Due September 28, 2010; Beginning of the lecture. Assignment 1: Opportunity Cost and Production Possibility Frontier (PPF)

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1 ECON12011: SMU Due September 28, 2010; Beginning of the lecture Last Name/ First Name/ Student ID: Assignment 1: Opportunity Cost and Production Possibility Frontier (PPF) General Guidelines 1 No late assignment will be accepted unless there is a medical excuse 2 Assignment should be submitted individually 3 Use this sheet to answer questions Cleanliness matters (5% deduction of the mark obtained if not legible) 4 Respect the length indicated for answers if applicable (no more than the limit will be read) 5 Show your work if applicable 6 This assignment is marked out of 20 and it stands for 5% of your final grade Read the story below adapted from Gulliver s Travels- and answer the questions After spending some time in Lilliput, Gulliver goes to visit Blefuscu to see how their society compares to Lilliput His observations in his diary are reproduced below: Blefuscans also produce two goods: cookies and crossbows But things are pretty different in here Like Lilliputians if they spend all their resources on crossbows they can produce 6 of them per day, although currently they are producing 4 crossbows and 6 cookies in a day What is interesting is that in Blefuscu there is a water-shortage and that impedes the production of cookies If Blefuscans want to produce more than 9 cookies then they have to go get water from a remote lake which takes up more workers and negatively affect the production of crossbows I think in Blefuscu, to produce more than 9 cookies, every extra cookie costs one less crossbow This is interesting 1 Draw Blefuscu s PPF in the chart below putting Cookies on the x-axis and Crossbows on the y-axis (look at Question 2 for a Hint) Page 1 of 2

2 ECON12011: SMU Due September 28, 2010; Beginning of the lecture 2 Write the equation of the straight line(s) that represent Blefuscu s PPF (here is the Hint) 3 Using Blefuscu s PPF, fill out the table below Production of Cookies Production of Crossbows What is the opportunity cost of cookies in Blefuscu? Comment! 5 In no more than 4 lines, compare Blefuscu s PPF to Lilliput s PPF as seen in the lectures Page 2 of 2

3 ECON12011: SMU Due September 28, 2010; Beginning of the lecture Last Name/ First Name/ Student ID: Assignment 1: Opportunity Cost and Production Possibility Frontier (PPF) General Guidelines 1 No late assignment will be accepted unless there is a medical excuse 2 Assignment should be submitted individually 3 Use this sheet to answer questions Cleanliness matters (5% deduction of the mark obtained if not legible) 4 Respect the length indicated for answers if applicable (no more than the limit will be read) 5 Show your work if applicable 6 This assignment is marked out of 20 and it stands for 5% of your final grade Read the story below adapted from Gulliver s Travels- and answer the questions After spending some time in Lilliput, Gulliver goes to visit Blefuscu to see how their society compares to Lilliput His observations in his diary are reproduced below: Blefuscans also produce two goods: cookies and crossbows But things are pretty different in here Like Lilliputians if they spend all their resources on crossbows they can produce 6 of them per day, although currently they are producing 4 crossbows and 6 cookies in a day What is interesting is that in Blefuscu there is a water-shortage and that impedes the production of cookies If Blefuscans want to produce more than 9 cookies then they have to go get water from a remote lake which takes up more workers and negatively affect the production of crossbows I think in Blefuscu, to produce more than 9 cookies, every extra cookie costs one less crossbow This is interesting 1 Draw Blefuscu s PPF in the chart below putting Cookies on the x-axis and Crossbows on the y-axis (look at Question 2 for a Hint) Crossbows PPF Page 1 of 2 Cookies

4 ECON12011: SMU Due September 28, 2010; Beginning of the lecture 2 Write the equation of the straight line(s) that represent Blefuscu s PPF (here is the Hint) First segment (dark red); we have two point (0, 6) and (6, 4); suppose stands for crossbows and stands for cookies: Slope= Line: 6 0 (1) Second segment (light red); Slope= 1 as given in the questions we have also another point: 9 3: (3, 9) Line: (2) 3 Using Blefuscu s PPF, fill out the table below Production of Cookies Production of Crossbows What is the opportunity cost of cookies in Blefuscu? Comment! Opportunity cost is NOT constant For a production level of cookies smaller than 9, it is ; and for a level of production of cookies greater than 9, it is 1 We see that as the production of cookies increases above 9 its opportunity cost rises as well 5 In no more than 4 lines, compare Blefuscu s PPF to Lilliput s PPF as seen in the lectures In the lecture opp cost was constant for all levels of production, here it is not constant This impacts the shape of PPF by making it be formed by two straight lines, instead of one The nature of constraints put on production process affects how one good is compared to the other (for instance producing too much of one good may use up the inputs suited for its productions; so any increase in its production gets harder and harder) Page 2 of 2

