Part I
- B (Sum of all costs except the lost salary, lost interest) = $30,000+$500+$6000+1200+$1300
- E (implicit costs are indirect payments that includes tips)
- B (Total Utility2-Total Utility1- 50-30)
- C (Sum the total utility from consuming the bundle = 180+50+40 = 270 utils. Note that E provides the highest utility but the bundle costs more than $6
- D (low price elasticity means relatively low reduction in demand in response to price/tax increments
- The diagram in the question is unclear. Please use this diagram to answer the three questions
- Use diagram
- Assuming point b and c represent 25 and 30 changes in quantity, the PED=
% change in quantity/%change in prices
= [(30-25)/25]/[(8-6)/6)] = {5/25}/1/3) =15/25 =0.6
- B (Law of demand dictates than an increase in prices results in a reduction in demand (sales)
- C (lies above the equilibrium point and on the supply curve)
- C (Surplus supply triggers competition among suppliers)
- E (6 is the equilibrium price)
Part II
- BMW=160,000 ($37,000)
Mitsubishi = 124,000 ($28,200)
Marginal Utility to Price Ratio = 124,000/$28,000 = 4.397161
Effectively, Lori should buy a Mitsubishi
- The price should fall so that the marginal utility to price ratios are equal or lower than the Mitsubishi i.e. 4.397161=160,000/P
P=160,000/4.397161
=$36,387.1143
- (a) E
(b) D (allows minimum consumption goods to be produced)
(c) C (lies on the PPF, not inside or boundary)
(d) F (lies inside AE, which is lower than AE.’
(e) D (technology increases efficiency
- (a) A
(b) B
(c) F
(d) B (78-67)
(e) A
Part III
- The key primary inputs include labour, land and timber. Hong Kong is a tiny Island territory with no access to trees and land, and the high costs of living make it expensive to higher labour to work on the apartment. The land is expensive, and many apartments are essentially densely populated skyscrapers. On the other hand, Burkina Faso is a large tropical nation with a huge supply of trees, cheap labour and land. Effectively, the apartment would be relatively cheaper in Ouagadougou, than Hong Kong. Effectively, in order to ensure efficiency in both locations, different approaches need to be used. In Hong Kong, the design and construction of the apartment would be different. The design should have a very small footprint and instead utilize the vertical space. Further, machines and prefabricated timber would be necessary for the construction. In Ouagadougou, there is plenty of land, and so there is no need for highrise apartments. Further, the cheap labour means that it is possible for the construction to use the cheaply available labour in the construction as against using machines. The cheap and easily available timber means that the resource can be easily sourced locally, which eliminates the need for prefabricated and artificial fittings.
- Accounting profit is easily the most commonly used. It amounts to the difference between the total revenues and the firm’s explicit costs. Explicit costs refer to costs incurred by firms in making direct purchases used in the production also known as the cost of goods sold. On the other hand, economic profit refers to the difference between the firm’s total revenues and the sum of both implicit and explicit costs. Effectively, the economic costs involve both the cost of goods sold as well as the opportunity costs incurred due to the diversion of resources from some function to the other. Normal economic profit refers to the difference between economic and accounting profits, which means that normal profits ensure that resources remain in their current allocations. As long as the economic profit remains non-negative, it means that the opportunity costs involved in the diversion of resources to the production activities of the firms are not excessive and that alternative uses would not yield markedly better results. As such, there is no really incentive to re-allocate resources to other uses by shutting down the firm.
- Demerit goods are associated with inelastic price elasticity of demand. This means that an increase in prices due to per unit taxation would induce a less than proportionate reduction in the quantity consumed. If a per unit tax is imposed on luxuries, the high price elasticity of demand would means that demand would fall sharply and thus the government would have reduced tax revenues. On the other hand, normal goods comprise of products such as foodstuffs, fuel, gas and electricity, which are consumed on a daily basis. Effectively, increased taxation on this product would generate an economy-wide inflation. Increased inflation means that the purchasing power of many consumers would be eroded by the increased cost of living, which will in turn encourage people to demand increased wages (including minimum wages). Since increasing wages takes a long, the immediate effects of taxation would be public frustration and anger that would generate protests.
