Question 1

Question 1

(a) In Fig. 1, the current equilibrium price is $60 a mobile phone and the equilibrium quantity is 4 per market period before the new tax is applied. Mobile phone users enjoy the customer surplus of $80 which is the area of the yellow triangle. Mobile phone sellers earn producer surplus of $80 which is the area of the blue triangle. At the equilibrium and efficient quantity, total surplus, which equals the sum of consumer surplus and producer surplus, is maximised. Consumer and producer are enjoying the largest possible surpluses. (b) and (c) With a $20 tax in Fig. 2, the buyers' price rises to $70, the sellers' price falls to $50, and the quantity decreases to 3 mobile phones per market period. With the imposition, the sellers' minimum supply-price rises by the amount of the tax and the supply curve shifts to S + Tax. This supply curve does not show marginal social cost. The tax component isn't a social cost of production. It is a transfer of resources to the government. At the new equilibrium quantity, consumer surplus shrinks to the yellow area ($45), and the producer surplus shrinks to the blue area ($45). Part of the loss of total surplus is the government's tax revenue (the pink area) and part becomes a deadweight loss (the grey area). (d) With a tax of $20 per mobile phone, sellers will offer 4 mobile phones per market period only if the price is $80 per mobile phone, so the price paid by buyers rises by $10 to $70 per mobile phone and received by sellers falls by $10 to $50 per mobile phone at the new equilibrium quantity of 3 mobile phones per market period. Consequently, buyers pay $10 of the tax and sellers pay the other $10. The tax is split evenly between sellers and buyers. (e) The average price elasticity of demand for mobile phones between the before tax and after tax equilibrium is 1.86 which is come from the mid-point formula. The measure is greater than 1 and the good (mobile phone) is said to have an elastic demand. With a $20 tax, the quantity demanded decreases to 3 mobile phones per market period in response to the tax-induced increase in price which is $70 per mobile phone. Therefore, the responsiveness measure of 1.86 indicates how much the mobile phone demand is sensitive to the increase in price.

Question 2
Printer Thailand India
100Lhrs/unit 90Lhrs/unit

Kilogram of Rice
5Lhrs/kg 3Lhrs/kg (b)
60% of

9,000Lhrs = 5,400hrs (Rice) 40% of 9,000Lhrs = 3,600hrs (Printer)

Thailand
Printer (unit) Rice (kg)

Lhrs to produce 1
100hrs 5hrs

Allocation of Lhrs
3,600hrs 5,400hrs

Total Output
36 units 1080 kgs

India
Printer (unit) Rice (kg)

Lhrs to Produce 1
90hrs 3hrs

Allocation of Lhrs
3,600hrs 5,400hrs

Total Output
40 units 1800 kgs (d)

Thailand has a comparative advantage over India producing printers and India has a comparative advantage over Thailand in producing rice. Therefore, if the two countries specialise and trade, then Thailand should produce printers and India should produce rice.

Thailand
Printer (unit) Rice (kg)

Lhrs to Produce 1 100hrs 5hrs Lhrs to Produce 1 90hrs 3hrs

Opportunity Cost

20kgs of rice 1/20unit of printer

Opportunity Cost

India
Printer (unit) Rice (kg)

30kgs of rice 1/30unit of printer

Specialisation
Printer (unit) Rice (kg) Thailand 90 units 0 India 0 3000 kgs of rice

Specialisation increased the combined output of printers for the two countries by 14 units and the combined outputs of rice for the two countries by 120 kgs of rice. (Printer: 90 units less 76 units equals to 14 units), (Rice: 3000kgs less 2880kgs equals to 120kgs)

(e) Thailand
Printer (unit) Rice (kg)

Trade
Time required 4,200Lhrs 6,000Lhrs 10,200Lhrs India 48 1800 1848 Time required 4,320Lhrs 5,400Lhrs 9,720Lhrs

Total

42 1200 1242

The trade has made the two countries better off as we can see the result from the table above. Each countrys consumption bundle after the trade reflects the consumption point which sits on outside each countrys frontier. The total amount of each countrys output is unattainable if the trade does not take place. The total time required to get such an amount also shows that it is impossible to produce with the given Lhrs of 9,000 if the two countries do not trade and consume whatever they produce.