5 ECON12011: SMU Due October 18 th, 2010; 4:00 pm (drop it at my office Sobey 348) Last Name/ First Name/ Student ID: Assignment 2: Demand, Supply, Market Equilibrium General Guidelines 1 No late assignment will be accepted unless there is a medical excuse 2 Assignment should be submitted individually 3 Use this sheet to answer questions Cleanliness matters (5% deduction of the mark obtained if not legible) 4 Respect the length indicated for answers if applicable (no more than the limit will be read) 5 Show your work if applicable 6 This assignment is marked out of 20 and it stands for 5% of your final grade Read the story below adapted from Gulliver s Travels- and answer the questions Finally, Gulliver managed to not only make Lilliputians and Blefuscans giving up the idea of war but also to get them to trade! It is so that Blefuscans specialized in producing cookies that they sell inside Blefusco but also to Lilliputians Lilliputians, on the other hand started producing large rock-throwing weapons that they sell to Laputa (an Island Gulliver had stayed in before) His observations in his diary are reproduced below: Blefuscans are now only producing cookies while Lilliputians produce their rock-throwing weapons that they sell to Laputa Now, they start having a real economy using money (pieces of gold) I wonder what will be the price of cookies in the integrated market created by Blefuscu and Lilliput Let s try to see: It seems that for a price below 50 pieces of gold (for a pack of 100 cookies) Blefuscans are not willing to sell any cookies to Lilliputians And as of Lilliputians if the price goes above 220 pieces of gold for 100 cookies, they will not be willing to buy any cookies, as it becomes too expensive for them and they will start producing it themselves Currently however the volume of exchange is cookies (110 packs of 100) for120 pieces of gold 1 In the chart, represent market for cookies in Blefuscu and Lilliput (unit of measurement in 100 of cookies) Hint: You need to first find Demand and Supply curves: Derive them below while showing your work Page 1 of 4

6 ECON12011: SMU Due October 18 th, 2010; 4:00 pm (drop it at my office Sobey 348) A few weeks afterward Gulliver writes in his diary: Something very interesting happened: Laputa, facing a drought can no longer buy as many weapons as before from Lilliput It has adversely affected Lilliputians income Now I do not think they can afford paying any price above 180 pieces of gold for 100 cookies I wonder what will happen to the price of cookies 21 How the equations describing market for cookies will be affected after this change? 22 Find the new market equilibrium Represent in the chart above (in a way distinguishable from the initial equilibrium) Page 2 of 4

7 ECON12011: SMU Due October 18 th, 2010; 4:00 pm (drop it at my office Sobey 348) 23 In maximum three lines, describe how market adjusts to this change 3 These Islands inhabited with miniature creatures, Lilliput and Blefuscu, do not cease to surprise Gulliver with their changes A few weeks after he wrote in his diary: now water-shortage is hitting Blefuscu harshly I suspect that no matter the price Lilliputian want to pay for cookies, Blefuscans cannot produce more than 6500 cookies (65 packs of 100) On the other hand, Lilliputians are now as rich as they have been in the first place because Laputa started buying lots of weapons from them again So I wonder what will happen to their Cookies Market 31 How the equations describing market for cookies will be affected after this change? 32 Find the new market equilibrium Represent in the chart below Page 3 of 4

8 ECON12011: SMU Due October 18 th, 2010; 4:00 pm (drop it at my office Sobey 348) In maximum three lines, describe how market adjusts to this change Page 4 of 4

