ShortAnswer
1.a).The opportunity cost of choosing option C is D. because D is thebest alternative forgone. In the absence of C I would have chosen D.
b).Theopportunity cost of choosing alternative C would be E.
c).Becausewhen choosing something to pursue, you have to consider whatalternative are available and if that alternative is the best. Youwill have to compare that choice with other unrelated factors toensure that your choice is the one that bestows a maximum benefit.
2a
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Theblue mark shows the combination of producing four cars and 10 tons ofwheat scenario of Canada.
Thered mark shows the combination for South Korea production four carand 5 tons
Thefrontier graph cuts at 4 and ten the maximum units that could beproduced if the resource were only dedicated to producing those unitsonly.
b).Theopportunity cost of Canada producing a car is equivalent to 4/10units of grain. The opportunity cost of producing grain is equivalentto 10/4 units of a car.
Theopportunity cost of South Korea producing a car is equivalent to 4/5units of grain. Subsequently, the opportunity cost of producing grainin South Korea is equivalent to 5/4 units of a car.
c).Nocountry has an absolute advantage in producing cars as both countriesgiven the same resource would still produce equal amounts of cars.
Canadahas an absolute advantage in producing grain because with sameresources as South Korea it can still produce more quantity.
d).Comparativeadvantage means that a country can produce a commodity relative atlower opportunity cost compared regarding best alternative forgonethat could have been produced.
Carsare cheaper to produce in South Korea than in Canada, the opportunitycosts of producing cars are low. While the opportunity cost ofproducing the car in Canada is high. South Korea has a comparativeadvantage in producing cars.
Onanother hand, it is cheaper for Canada to produce wheat compared toSouth Korea as its opportunity cost is small. Canada has acomparative advantage in producing wheat.
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S1
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3)Equilibrium price is $4 while equilibrium quantity is 8000units
At$5 price, the quantity demanded would be 6000 while that suppliedwould be 10000units this will result in excess supply. I expect theprice to shift down wards. The supply curve would shift from thedirection of S1 to S, to equilibrium.
Ifthe price were at $2, there would be a lot of demand hence shortage.The quantity that can be supplied at that price is 4000 and demandstands at 12000units. The market equilibrium would be off balance.This would result in an increase in price. Hence pushing the price tomarket equilibrium
4)No change in demand coupled with no change in supply would result insame equilibrium level. The market forces have not been altered.
Nochange in demand and increase in supply would result in excesssupply, and the equilibrium will shift downwards. Prices will fallcausing the shift.
Nochange in demand coupled with decreased supply would result in theshortage. This will shift the equilibrium upward. The shortageresults to price hiking.
Anincrease in demand no change in supply would also result in shortageresult to an upward shift of equilibrium. Price will rise due toshortage consequently rising equilibrium.
Anincrease in demand with increased supply all happening simultaneouslywon’t affect equilibrium. As the force of supply and demand arecanceling each other.
Anincreased demand decreased supply would lead to shortage making thecurrent supply price shoot hence upward movement of equilibrium.
Adecreased demand means the supply remain the same but the peoplebuying are less. This will increase the supply at the current marketsituation resulting to excess supply hence price will fall, so willthe equilibrium.
Adecrease in demand coupled with an increase in supply in the realmarket it never happens simultaneous the case is ambiguous but if itdid the equilibrium would move downwards.
Ifdemand and supply decrease simultaneously without any imbalanceequilibrium will be retained at the same level.
5.A price ceiling is maximum levels set, beyond which something is notallowed to be sold.
a).Themarket price of 300 will not stand there will be less supply thanwhat is demanded as result there is likely hood of the rise of blackmarkets. Demand will spill over to other related markets. There isthe likelihood that there will be goods rationing and if theconsequences persist the producers will move to other lines ofproduction. As a result, the government will have two choices to killthe business or let forces of demand determine the price.
b).Pricefloors are risky when the goods are not monopolized or necessities.In this case the demand at that price is low compared to what issupplied. The resulting consequences will be a reduction in revenueof some business people who will in turn start selling the bicyclessecretly below the recommended prices to attract customers.
c).Pricefloors can be advantageous to business owners if the line is amonopoly. They are used by the government to encourage better pay.Also, used to stabilize market prices to avoid the business peoplefrom being exploited same as consumer, in price floors and priceceiling respectively
6).a).Wateris an essential good, assuming that no one can get free water peoplewill still buy it even if the price changed, the quantity demandedwon’t change significantly. Water has no substitute too. Diamondson other hand, are not essential but are valuable (Veblen goods) acut or increase in price would not change demand that much. I expectneither to have elastic demand
b).Insulinand Decongest spray. The one with many alternatives is elastic. WhatI know is, if your nasal is blocked you have an alternative tobreathe with mouth, or you can make a homemade saline remedy. On theother hand, a diabetic patient needs his/her insulin once they startusing of medication. Another factor would influence elasticity inthis case is income. The elasticity of these remedies also depends onthe users view.
c).Foodand breakfast cereals, food, are a must to all living things theyneed it to survive. Breakfast cereals are not a must they can besubstituted by other types of breakfast. Thus, the demand for cerealis elastic while food is inelastic.
d).Gasolineover the course of week or a year. The time to adjust matters a lot,change in price in a week will not affect gasoline demand so much butin a year a lot can change and its demand can be elastic. Gasolineprice change in a week is demand inelastic while a year is elastic.
e)Personal computers are elastic but a change in IMB computers won’tchange the demand that much they are inconvenient and theirsubstitutes are much better. But a reduction in price of personalcomputers would attract so many users. Personal computers areelastic.
7).Midpoint Elasticity
Ato B
(12-18)/(30/2) =0.4
(300-100)/(400/2) =1
1/0.4=2.5
Thisportion of the curve is elastic, a small change in price result tosignificant change in quantity demanded. For instance, quantitydemanded at $18 is 100 but a change in price to 12 results to doublequantity demanded.
Bto C
[(6-12)/(18/2) =0.67
(500-300)/400=0.5
0.5/0.67=0.75
Herethe curve is inelastic as the calculations prove a change in pricewould not significantly reduce the quantity demanded. What meets theeye and calculation is different.
Butone thing is clear in the two midpoints a decrease or increase inprice in 6 units result in decrease or increase in demand by200units.
.Question8
a).Theprice current charged is $5
Inadult the $5 attract 50 adults that would translate in 5×50=$250
Whilein the children it attracts 20. 5 ×20=$100
Total$350 current revenue
b).Demandis elastic in children market. This can be supported by little changein price greatly affects the quantity while in the adult changesinsignificantly.
c).Adultmarket is inelastic change in price does not significant affect theadult who will watch the movies.
d).Arcelasticity
(Q2-Q1/(Q2+Q1)/2)/p2-p1/ (p1+P2)/2
(60-50)/(60+50)/2)÷(2-5/(2+5)/2
10/55÷3/3.5=0.1818/0.857
0.2121The elasticity of adult demand is inelastic it is less than 1
e).(40-20)/(40+20)/2/(3-5)/(3+5)/2
20/30÷1/2=0.6/0.5
1.3The elasticity of children demand is elastic its value is greaterthan 1
f).Increasing the adult ticket to $8 dollars would mean 8 ×40=%320
Theeffect of reducing price in children would result to 3×40=$120
atotal of $440
Newincome –Previous
440-350=90
Therevenue would increase by $90
References
Mankiw, N. G.,& Taylor, M. P. (2011). Microeconomics.Andover: South-Western.
Ragan, C.,Lipsey, R. G., & Lipsey, R. G. (2011).Microeconomics.Toronto: Pearson Canada