Microeconomics - the Effect on the Market for Cars - Assignment Example

365875 microeconomics ASSIGNMENT QUESTIONS 1. How does the principal of opportunity cost apply to you attending college? Let’s say you decide to save some expenses by not buying the textbook and study guide for this unit what might be the opportunity cost of that decision? (1 mark) Basically, opportunity cost is the cost of not choosing an alternative. Based on the 2 alternative choices below, the opportunity cost is alternative 2, buying the textbook and study guide for this unit. Alternative 1 Save expenses by not buying the textbook and study guide for this unit. Alternative 2 buying the textbook and study guide for this unit. 2. For each of the following, draw a diagram that illustrates the effect on the market for cars. Indicate in each case the impact on equilibrium price and quantity (West 2003;5) a) The price of petrol, a complementary product, keeps rising http://www.netmba.com/econ/micro/supply-demand/ The increase in price of petrol cause a shift in the equilibrium price from D1 vs S intersection to Do vs S intersection. b) There is an increase in the price of compulsory car insurance The increase in the price of compulsory car insurance will cause a shift in the equilibrium price from the D1 vs S intersection to the Do vs S intersection. c) A technological innovation reduces the cost of production http://www.netmba.com/econ/micro/supply-demand/ A technology innovation reduces the cost of production causes a shift in the equilibrium price from Do vs S intersection to D1 vs S intersection. http://www.netmba.com/econ/micro/supply-demand/ d) A local government imposes a green tax on car ownership (2 marks) http://www.netmba.com/econ/micro/supply-demand/ A local government imposition of a green tax on car ownership causes the equilibrium price from D1 vs S intersection to Do vs S intersection (Samuelson, 1973;125). 3. The supply of oil will never actually run out. Why? (1 mark) The supply of oil will never actually run out because there are alternative sources of energy. Some environment friendly cars will use solar panels (sun energy) to run their cars. Some electricity generating companies will use atomic energy to generate electricity. Other electric companies are shifting from fossil oil to waterfalls (hydroelectric power) to generate home and office electricity. The shift in fuel demand from oil to other sources will prevent the supply of oil from actually running out (Samuelson, 1973;25). 4. Under a situation of rent control on units, flats and apartment who actually wins and who loses? What are the long term implications of having rent control? (2 marks) Under a situation of rent control on units, flats, and apartments, the actual winners are the tenants of the units. They are able an amount equal to the difference between the maximum rental payment allowed by the rent control law and the rent payment under the situation where the rent control on units, flats, and apartments is not implemented. On the other hand. the actual losers are the tenants of the units. They are not able to collect an amount equal to the difference between the maximum rental payment allowed by the rent control law and the rent payment under the situation where the rent control on units, flats, and apartments is not implemented (Albelda et al, 1999;138). 5. Why do most governments not place sales tax on those goods which have a high price elasticity of demand? What goods do governments typically tax ? (1 mark) Most governments do not place sales tax on those goods which have a high price elasticity of demand because of its unfairness because the workers bear the brunt of the tax collections. For example, a $1 tax is charged on a box of apples generated in a farm. An inelastic apple price to the clients (where a price will increase generating a small demand loss accounted as excess revenue) will persuade the farmers /suppliers to pass the tax to the consumers . However, if the price is not farmer cannot increase apple prices because the demand is inelastic ( if the apple price will increase, an increase in demand will be lost than the excess sales generated), the farmer /supplier will have to pay for the taxes or suffer a reduction in revenues. However, is the farmer will increase the apple price by $ 0.40, then the customers and the supplier,/farmer will share the tax payments. Thus, the governments typically taxes goods that do not have price elasticity of demand (Samuelson & Nordhaus, 1995; 15). 6. The price of computers has fallen significantly in the years since they were first introduced, yet demand for them has increased significantly. Is this a contradiction? Illustrate your answer with a diagram. (2 marks) On the contrary, this is in compliance with the law of demand. One good reason is that the public’s demand for the competitor’s product (manual typewriters), has declined due to the issue using computers to produce company reports is more time saving, more comfortable, and less tedious as compared to using the outmoded manual typewriters. Likewise, another reason for the increase in the demand is the increase in the purchasing power of the clients. A few clients could have been promoted and can afford to buy personal computers (Chisolm & McCarty, 1981;152). 7. Why should a firm continue to produce if it makes no economic profit? (1 mark) The firm continue to produce if it makes no economic profit because the company may able to generate accounting profit. In addition, the company may not be able to generate economic profit now due to competitors’ better products, offers, benefits, services, etc. today but the company may be able improve its current product quality and generate economic profits in the near future. This is possible when the public’s demand for the competitors’ products wanes due to increasing competitor prices (Rush, 1998; 83). 