9 ECON12011: SMU Due October 18 th, 2010; 4:00 pm (drop it at my office Sobey 348) Assignment 2: Demand, Supply, Market Equilibrium Read the story below adapted from Gulliver s Travels- and answer the questions Finally, Gulliver managed to not only make Lilliputians and Blefuscans giving up the idea of war but also to get them to trade! It is so that Blefuscans specialized in producing cookies that they sell inside Blefusco but also to Lilliputians Lilliputians, on the other hand started producing large rock-throwing weapons that they sell to Laputa (an Island Gulliver had stayed in before) His observations in his diary are reproduced below: Blefuscans are now only producing cookies while Lilliputians produce their rock-throwing weapons that they sell to Laputa Now, they start having a real economy using money (pieces of gold) I wonder what will be the price of cookies in the integrated market created by Blefuscu and Lilliput Let s try to see: It seems that for a price below 50 pieces of gold (for a pack of 100 cookies) Blefuscans are not willing to sell any cookies to Lilliputians And as of Lilliputians if the price goes above 220 pieces of gold for 100 cookies, they will not be willing to buy any cookies, as it becomes too expensive for them and they will start producing it themselves Currently however the volume of exchange is cookies (110 packs of 100) for120 pieces of gold 1 In the chart, represent market for cookies in Blefuscu and Lilliput (unit of measurement in 100 of cookies) Hint: You need to first find Demand and Supply curves: Derive them below while showing your work You are given two points on the demand curve and two pints on supply curve Demand: Maximum willingness to pay: (0, 220) Equilibrium point (current exchange level being on both demand and supply curve): (110, 120) Hence the equation of the demand curve can be written as: Slope Page 1 of 5

10 ECON12011: SMU Due October 18 th, 2010; 4:00 pm (drop it at my office Sobey 348) Supply: Minimum willingness to accept: (0, 50) Equilibrium point (current exchange level being on both demand and supply curve): (110, 120) Hence the equation of the supply curve can be written as: Slope P Supply Equilibrium Demand Q 2 A few weeks afterward Gulliver writes in his diary: Something very interesting happened: Laputa, facing a drought can no longer buy as many weapons as before from Lilliput It has adversely affected Lilliputians income Now I do not think they can afford paying any price above 180 pieces of gold for 100 cookies I wonder what will happen to the price of cookies 21 How the equations describing market for cookies will be affected after this change? Demand curve will shift to the left given the fall in available income: Page 2 of 5

11 ECON12011: SMU Due October 18 th, 2010; 4:00 pm (drop it at my office Sobey 348) : Supply curve does not change 22 Find the new market equilibrium Represent in the chart above (in a way distinguishable from the initial equilibrium) We use the new equilibrium point as the price ( ) at which quantity demanded and quantity supply are equal: In maximum three lines, describe how market adjusts to this change Q d Q s Supply Demand Excess Supply Q Page 3 of 5

12 ECON12011: SMU Due October 18 th, 2010; 4:00 pm (drop it at my office Sobey 348) (i) Demand curve shifts to the left; (ii) At the initial equilibrium (price of 120) quantity supply (110) is greater than quantity demanded (using new demand 180 we see that it is 66): ie Excess Supply putting downward pressure on current price; (iii) as price falls quantity demanded increases and quantity supply falls until a new equilibrium is established 3 These Islands inhabited with miniature creatures, Lilliput and Blefuscu, do not cease to surprise Gulliver with their changes A few weeks after he wrote in his diary: now water-shortage is hitting Blefuscu harshly I suspect that no matter the price Lilliputian want to pay for cookies, Blefuscans cannot produce more than 6500 cookies (65 packs of 100) On the other hand, Lilliputians are now as rich as they have been in the first place because Laputa started buying lots of weapons from them again So I wonder what will happen to their Cookies Market 31 How the equations describing market for cookies will be affected after this change? Demand curve becomes Supply: New P* Q Supply Demand New Q* Q Page 4 of 5

13 ECON12011: SMU Due October 18 th, 2010; 4:00 pm (drop it at my office Sobey 348) 33 In maximum three lines, describe how market adjusts to this change Supply become infinitely inelastic after the quantity of 65 of packs of cookies On the other hand demand curve return to its initial position (with a maximum willingness to pay of 220) Recalling that with this demand the old equilibrium has been established at 110 pack of cookies we see that this is no longer possible Hence the best Lilliputians can do is to buy the maximum available to them which is 65 packs Blefuscans will receive We see that the new equilibrium price (16091) is higher than the old one (120) The reason is the higher scarcity Page 5 of 5

