BUSN 2043 Managerial Economics 2015 S1 (Tutorial 2- 14th March 2015)

Prepared by: Khong Kok Shen (2148234)

Question 3-1
What is Pareto efficiency? Why do economists use this criterion for
comparing alternatives economic systems?
Pareto efficiency state that the allocation of resources in an economy is in the
most efficient level or optimal whereby there is no any extra resources can be used
to increase any individual utility. In this situation, the economy cannot makes an
individual better off and do not makes the other party worse off.
Economist use this criterion to compare alternatives economic systems
because it can helps to understand how well is the resources can be allocated in an
economy. It can simply related by the production possibility curve. The trade off of
production could not occur outside the production curve because the economy does
not have sufficient resources. If production point is occurred inside the production
curve means the economy does not allocate the resources effectively.

Question 3-5
What do you think will happen to the price and quantity of DVD
players if
a. The availability of good movies to play on DVD players
increases?
b. Personal income increases?
c. The price of inputs used to produce DVD players decreases?
d. Tickets prices at local movies theaters decline substantially?
Pric
e

SS

DD

Quantit
y increase. Thus, the DD curve will shift to the
a. The demand on DVD player will
north east side, causing the price and quantity supply of DVD player increase.
b. When personal income increases, the purchasing power of the individual will
increase. Thus, the demand on the DVD player will increase. The DD curve will shift
to the north east side and the price and quantity supply of DVD player will increase.

c. The production cost will reduce, so the quantity supply will increase. Thus, the SS
curve will shift to south east side and causing the price of the DVD reduced and the
quantity of demand will increase.
d. When the ticket price of the theater declined, the people will watch movie at the
theater more than purchase DVD. So, the demand of DVD player will reduce and the
DD curve will shift to south-west. The shifting of the DD curve will cause the price of
the DVD and quantity supply reduced.

Question 3-7
a. What is an externality?
b. Why might externalities lead a firm to discharge too much
pollution into a river?
c. Congress has passed a law that limits the level of cotton dust
within textile factories. Why might a textile firm allow too
much cotton dust within its workplace?
a. Externality is an outcome of an economic activity which experienced by third
parties. It can be positive or negative.
b. When a firms discharge too much pollution into a river, the situation is known as
negative externality. This situation is caused by the production machine of the firm.
When production goes on, the machine will release several wastages such as
smoke, oil, waste and so on. The cost to recycle the wastage is very high and the
firms usually will discharge into a river. Therefore, it will pollute the river and affect
the ecosystem of the river and residences health nearby.
c. One of the reasons a textile firm allow too much cotton dust within its workplace
is the machine they used in the production. The machine used may be old and not
eco-friendly. The technology used in the factory maybe not able to produce the
cotton in the least cotton dust. The cost to change a new series of machine and
technology is high and will reduce the income of the company. Second, the firm may
be do not care or focus on the importance of corporate social responsibility. To
improve the environment, the company has to allocate huge amount of money to
invest into a zero money-return activity or technology.

Question 3-11
If markets are so wonderful, why do firms exists?
The firms still exists in a wonderful market because it plays an important role
of facilitating the movement of the resources. A market contains of various
elements such as employee, production material, technology and so on. The firms
responsibility is to manage and facilitate the movement of each available resource.
If the resources do not allocate effectively, it will turn to be wastage.

Question 3-18
Suppose that annual demand in the U.S. market for ice cream cones
can be expressed as Qd = 800 + 0.2I 100P, where Qd is the number
of cones demanded in millions of cones, I equals average monthly
income in dollars, and P is price in dollars per cone. Supply can be
expressed as Qs = 200 + 150P (with the same units of quantity and
price)
a. Graph the demand and supply curves for ice cream cones,
assuming that average monthly income is $2,000 and solve for
the equilibrium price and quantity.
b. Now assume that average monthly income drops to $750 and
supply is unchanged. Draw the new demand curve on the same
graph as used in (a) above and solve for the new equilibrium
price and quantity. How would you describe the shift in
demand intuitively?
a.

I=$2000
Qd= 800 + 0.2I 100p
Qd= 800 + 0.2(2000) 100p
Qd= 1200 100p

When Equilibrium,
Qd = Qs
1200 100p = 200 + 150p
1000 = 250p
P = $4
When P=$4,
Quantity= 1200 100p
= 1200 100(4)
= 800unit

b. When I= $750
Qd= 800 + 0.2(750) 100p
Qd= 950 100p
New equilibrium Price,
Qd=Qs
950 100p = 200 + 150p
750 = 250p
P= $3
New equilibrium Quantity,
Quantity= 950 100(3)
= 950 300
= 650
When the average income had reduced to $750, then the purchasing power of the
consumer will reduce. Therefore, the demand curve will shift from the origin to the
south-west direction. After the shift of the demand curve, the both the equilibrium
of price and quantity will reduce to $3 and 650 unit respectively.