Question 3

Question 3
(a) Subsidies to nuclear power contribute to unique environmental and safety issues intending to redress economic injustices or imbalances. Even if nuclear power or energy involves negative externalities, the grant of the subsidies draws the result that the market outcome for the energy resource would be reduced to the efficient amount (Equilibrium). As the clean-up subsidy is the part of the companys private cost, it would not have resulted in inefficient overproduction which is created by an excess of subsidy given to the power company. So, the figure represents that with the subsidy borne by the government, the nuclear energy market
5

provides the efficient amount of electricity for society without using more resources at the efficient price. (b) With no subsidies granted in the future, the supply curve will shifts leftward. The equilibrium quantity decreases from Q1 to Q2, the price rises from P1 to P2, and the price received by producers decreases. The supply of nuclear electricity without subsidies will raise the price paid by consumers and decreases the marginal cost of producing nuclear electricity. In the new equilibrium, marginal benefit exceeds marginal cost and the supply without subsidies will result in inefficient underproduction while the original equilibrium creates the efficient environment for consumers and producers. (c) The quantity of E3 is more than the E2s and less than the E1s. The price of E3 is higher than the E1s and lower than the E3s. The insurance levy (Pigouvian Tax) is imposed on the companys output to deal with future possible externalities. The tax shifts the supply curve with the clean-up subsidy leftward by the amount of the tax (P1-P2). With the increment in cost, producers have an incentive to cut back the companys production to the socially optimum level (E3) by reducing the marginal external cost equal to the marginal tax. (d) If we assume that nuclear power is the most cost effective energy generation, the scenario (b) is the worst case among the three, because the equilibrium quantity is less than the other two at the equilibrium price higher than the scenario (a) and (c). The subsidised supply curve <Scenario (a)> reduces producers burden as well as consumers burden on the energy resource, so it seems to be the most beneficial to the society however, here we are facing with the negative externalities which is a social cost incurred by nuclear reactor leaks. The curve with a clean-up subsidy could encourage overuse of such energy resource which increases the social burden with relation to the externalities. The possible solution to the negative externalities is the imposition of pigouvian tax designed to induce producers to limit their production of the energy resource to the socially allocatively efficient level of production. The social cost incurred by the energy resource is not covered by the private cost of the market activity. Even if the government supports the company to make the use of the energy resource beneficial to the society, it is too heavy to handle the damage caused by such catastrophe as in the article. Therefore, the tax will reduce over-consumption of the energy resource creating the negative externalities and correct the market outcome for nuclear electricity in Japan back to the optimum level of efficiency.

Question 4

Question 4
(a) A decrease in population will shift the demand curve leftward, and an increase in productivity will shift the supply curve rightward. Due to this, the equilibrium point will shift down from Eo to En which decreases the price level from Po to Pn. However, the quantity remains constant. If demand increase by more than the amount shown in the figure A, the quantity will decrease; if supply increases by more than the amount shown in the figure A, the quantity will increase. (b) Due to increase in income, people will seek and buy normal goods instead of inferior goods. The situation will shift the demand curve leftward, decreasing demand. Due to increase in prices of factors of production, the supply curve will shift leftward. These changes will shift the equilibrium point from Eo to En. Decreasing the quantity demanded from Qo to Qn, whereas the direction of the price change is uncertain. (c) Due to decrease in the number of suppliers, the supply curve will shift leftward, decreasing supply at all price levels. And when income decreases the demand curve will shift rightward (pursuit of second best one) as the inferior good is directly affected by a level of income. As a result of these changes, the equilibrium point will shift upward from Eo to En, increasing price level but the direction of the quantity change is uncertain. (d) With decreased consumer preference the demand curve will shift leftward. And when the price of compliment increases the demand for the product will shift further towards its left. Decreasing the demand drastically, demand curve will shift from D to D2 and finally to D3. The equilibrium point will shift from Eo to En, showing price falls and quantity consumed also falls. (e) Due to increase in the price of substitute in consumption, the demand curve for the inferior product increases shifting the demand rightward. But in the production, the supply curve will shift towards left decreasing the supply because suppliers are willing to produce a product that gives higher return. Due to increased demand and decrease in supply, the price level increases but quantity remains constant.