14 ECON12011: SMU Due November 2 nd, 2010; at the beginning of the lecture Last Name/ First Name/ Student ID: Assignment 3: Price Control General Guidelines 1 No late assignment will be accepted unless there is a medical excuse 2 Assignment should be submitted individually 3 Use this sheet to answer questions Cleanliness matters (5% deduction of the mark obtained if not legible) 4 Respect the length indicated for answers if applicable (no more than the limit will be read) 5 Show your work if applicable 6 This assignment is marked out of 20 and it stands for 5% of your final grade Read the story below adapted from Gulliver s Travels- and answer the questions Gulliver was delighted to learn that Lilliputians and Blefuscans are negotiating a Trade Treaty with each other about their cookies market However, Gulliver s delight did not last as he learned soon afterwards that the negotiations have reached a dead-end when Lilliputians asked for Price Ceiling equal 100 pieces of gold and Blefuscans for a Price Floor of 140 pieces of gold Gulliver wrote in his diary: It seems to me that Lilliputians and Blefuscans are not communicating properly They both seem unaware of the impact of their request on their trade partner And also they do not consider the overall impact of these requests on their economy Probably I do better make some calculation and show them the impacts clearly Recall that Lilliput-Blefuscu cookies market was described by the curves below: : Blefuscans: In the charts, represent market for cookies in Blefuscu and Lilliput (unit of measurement in 100 of cookies) along the situation created by each of the requests (price ceiling and price floor) Page 1 of 5

15 ECON12011: SMU Due November 2 nd, 2010; at the beginning of the lecture A Lilliput s request B Blefuscu request Page 2 of 5

16 ECON12011: SMU Due November 2 nd, 2010; at the beginning of the lecture 2 Reproduce Gulliver s calculation about the impact of each of these two requests on the market (each side s separately and overall) Hint: Use Consumer Surplus, Producer Surplus and Economic Surplus A Lilliput s request B Blefuscu s request 2 Unfortunately, after all his calculations, Gulliver failed to convince either of Lilliputians or Blefuscans to give up their requests But after a great deal of thinking, he came up with a clever idea He wrote about it in his diary: I know what to do, I will propose Lilliputians to go for a Price Ceiling of 130 pieces of gold and the Blefuscans to go for a Price Floor of 110 pieces of gold 21 Explain why Gulliver s proposition, if accepted, can cease the dead-end in trade negotiations (maximum 3 lines) Page 3 of 5

17 ECON12011: SMU Due November 2 nd, 2010; at the beginning of the lecture Gulliver s proposition was accepted, the trade treaty came into application with a price floor of 110 and price ceiling of 130 However, some complications arose a few months afterwards Gulliver wrote in his diary: Laputa, is facing anotehr drought and they can no longer buy as many weapons as before from Lilliput It has adversely affected Lilliputians income I afraid it will impact the trade between Lilliput and Blefuscu and actually their Trade Treaty may lead them to a conflict with Lilliputians being unhappy with the Trade Treaty as it is It was very thoughtless of me that I failed to anticipate it Suppose this fall in the revenue of the Lilliputian makes their new demand function to be: : 22 Use the chart below to provide an illustration for the situation described in the above lines Page 4 of 5

18 ECON12011: SMU Due November 2 nd, 2010; at the beginning of the lecture 23 Numerically explain why Gulliver feared a conflict between Lilliput and Blefuscu and gets Lilliputians unhappy Hint: Use Consumer Surplus, Producer Surplus and Economic Surplus Page 5 of 5

19 ECON12011: SMU Due November 2 nd, 2010; at the beginning of the lecture Last Name/ First Name/ Student ID: Assignment 3: Price Control General Guidelines 1 No late assignment will be accepted unless there is a medical excuse 2 Assignment should be submitted individually 3 Use this sheet to answer questions Cleanliness matters (5% deduction of the mark obtained if not legible) 4 Respect the length indicated for answers if applicable (no more than the limit will be read) 5 Show your work if applicable 6 This assignment is marked out of 20 and it stands for 5% of your final grade Read the story below adapted from Gulliver s Travels- and answer the questions Gulliver was delighted to learn that Lilliputians and Blefuscans are negotiating a Trade Treaty with each other about their cookies market However, Gulliver s delight did not last as he learned soon afterwards that the negotiations have reached a dead-end when Lilliputians asked for Price Ceiling equal 100 pieces of gold and Blefuscans for a Price Floor of 140 pieces of gold Gulliver wrote in his diary: It seems to me that Lilliputians and Blefuscans are not communicating properly They both seem unaware of the impact of their request on their trade partner And also they do not consider the overall impact of these requests on their economy Probably I do better make some calculation and show them the impacts clearly Recall that Lilliput-Blefuscu cookies market was described by the curves below: : Blefuscans: In the charts, represent market for cookies in Blefuscu and Lilliput (unit of measurement in 100 of cookies) along the situation created by each of the requests (price ceiling and price floor) Page 1 of 6

