HI5003 Economics for Business Tutorial Submission Questions T1 2020

PRODUCTION POSSIBILITY FRONTIER – QUESTION 1:

1. Position B is said to be an inefficient combination. The reason being over here both the resources are not fully utilized. Hence, it is considered as inefficient combination.

V is the point which lies on Production Possibility Frontier. Since it lies on the curve, it is considered to be the point of efficient output. Both the resources are fully utilized.

D is considered a point which is not attainable. With the current combination, the point D is outside the Production Possibility Frontier. Hence, it is market as not attainable as of now.

Considering that the Nepal is currently operating at T, then 10,000 additional tonnes of rice involves sacrificing of 10 machinery units. Hence, the opportunity cost is 1/1,000 tonnes of rice for each extra machinery.

B.

B1: If the Nepal begins to manufacture fertilizers, then the fertilizer is likely to induce more production of rice in the same quantity of land. Thus the Production Possibility Frontier 2 (PPF2) will represent the same.

B2: The discovery of steel in Nepal is likely to increase the number of machines in the country. However, there will not be any increase in the production of rice. Thus we believe PPF3 is the best representation of this scenario.

B3: Since the Nepal Government has got the requested funds for both the Rice and Machinery segment, the Government is likely to spend a huge amount to increase these productions. Thus PPF4 is considered as the best representation for the Government aid and support to the machinery and Rice segment.

MARKETS IN ACTION – DEMAND AND SUPPLY : QUESTION 2:

3. The market equilibrium price is considered to be AUD $ 3. It is at that price, the demand is equal to the supply. The Quantity of cotton at AUD $3 is 55 Kg.
4. If the Government fixes the Cotton Price at AUD $ 2, then there will be more people to buy the product. The demand for the cotton will be around 70 kg. However the supply will be only 40 kg. Thus there will be always in-equilibrium in the market and all the people will try to buy the available cotton and there by resulting in chaos.

PRICE ELASTICITY OF DEMAND AND SUPPLY – QUESTION 3:

1. The price elasticity of demand is found to be 0.8 for Big Tobacco Co Ltd. It means that the price elasticity is considered to be Relatively Inelastic Demand (since the elasticity is 0.8). We see that because of the increase in prices, the demand is likely to come down to 800 packets from 1000 packets. Though there is going to be a drop in sales in the near term, people will accept this price shortly and the demand for the product is likely to rebound in the near future.
2. Cigarette is considered to be injurious to health. Government can levy more taxes on these products and where by the companies will increase the cost of cigarettes to hope up with the increase in taxes. This is likely to pinch the customers who are buying and using cigaretts. There by a good number of citizens are likely to come out of smoking.

PRODUCTION COST – QUESTION 4:

John’s Accounting Profit is $ 67,000

John’s Economic Profit is $ 61,500

MARKET STRUCTURE: PERFECT COMPETITION AND MONOPOLY QUESTION 5:

Price per Bag at Perfect Competition = AUD $40 /bag

Quantity sold at Perfect Competition  = 500 bags/month

Average Total Cost stands at AUD $33/bag

Thus the profit for the Sarah Mat stands at AUD $ 3,500.

The key characteristics of a Perfect Competition firm is that

• There will be n number of small firms operating in the country.
• Since, the Sarah Mat is selling rice, a commodity. All have the same product.
• Any companies can come and leave the market. There is no restriction.
• The details about the price and technology is well known in the market.