Business
Question 1
Question 2
Suppose Glenda owns a hotel at a ski resort. The left-hand panel of the diagram below depicts the market supply of rooms along with the demand for rooms in winter (W), spring (SP), summer (SU) and fall (F). The right-hand panel depicts Glenda’s unit costs per room when rented; these costs are the same for each season.
KEY
ATC-Average Total Cost
AVC-Average Variable
MC-Marginal Cost
Use the diagram above to help Glenda complete the table below. For the profits column, just indicate whether her profits for the season are positive (+), negative (-), or zero (0).
Question 3
- U.K Market
Price
Qty
- International Market
Price
Qty
Trade between the U.S.A and the U.K and the international market increases the trade surplus for both U.S.A and the U.K. For example, the U.S.A does not benefit from this situation since the supply of wheat in the U.S.A is perfectly sensitive to prices of wheat. Therefore, increase in supply of wheat through trade will lead to excess supply of wheat thus causing the price of wheat to drop below the average price.
Conversely, the U.K benefit from this situation since the supply of wheat in the U.K is perfectly insensitive to changes in prices of wheat. As a result, increased supply of wheat due to trade will lead to no changes in prices of wheat. Therefore, the price of wheat will remain high enabling them to sell their wheat at a higher price than the U.S.A.
U.S.A loses because its revenues fall below the unit cost of production due to decreased wheat prices brought by increase in wheat supply through trade.
Britain is the winner since its perfectly inelastic supply ensures constant high prices for its wheat. This generates sufficient revenue to cover costs of production.
References
Wessels W.J.(2006). Economics. U.S.A: Barron's Educational Series
