Analysis of Marginal Costs - Assignment Example

Q. 1 Period 1 Explanation: Using S and Sa to represent the supply curves and D and Da to represent the demand curves, i. Because of the government incentives, bigger tracts of pine forest plantations are utilized for carbon sequestration rather than for timber. The result is that the supply curve moves from S to Sa. ii. Because of the decline in the price of iron ore used in making steel house frames, the demand for timber shifts from D to Da. iii. The net price, P increase to P1. Period 2 Explanation: Using S to represent the supply curve and D, Da and Db to represent the demand curves, i. The decline in the average square meter size of new house constructions causes a decline in the demand for timber. Hence, the demands curve shifts from point D to Da. ii. The increase of the first home owner grant causes an increase in the demand for timber. Hence, the demand curve moves from Da to Db. iii. The net change in price is from P to P1. This is based on the assumption that increase demand as a result of the increase in the grant is less compared to the decrease in demand as a result of the reduction of the meter size of new constructions. Q. 2 Part 1: P = 2250 – 1.75Q 1.75Q = 2250 – P Q = Substituting P for $325, we have Q = Q = Q = 1100 Therefore, at a price of $325, Hope can sell 1100 skydives Part 2: Q = 1285.71 – 0.57 * 360 Q = 1285.71 – 205.2 Q = 1080.51 Q ≃ 1081 Total income at $325 = $325 * 1100 = $357500 Total income at $360 = $360 * 1081 = $389160 The difference between the two revenues is $(389160 – 357500) = $31660 This means that after the price increase, there is an increase in revenue, hence the decision is right. The same can be validated by calculating the price elasticity of demand as follows: Price Quantity 325 1100 360 1081 Price elasticity of demand (PED) = = = = = -0.1704 The PED is inelastic at the price range between $325 and $360. Therefore, the increase in price does not result in a larger decline in demand, meaning that total revenue rises. Part 3 The situation can be explained by cross price elasticity of demand Demand for videos at price $325 = 1100 * 0.80 = 880 Demand for videos when the price is at $360 = 1081 *0.75 = 810.75 ≃ 811 Price of skydive (PS) Quantity of videos (QV) 325 880 360 811 The cross price elasticity of demand = = = = -0.799 Inferences: i. When the price of skydives rises by 1 percent, the demand for videos declines by 0.799 percent. ii. The negative cross elasticity of demand indicates that the two (skydives and videos) are complementary goods Part 4: Total revenue generated prior to the price increase: Total revenue of skydives prior to price increase = $325 * 1100 = $357500 Total revenue of videos before prior to skydive price increase = 100 * 880 = $88000 Therefore, the total revenue of the both products when the price is at $325 = $(357500 + 88000) = $445500 Total revenue generated after price increase Total revenue of Skydives after the price increase = 360 * 1081 = $389160 Total revenue of videos after the price increase of skydive = 100 * 811 = $81100 Thus total revenue of the both products after the price increase = $(389160 + 81100) = $470260 Given that the total revenue rises following the price increase, I can recommend that Hope increases the price. Q.3 1. Price Quantity demanded Quantity supplied 0 400000 -10000 10 368750 10000 20 337500 30000 30 306250 50000 40 275000 70000 50 243750 90000 60 212500 110000 70 181250 130000 80 150000 150000 90 118750 170000 100 87500 190000 110 56250 210000 120 25000 230000 130 -6250 250000 From the graph, The equilibrium price is $80 The equilibrium quantity is 150000 students. 2. Total daily revenue = $80 x 150000 = $12,000,000 3. Consumer surplus = = = $3,600,000 Producer surplus = = $5,625,000 4. At a price of $55, the supply falls to 100000. The corollary of this is that fewer people seem to capitalize on the childcare facilities. Approximately 100000 are able to attend the facilities on a daily basis. 5. Producer surplus = = $2500000 6. Price ceiling does not lead to fair and efficient results for children since they have to meet even higher costs compared to the initial aquarium price to find childcare services due to scarcity of these services after the price ceiling. This is because the price of $55 lowers supply to 100000 children but demand remains very high. This results to black market pricing, of which $96 is an example. Another implication of price ceiling is that it can lead to different types of discrimination, for instance some children will be favored to enroll in into the childcare services. Q. 4 1. Imposition of tax will have a more significant impact on the market price in regard to milk since milk has comparatively inelastic demand in relation to luxury cars. In contrast, tax will have a more significant effect on quantity demanded compared to luxury cars since the demand for luxury cars is more elastic than that of milk. This is illustrated in the diagrams below. Graph 1 Graph 2 Tax moves the supply curves of both items (luxury cars and milk upwards). The price rises significantly after the tax on milk (in graph 1 from P to P1). On the other hand, the quantity demanded of luxury cars decreases notably (in graph 2 from Q to Q1). 2. Tax is more effective when the demand is inelastic. In the present case, a relatively smaller deadweight loss results from milk. 3. Consumers will have to carry the tax burden of milk largely by paying more (price P1 in graph 1). But after the imposition of tax, producers of luxury car only receive the price P3 in graph 2, hence a bigger decline in the price after the tax denotes that they are the ones who largely bear the tax burden. Q. 5 a. Q FC VC TC MC AVC AFC ATC 0 100 0 100 1 100 85 185 85 85 100 185 2 100 165 265 80 82.5 50 132.50 3 100 235 335 70 78.33 33.33 111.67 4 100 295 395 60 73.75 25 98.75 5 100 365 465 70 73 20 93 6 100 445 545 80 74.16 16.67 90.83 7 100 535 635 90 76.43 14.29 90.71 8 100 645 745 110 80.63 12.50 93.13 9 100 775 875 130 86.11 11.11 97.22 10 100 925 1025 150 92.50 10 102.50 b. Marginal diminishing product comes into effect after the output 4. From this point, the marginal cost rises due to the fact that the marginal product of every additional variable input constantly decreases after that point. c. i. When the output rises, the average fixed cost declines constantly. ii. The average variable cost, marginal cost and average total cost curves have a U shape iii. The marginal cost curve intersects both the average variable cost and the average total cost curves at their minimum points iv. When the marginal cost is smaller than the average total cost and the average variable cost, it makes them to decrease. But when the marginal cost is higher than average variable cost and average total cost, it causes them to rise. The implication of this that when marginal cost is equal to the average total cost and the average variable cost, the two must be at their minimum points. Read More