of going to
college, and the time he
was working he could’ve
gone to school.
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Answer: This is talking about opportunity cost, where a cost is what you give up
to get it. This is because David chose to work and give up the chance to go to
university.
b.
When the government imposes a price ceiling (rent control), landlords do
not build new apartments and do not maintain the existing ones.
Answer: The example of Government step-in into market and influence the
economic outcomes, to make housing price more affordable for people within the
country.
c.
To tackle the problem of recession, the Bank of Canada increases the
money supply by lowering the overnight interest rate. The increase in money
supply lowers the interest rate which in turn increases investment. This increase in
investment would increase employment in the short run, but will increase the
price level at the same time.
Answer: Once government increased money quantity supply, more money
entering the market, and people have more money on hand, and they will spend
more for any goods and services. When the demand in the market increased,
suppliers have to produce more products, when supply increase, price also
increase.
2.
a.
Identify each of the following topics as being part of microeconomics or
macroeconomics:
(1 mark each)
i.
ii.
iii.
iv.
The average wage rate for unskilled workers is low in the developing
world. Answer: macroeconomics
An increase in government expenditures is used to increase employment
during a recession. Answer: macroeconomics
total production of automobiles in Canada. Answer: microeconomics
Under balanced budget fiscal policy, the government attempts to balance
the budget every year. Answer: microeconomics
b.
Which of the following statements are positive and which are normative?
(1 mark each)
i.
If consumer income increases, other things being equal, the demand for
normal goods will increase. Answer: positive
Canadian workers deserve an increase in minimum wage. Answer:
normative
During recession, unemployment can be expected to increase. Answer:
positive
Class sizes should not be more than 35. Answer: normative
ii.
iii.
iv.
3.
Suppose the following table shows the production possibilities for an economy.
(1 mark each)
Production
Good X Good Y
Point
A
5
10
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B
8
5
U
5
5
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a.
What is the opportunity cost of moving from point A to B? answer: 5 of
goof y
b.
What is the opportunity cost of moving from point B to A? answer: 3 of
goof x
c.
What is the opportunity cost of moving from point U to A? answer: 5 of
goof y
d.
Suppose points A and B are on the production possibility frontier. What
conclusion can be drawn about production point U? answer: point u its production
is inefficient
4.
Answer the questions below using the data in the following table, which shows a market
for a product that has significant social benefits.
Price
$16ffff
12ffff
8ffff
4ffff
2ffff
Quantity Demanded
30
35
40
45
55
Quantity Supplied
70
55
40
25
20
a.
What would the equilibrium price and quantity be? Answer: $8
mark)
(1
b.
Suppose the price is currently at $2. What problem would exist in the
economy? What would you expect to happen to price? Answer: demand higher
than supply, the price will increase. (2 marks)
c.
Suppose the price is currently $12. What problem exists in the economy?
What would you expect to happen to price? Answer: demand lower than supply,
that meant there has excessive supply, price will decrease to attract more demand.
(2 marks)
d.
Using the midpoint method, calculate the price elasticity of demand if
price changes from $12 to $16. Is this elastic or inelastic? Answer: inelastic and
price elasticity of demand is 0.077 (2 marks)
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e.
A government subsidy is given to the consumers that increases quantity
demand by 20 units at each price. what is the new equilibrium price and quantity?
(2 marks)
Answer: new equilibrium price is $12 with quantity 55.
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5.
a.
Describe the short run and long run impact of a binding price ceiling (rent control)
on the housing market. Include the important role of elasticity of demand and
supply in your answer. Answer: in short run housing become more affordable
while in long run risk may occurs such as housing shortage. Apply elasticity to
prevent excessive demand or supply.
(3 marks)
b.
Consider the following labour market:
QDL = 70 – 2W
QSL = 10 + 4W
Calculate the equilibrium level of wage rate and level of employment.
Calculate the level of unemployment and deadweight loss if the price floor
(minimum wage) is set at $15. Answer: deadweight is -50, unemployment is 60.
(3 marks)
6.
How would the following changes in price affect total revenue? That is, would total
revenue increase, decrease, or remain unchanged?
(3 marks)
c.
7.
a.
Price rises and demand is inelastic. Answer: increase
b.
Price falls and demand is elastic. Answer: increase
Price rises and demand is of unit elasticity. Answer: remain unchanged
a.
List four determinants of price elasticity of demand? Answer: proportion of
income/ time/ substitutability/luxury or necessity
(2 marks)
b.
Evaluate the following statement: “A farmer is producing wheat (a
necessity) on his land. The total production of wheat is Q1 bushels. The price per
bushel is $P1. Due to the introduction of new hybrid seed, the farmer’s
productivity increases, and total production increases from Q1 to Q2. At the same
time, the increase in production lowers the price from $P1 to $P2. The
introduction of new hybrid seed improves the living standard of the farmer.”