20 ECON12011: SMU Due November 2 nd, 2010; at the beginning of the lecture A Lilliput s request: Price Ceiling of Producer Surplus Consumer Surplus New Equilibrium Price Ceiling B Blefuscu request: Price Floor= Producer Surplus Consumer Surplus New Equilibrium Price Floor Page 2 of 6

21 ECON12011: SMU Due November 2 nd, 2010; at the beginning of the lecture 2 Reproduce Gulliver s calculation about the impact of each of these two requests on the market (each side s separately and overall) Hint: Use Consumer Surplus, Producer Surplus and Economic Surplus Initial Equilibrium: 110; 120 CS Lilliput PS Blefuscu A Lilliputians request: Price Ceiling =100 New Equilibrium: 100: : : CS Lilliput PS Blefuscu We see that with this Price Ceiling, Lilliputians Surplus rises compared to its pre-trade Treaty level at the expense of Blefuscans (whose surplus falls: ) Overall impact: A number of transactions are lost as the quantity exchanged in the market falls by (these transactions could have happened as for them always WTP In other words, there is a Dead Weight Loss (DWL) It is of the magnitude: Page 3 of 6

22 ECON12011: SMU Due November 2 nd, 2010; at the beginning of the lecture B Blefuscans request: Price floor of 140 New Equilibrium: 140: : : CS Lilliput PS Blefuscu We see that with this Price Floor, Blefuscans Surplus rises compared to its pre-trade Treaty level at the expense of Lilliputians (whose surplus falls: ) Overall impact: A number of transactions are lost as the quantity exchanged in the market falls by (these transactions could have happened as for them always WTP In other words, there is a Dead Weight Loss (DWL) It is of the magnitude: We see that with this price floor, the surplus of Blefuscans rises at the expense of Lilliputians (whose surplus falls) 2 Unfortunately, after all his calculations, Gulliver failed to convince either of Lilliputians or Blefuscans to give up their requests But after a great deal of thinking, he came up with a clever idea He wrote about it in his diary: I know what to do, I will propose Lilliputians to go for a Price Ceiling of 130 pieces of gold and the Blefuscans to go for a Price Floor of 110 pieces of gold 21 Explain why Gulliver s proposition, if accepted, can cease the dead-end in trade negotiations This suggestion works because a Price Ceiling (Floor) above (Below) Market Equilibrium Price has no impact and market Equilibrium price,, is 120: (Price floor) and (Price ceiling) Page 4 of 6

23 ECON12011: SMU Due November 2 nd, 2010; at the beginning of the lecture Gulliver s proposition was accepted, the trade treaty came into application with a price floor of 110 and price ceiling of 130 However, some complications arose a few months afterwards Gulliver wrote in his diary: Laputa, is facing another drought and they can no longer buy as many weapons as before from Lilliput It has adversely affected Lilliputians income I afraid it will impact the trade between Lilliput and Blefuscu and actually their Trade Treaty may lead them to a conflict with Lilliputians being unhappy with the Trade Treaty as it is It was very thoughtless of me that I failed to anticipate it Suppose this fall in the revenue of the Lilliputian makes their new demand function to be: : 22 Use the chart below to provide an illustration for the situation described in the above lines Producer Surplus Consumer Surplus New Equilibrium Price Floor= Numerically explain why Gulliver feared a conflict between Lilliput and Blefuscu and gets Lilliputians unhappy Hint: Use Consumer Surplus, Producer Surplus and Economic Surplus Solution Page 5 of 6

24 ECON12011: SMU Due November 2 nd, 2010; at the beginning of the lecture You see that demand curve will shift to the left After this demand shift, the new equilibrium will be: And And it means: CS Lilliput PS Blefuscu But given this new Market Equilibrium price, the price floor of 110 proposed by Gulliver and retained by Lilliputians and Blefuscans become effective and market price cannot fall below it despite the demand shift: And this Effective Price Floor, you can expect will redistribute the Economic Surplus of this market to the benefit of Supply-Side (Blefuscans) at the expense of Demand-Side (Lilliputians) Numerically: New Equilibrium: 110: 9941 : : CS Lilliput PS Blefuscu We see that with this price floor, the surplus of Blefuscans rises ( at the expense of Lilliputians (whose surplus falls: ) Lilliputian could be unhappy as a result leading to conflict between the two Isles Page 6 of 6

