Federation University
ATMC Melbourne

Business Economics

Assignment
Title Microeconomics

Student name: Parul Bedi

Student ID: 30302266

Lecturer/Tutor: Mr. Susil Ratnasekara

Word Count :

Date of Submission: 16/1/2015

Question 1
a) Suppose that oil prices rises sharply for years as result of a war in the Middle East. Illustrates with a diagram what happens to the:

i. Demand for automobiles?
Ans :- The demand curve moves to the left because people are not using automobile due to increase in the price of petrol.

ii. Demand for home insulation?
Ans :- No change

iii. Demand for coal?
Ans :-Demand curve moves to the right because price of oil is increased and industry used coal as another resource.

iv. Demand for tyres?
Ans :- Demand curve moves left because people will not use automobile so that tyres are not used.

v. Demand for bicycles?
Ans :- Demand curve moves to the right because people using bicycle instead of automobile due to increase in price of oil.

b) Explain the impact of external costs and external benefits on resource allocation?
Ans- Resources are over allocated when negative externalities exist because the equilibrium price is too low resources are under allocated when positive externalities exist because the equilibrium price too high.

c) Why are public goods not produced in sufficient quantities by private markets?
Ans- The main reason is that of the free rider problem. Pure public goods have characteristics such as non-excludability. These characteristics give rise to the free rider problem.

Question 2:
a) Explain why scarcity forces individuals and society to incur opportunity costs. Give specific examples.
Ans-
b) Suppose a chocolate bar manufacturer promotes its products by advertising and opportunity to win a ‘free car’. Is the car free because the winner pays zero for it?
Ans- Any thing is no free in this world. Pay for every thing.
c) Why is the production possibility frontier bowed outwards?
Ans:- Layton, Robinson & Tucker (2012) Production possibility curve moves outward due to the Economic growth and the company utilized their resources properly.

Question 7
The following diagram illustrate an industry under oligopoly consisting of equal sized firms and a particular firm in that industry. Each of the firm produces an identical product.

a) Assuming that the firm form a cartel, what price will the carpet choose if it wishes to maximise overall profit for the cartel?
Ans :- $25 (where MC=MR)
b) What total output must the carpet produce in order to maintain this price?
Ans :- 100
c) To what output will an individual firm be restricted if this price is to be maintained (assume all firms are permitted to produce the same level of output)?
Ans :- 10
d) If the other firms stick to this output, how much would an individual firm be tempted to produce if it wished to maximise its own profit at the agreed price?
Ans :- 20 (where MC = Price = MR)
e) If it undercut the cartel price, what price and output would maximise its profit (assuming that the other members did not retaliate)?
Ans :- $ 25, 15 units (where MC = MR)

Question 4
a) Suppose the income elasticity of demand for pre-recorded music compact disks is +7 and the income elasticity of demand for a cabinet maker’s work is +0.7. Compare the impact on pre-recorded music compact disks and the cabinet marker’s work of a recession that reduces consumer incomes by 10 percent?
Ans :- Pre recorded compact music disks is a normal good and income elastic since Y=+7.0 > 1.0.
Cabinet maker’s work is a normal good and income inelastic since Y=+0.5 < 1.0.
The impact on pre-recorded compact music disks is greater than that of cabinet maker’s work as pre-recorded compact music disks would be considered a luxury good whereas cabinet maker’s work are still considered a necessity even during a recession.
b) How might you determine whether MP3 music player and