- Housing costs me nothing.
This statement is not correct from the microeconomic point of view. There is always an opportunity cost, which is always born by the person who asks the question. Sale of the house or rent of the flat while moving into a cheaper housing would provide quantification of such cost when compared to actual level of income. Also, there are maintenance costs and tax related costs.
- Boring lessons.
The financial cost of the lessons was already covered, from the microeconomic point of view, if the lessons are useless, participation will only increase the total cost of the lessons, including opportunity cost as the author of the statement could employ time is a more efficient ways. Attendance will thus increase the cost of the lectures.
- Inelastic petrol demand.
The demand petro is very inelastic but the reason for is not because of the fact that the demand for it is so high, but because of the fact that there exist very few substitutes of petrol. In the long run however, the demand for petrol will become more elastic as people will find ways how to substitute it through alternative innovations such as electricity fuelling vehicles.
2.
a. PPF for Australia and Canada: PPF for both countries are below:
b. Absolute Advantage is the capacity to produce a good at a more advantageous cost per unit of production than the cost held by another country. Australia produces more cheese per day than Canada (1600 against 800) and more wine per day (3200 against 2400), which means Australia has an absolute advantage in production of both cheese and wine.
c. As shown on the case above, Australia has comparative advantage in production of wine as production of one unit of wine has opportunity cost of 2 units of cheese, while Canada has a comparative advantage in production of cheese, since one unit of cheese has opportunity costs of 3 units of wine.
d. The ratio of 1 unit of cheese to 2.5 units of wine is acceptable for both countries, as such ratio represents the average of their opportunity costs in production of wine and cheese. If both countries were autarkic, the CPF line would be identical to PPF line. However, focus on one commodity provides them the opportunity to purchase other commodity which is not produced local, in relation to the trade volume potential as in graphs below.
- In diagrams belonging to d., we can see the gains from trade as the surface between the blue line (PPF) and the red line (CPF). The surface represents additional consumption potential for local populations which are permitted by trade capacity of each country, being able to sell local production and thus enhance local consumption potential.
3.
a. Price will be reduced as a result of tax cut.
b. The price elasticity at the midpoint between the original and the new price will be 1,07.
c. The tax revenue is before the tax is 6 840 000 000 USD and 5 960 136 600 USD after the tax cut. The difference is 879 863 400 USD
d. Deadweight is the loss of allocative efficiency of markets, which is created through price ceilings or limitations imposed by regulation. Deadweight leads to decrease of consumer surplus as well as to decrease of consumer surplus. The deadweight loss is 1 525 500 USD.
e. The ratio of the change in deadweight loss to tax revenue difference is in this case 0,002. The deadweight loss indicator defines the reduction in the economic surplus beyond tax revenues and so the ratio thus describes how much business was cut from the prior equilibrium due to the tax change.
4.
a. With no pollution control, the price of the chemical will be 120 USD per ton, as the profit is maximum on such level.
b. Marginal social cost represents the total cost to society as a whole for producing one further unit, or taking one further action. This total cost of producing one extra unit of something is not simply the direct cost borne by the producer, but a variable that includes the costs to the external environment and other stakeholders.
Marginal production cost can be described as the additional increase in cost which results from every additional unit sale. Marginal cost is calculated as division of total cost by changes in output quantities. Marginal cost can remain constant, it however obeys the law of diminishing returns and therefore will decline with the increase of the output level. The law of diminishing returns or the law of diminishing marginal product is a characteristic of the production process in which the marginal product of each factor of production gets reduced with each additional unit of that factor, if other factors of production remain the same.
Deadweight is the loss of allocative efficiency of markets, which is created through price ceilings or limitations imposed by regulation. Deadweight leads to decrease of consumer surplus as well as to decrease of consumer surplus. The Deadweight loss in this particular case is 180 000 USD.
c. In such case price per ton is 160 USD, tax is 80 USD per ton and total revenue is 320 000 USD per day. The efficient quantity is found at the level of price of 160 USD per ton.
d. The diagram below depicts the situation described in 4c.
- The occurrence of externalities often leads to sub-optimal decision-making as market operators do not provide incentives to limit negative externalities caused by them. These negative externalities, however, affect the society as a whole. The negative externality issue could be solved in a different way, such as through subsidization of the producers that invest into their anti-polluting strategies – or in other words investment into positive externalities. This model was proposed by French economist Pigou in the past, who proposed so called Pigou subsidy. In such way, these producers will benefit from their environmental stand and will step by step remove the polluting competitors through the market forces.
5.
a. Unregulated taxi ride market. Regulated markets, which also includes the market with taxi services, will be more limited as to the potential since the supply curve will have to adapt to the regulations. The ultimate consequence will be suffered by the consumer.
b. Consumer surplus can be described as the gain acquired by consumers due to the fact that they are able to purchase goods or services for a price that is less than the maximum price they would be willing to pay. In other words, consumer surplus, producer surplus in a regulated market. Consumer surplus is the differential volume between the willingness of consumers to pay for services or goods and between the actual payments of the consumers. In an unregulated market will the surplus be higher than in a regulated market.
- Regulated markets will be more limited as to the potential since the supply curve will have to “obey” the regulations. The ultimate consequence will be suffered by the consumer.
- The graph below shows different place of equilibrium in an regulated and unregulated market. The standard markets without regulation lead to quantity and equilibrium determined at the point where the demand and supply intersect (B), while in the regulated market, the regulation increases the price of goods and decreases the quantity of goods sold in the equilibrium.
- Consumer surplus, producer surplus in a regulated market. Consumer surplus is the differential volume between the willingness of consumers to pay for services or goods and between the actual payments of the consumers. Producer surplus on the other hand, is the differential volume between the willingness of producers to produce for services or goods and between the actual supplies. Deadweight is the loss of allocative efficiency of markets, which is created through price ceilings or limitations imposed by regulation. Deadweight leads to decrease of consumer surplus as well as to decrease of consumer surplus. Marginal revenue, which is one of the important basic stones for calculation of the producer surplus, can be described as the additional increase in revenue which results from every additional unit sale. Marginal revenue is calculated as division of total revenue by changes in output quantities. Marginal revenue can be constant, it however obeys the law of diminishing returns and therefore will decline with the increase of the output level. The law of diminishing returns or the law of diminishing marginal product is a characteristic of the production process in which the marginal product of each factor of production gets reduced with each additional unit of that factor, if other factors of production remain the same.