8. Discuss the main strengths and weaknesses of game theory as a theory of oligopoly behaviour and as an aid to a real world corporate oligopolist in deciding prices and output. (2 marks). Game theory has its strengths as a theory of oligopoly behaviour and as an aid to a real world corporate oligopolist in deciding prices and output. One advantage of the game theory emphasises that the theory that a person’s probable future success or failure can be predicted with higher percentage of success if the feasibility study is based on prior and current successes and failures of persons or organisations in the same economic or marketing environment. Put it another way, a person will prefer to set up a hamburger store because of the success of the McDonalds hamburger chain. For example, a buyer of goods will use the supply curve or the equilibrium curve as a basis for determining when one can buy a good (a buyer will buy a good if the price will decline to more affordable levels). This analysis is true in the Oligopoly market where are there only a few competitors (Slavin, 1989; 5). One disadvantage of the game theory states that the people are led to believe that the outcome of the game theory is fool –proof. This means that all persons putting up a hamburger business will automatically generate enough revenues to cover all of the operating expenses. This is not always true because the hamburger market may be too saturated. This prevents the new hamburger company to generate enough revenues to pay of its daily production, marketing, finance, and other operating expenses. This analysis is true in the Oligopoly market where are there only a few competitors. 9. Why should we study perfect competition if it does not actually exist in the real world? (1 mark). We should study perfect competition even though it does not actually exist in the real world because it will serve as a guide or a standard to be adhered to. The government plays a significant role in ensuring that the supply and demand market is in a laissez faire environment. The perfect competition market is the invisible hand that turns the private individuals’ or organisation’s goals into the greatest good for the greatest number of affected parties. Prices of goods and services serve as signals to guide production in the ways we want. In terms of supply, companies will increase production if the price of goods will increase. On the other hand, an increase in prices will create a decline in the demand for goods and services. This is the very essence of the perfect competition (Rush, 1998; 15). 10. Explain how the entry and exit cost in an industry in which there may be only one firm operating affects the level of prices the firm will charge. (1 mark) The price will dictate the price it wants in a monopoly. In a monopoly, there is only one supplier. The customers are forced to buy the products of the suppliers, despite the increase in selling price, because the clients have not other supplier alternative to go to. The company will recuperate their entry and exit cost in the industry in order to generate profits. Profits are generated if the revenues from sale of the goods and services are higher in value than the total of the sum of the cost of goods / services and other expenses to product the goods or services (Samuelson, 1995; 212). 11. Explain and illustrate with diagrams the differences between diminishing marginal returns and decreasing economies of scale and give some examples. Initially, the law of diminishing marginal returns refers to the marginal production of one of the production factors. The law of diminishing returns includes the situation where the suppliers will get less and less extra output when more production inputs are fed while holding all other production inputs fixed. The marginal product for every production quantity will be reduced as the amount of production infusion is increased while other inputs are place on hold. For example, One machine produces a maximum of 10 units per hour. An increase in the raw materials into the machine will not increase the production output in excess of the maximum quantity of 10. On the other hand, decreasing economies of scale occurs when the occurrence of inefficient management and labour policies. The hiring more workers than optimum will create a decreasing economies of scale. Likewise, deteriorating transporting will contribute to decreasing economies of scale. Further, the organisation’s change to a new marketing strategy to distribute its goods and services to more areas or communities will increase the company’s delivery and other maintenance expenses (Chisolm, 1981;48). (2 marks) 12. More Holden cars have been sold in the last year than any other model of car despite the price of Holden cars has risen. Does this mean that the law of demand does not actually hold? (1 mark) On the control this is in compliance with the law of demand. One good reason is that the public’s demand for the competitor’s product (Toyota), has declined due to the issue of the Toyota cars’ malfunctioning steering wheel. Likewise, another reason for the increase in the demand is the increase in the purchasing power of the clients. A few clients could have been promoted and given corresponding car benefits (Albelda et al., 1999; 109). 13. Why have western governments introduced a price for carbon emissions. Is there ,however, a prisoner’s dilemma at play in explaining why some countries are reluctant to charging a price for carbon emissions? Some countries are reluctant to charging a price for carbon emissions because sooner or later, everything in this world is no longer free. There is a worldwide trend to put a price on fossil oil burning. This is in light with the global warming upheavals among environment –conscious nations. The governments are against the main goal of pricing carbon emissions. The main goal is to discourage the burning of fossil oil because it increases the painful economic consequences of burning fossil oil. One of the painful consequences is global warming through the emission of greenhouse gases (http://e360.yale.edu/content/feature.msp?id=2148). (3 Marks) REFERENCES Yale, retrieved June 2, 2010, http://e360.yale.edu/content/feature.msp?id=2148 Field, A., Appleyard, D., 1998. International Economics, London, Irwin McGraw –Hill Press Samuelson, P., (1973), Economics, London, Sydney, McGraw Hill Albelda et al., (1999), Real World Micro, Worcester, Saltus Press Samuelson, P., Nordhaus, W., (1995), Economics, London, McGraw –Hill Chisolm, R., McCarty, M., (1981), Principles of Economics, London, Scott Foresman Press Rush, M., (1998), Microeconomics, N.Y., Harlow England, Sydney, Addison Wesley Press Slavin, S., (1989), Economics, Chicago London Sydney, Irwin Press Read More