Question 5
(a) The use of celebrity for endorsements creates a very favorable impact on the consumer and it creates a connection which forces a consumer to purchase a product. The following attractive elements of celebrity endorsements attached to a product dominate consumers buying behavior. * Instant Awareness, knowledge about the brand and easy recall. * Values and image of the brand is defined, highlighted and refreshed by the celebrity. * The celebrity adds new edge and dimension to the brand. * Credibility, trust, association, aspiration and connectivity to brand. * Belief in efficiency and new appearance that will result in at least trial usage Consequently, higher utility figure is given to this sort of product. At a given budget, consumers seek to maximise the utility from obtaining a product. Therefore, given similar prices and functionality, celebrity endorsement that furthers consumers utility are more likely to be preferred and subsequently increases the demand. (b) Assuming that Molly is a supplier in relation to the sale of the autographed poster, she is not willing to trade away such a good if the number is limited. Even if Helga offered her $50 for the post, Molly enjoys higher utility figure from the poster than from the value she gets by selling the poster to Helga. The poster itself stands very unique being to Molly. Unlike the behavior of Molly as a supplier, she treats the poster as if it is nothing worth if it was ever damaged or destroyed. Assuming that Molly is a consumer being not possessed of the poster, she faces with a budget constraint and preferences. Mollys income might be limited at her age and there are many things she wants to buy if she has that much money in hand. When Helga offered $50 for the poster, Molly refused to sell it and her thought towards the worth of the poster is against her act towards Helga. Her inconsistent attitude reflects that even if she has an opportunity to buy the poster when she has that much of money, she might choose not to buy that poster and go for another interesting good she has in her mind.

(a) Hotdog = $1, Hamburger = $2 (b) The slope of the budget line (straight line) indicates the number of units of hamburgers that Max must give up in order to buy an additional unit of hotdog. If Max gives up 1 hamburger, he can buy 2 hotdogs. In other words, there is a 1 to 2 trade off for two hotdogs Max buys he has to forego buying 1 hamburger. Both the budget line and PPF shows the boundary between those combination of goods and services that can be produced/purchased and those that cannot.

Reference Question 1
Douglas F. McTaggart, Christopher C. Findlay, Michael Parkin, Microeconomics 6th ed. Page 135 143

Question 2
Douglas F. McTaggart, Christopher C. Findlay, Michael Parkin, Microeconomics 6th ed. Page 35 44

Question 3
Douglas F. McTaggart, Christopher C. Findlay, Michael Parkin, Microeconomics 6th ed. Page 142 143

http://tutor2u.net/economics/content/topics/marketsinaction/producer_subsidies.htm http://users.hunterlink.net.au/~ddhrg/econ/ext1.html#subsidy

Question 4
Douglas F. McTaggart, Christopher C. Findlay, Michael Parkin, Microeconomics 6th ed. Page 56 73

Question 5
Douglas F. McTaggart, Christopher C. Findlay, Michael Parkin, Microeconomics 6th ed. Page 268 281

http://www.scribd.com/doc/43610142/The-Effect-of-Celebrity-Endorsement-on-Consumer-BuyingBehaviour http://www.cba.ua.edu/~helder/choice.htm The graphing tool that I have used is IPAD using application called OmniGraphs

10