Answer: the introduction of new seed allows farmer to produce more and lower
the price.
(3 marks)
c.
Assume that the income elasticity of demand for good X is –3.69 and the
cross-price elasticity is –1.16. What would happen to demand for X if there is an
increase in income and an increase in price of Y at the same time? Explain your
answer. Answer: Since income increase, people have extra money on hand will be
given more purchasing power, people will buy more.
(5 marks)
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8.
Data on price of Y, quantity demand for X when income is 100, and quantity demand for
X when income is 200 are given in the following table. The price of X is fixed at $7.
Py
0
1
2
3
4
5
6
7
8
9
10
a.
QDx (Income $100)
121.5
120.2
118.9
117.6
116.3
115
113.7
112.4
111.1
109.8
108.5
QDx (Income $200)
196.5
195.2
193.9
192.6
191.3
190
188.7
187.4
186.1
184.8
183.5
Calculate income elasticity of demand for X using the midpoint method when
income increases from $100 to $200 and when price of Y is fixed at $9. Explain
(5 marks)
your answer. Answer: (109.8/184.8)/(100/200)= 1.188= 1.19
b.
Calculate cross price elasticity of demand for X when price of Y decreases
from $9 to $8 and when income is $100. Explain your answer. Answer: %change
in quantity/ % change in price.
(5 marks)
9.
a.
What is the difference between a “change in supply” and a “change in quantity
supplied”? Answer: change in supply= movement of supply curve respond to
factor other than price. Change in quantity supplied. = movement of supply curve
respond to price change.
(5 marks)
b.
How will each of the following events shift the demand and/or the supply
curve for bread? Also, indicate the effect of each event on equilibrium price and
equilibrium quantity. That is, do equilibrium price and equilibrium quantity rise,
fall, or remain unchanged? Or, is the answer indeterminate because it depends on
the magnitude of the shift? (8 marks)
i.
ii.
iii.
The price of flour decreases. Answer: equilibrium quantity will rise,
equilibrium price will fall, demand will rise.
Consumer income increases, and bread is a normal good. Answer: demand
will rise, equilibrium price will rise.
The price of lettuce wraps (a substitute of bread) increases, and sellers
expect the price of bread to fall next month. Answer: demand will rise,
and equilibrium factors remain unchanged.
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iv.
The number of buyers decrease, and consumers expect the price of bread
to be higher next month. Answer: demand will fall, equilibrium price will
fall.
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10.
a.
Based on the following data on taxable income and amount of tax, identify each
type of tax system as progressive, regressive, proportional, or lump sum.
(4 marks)
i.
Tax System A: Answer: lump sum
ii.
Tax System B: Answer: proportional
iii.
Tax System C: Answer: progressive
iv.
Tax System D: Answer: regressive
Taxable
Income
$40,000
$80,000
$120,000
11.
a.
Tax System A
Tax System B
Tax System C
Tax System D
$6,000
$12,000
$18,000
$4,000
$8,000
$12,000
$6,000
$9,600
$12,000
$6,000
$6,000
$6,000
b.
An increase in the tax rate will always increase the tax revenue and
decrease the deadweight loss. Explain. Answer: this is because people will spend
less when the tax is high, and tax reduce income from seller too, so sellers also
produce less. Therefore, entire market will fall below optimum equilibrium.
(6 marks)
List and define different policy options that a government can apply to correct for
negative externalities. Answer: government can implement tax to lower negative
externalities, while provide subsidies for positive externalities.
(4 marks)
b.
The Coase Theorem suggests that efficient solutions to externalities can be
achieved through bargaining. Under what circumstances does this fail to produce
a solution? Answer: 1/bargaining process discontinued, 2/numerous bargaining
occur , 3/ when there has transaction cost
(3 marks)
12.
c.
Define private goods and public goods and give at least two examples of
each. Answer: private goods- good that is excludable and rival such as coke and
clothes. Public good- good that is non- excludable and non-rivalrous such as air,
drinking water.
(4 marks)
The following table shows the production of meat and wheat produced in tonnes per day
for Germany and Canada.
(2 marks each)
Germany
Canada
Meat
200
200
Wheat
300
150
a.
Which country has absolute advantage in producing wheat? Why?
Answer: Germany, because they are able more than Canada.
b.
What is the opportunity cost of producing one tonne of meat in Germany?
Answer: 1.5 tonnes of wheat.
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c.
What is the opportunity cost of producing one tonne of wheat in
Germany? Answer: 0.67 tonnes of meat.
d.
Which country has the comparative advantage in producing meat? Why?
Answer: Canada, because Canada has lower opportunities cost in producing meat.
e.
Which country has the comparative advantage in producing wheat? Why?
Answer: Germany because they have lower cost.
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