25 ECON12011: SMU Due November 16 th, 2010; at the beginning of the lecture Last Name/ First Name/ Student ID: Assignment 4: Production in the Short-run General Guidelines 1 No late assignment will be accepted unless there is a medical excuse 2 Assignment should be submitted individually 3 Use this sheet to answer questions Cleanliness matters (5% deduction of the mark obtained if not legible) 4 Respect the length indicated for answers if applicable (no more than the limit will be read) 5 Show your work if applicable 6 This assignment is marked out of 20 and it stands for 5% of your final grade Read the story below adapted from Gulliver s Travels- and answer the questions Gulliver, having successfully resolved the conflict between Lilliputians and Blefuscans, decided to take the economic relationship between Lilliput and Blefuscu to a higher level He thought, given the drought in Laputa and the resulting fall in Lilliputians income, migration of some Lilliputian workers to Blefuscu to help producing cookies is a good idea But putting his plan into application was not easy He wrote in his diary: Blefuscans claim that Lilliputians do not contribute as much them to the production of cookies But I know that it is not Lilliputians fault There have already been about 80 Blefuscans working in cookie production; the sketch I made of production process explains that 1 Use at the figure below and in no more than three lines, explain what Gulliver wanted to write tp labour 80 workers Page 1 of workers

26 ECON12011: SMU Due November 16 th, 2010; at the beginning of the lecture **&** After Gulliver s explanations to Blefuscans, they decided to resume the collaboration with Lilliputians, but it did not last as a Blefuscan came to him with the Table below arguing that the must send all the 100 Lilliputian workers back home Number of workers Average Production of cookies Use the figure below to help Gulliver finding an argument against the plan of firing 100 Lilliputians workers out of 180 Write no more than 3 lines labour ap mp 80 workers 120 workers 125 workers Page 2 of workers

27 ECON12011: SMU Due November 16 th, 2010; at the beginning of the lecture **&** Gulliver managed to convince Blefuscans not to fire all the Lilliputian workers by suggesting them being only paid their extra contribution to the production of cookies (Marginal Product: MP) 3 Use the figure in Page 1 to estimate maximum number of Lilliputian workers who will be willing to work given this wage scheme (above the 80 Blefuscans that are already working) Explain why, in no more than 2 lines! **&** Gulliver s wage scheme was later opposed by Blefuscans noticing that some Lilliputians are paid more than them Blefuscans divide the Total Product equally among Blefuscan workers (it means that they are aid the average product) 4 Use the figure in page 2 to find out how many Lilliputians are paid more than Blefuscans! Briefly explain why! 5 The wage scheme implemented by Blefuscans for Lilliputian workers (their Marginal product) caused conflicts between them who are now paid different amounts As a result of decided to quit and the collaboration was about to end Use the figure in page 2 to explain why! Page 3 of 4

28 ECON12011: SMU Due November 16 th, 2010; at the beginning of the lecture **&** Gulliver, worried about the possibility of the break-up of the collaboration of Blefuscans and Lilliputians came up with a proposition He wrote in his diary: If Blefuscans limit the number of Lilliputian workers to 40 and both 40 Lilliputians and 80 Blefuscans worekrs get an equal share of the Total Production of cookies not only the wage of Blefuscans themselves increases but also no conflict will arise because of differences in wages among Lilliputians 7 Use the figure in page 2 and the Table below to verify Gulliver s statement Briefly explain why using what you have learned about marginal and average product Number of workers Total Production of cookies Page 4 of 4

29 ECON12011: SMU Due November 16 th, 2010; 5:00 pm Last Name/ First Name/ Student ID: Answer Key Assignment 4: Market Production in the Short-run Read the story below adapted from Gulliver s Travels- and answer the questions Gulliver, having successfully resolved the conflict between Lilliputians and Blefuscans, decided to take the economic relationship between Lilliput and Blefuscu to a higher level He thought, given the drought in Laputa and the resulting fall in Lilliputians income, migration of some Lilliputian workers to Blefuscu to help producing cookies is a good idea But putting his plan into application was not easy He wrote in his diary: Blefuscans claim that Lilliputians do not contribute as much them to the production of cookies But I know that it is not Lilliputians fault There have already been about 80 Blefuscans working in cookie production; the sketch I made of production process explains that 1 Use at the figure below and in no more than three lines, explain what Gulliver wanted to write tp labour 80 workers 165 workers The production process is such that as the number of workers (variable input) increases from zero, up to 80 workers the contribution of each additional worker is larger than the previous one : MPL is increasing if the number of workers is smaller than 80 (and TP of labour increases with an increasing rate): Red curly bracket Between 80 and 165 workers the contribution of each additional worker is smaller than the previous ones MPL is decreasing if the number of workers is smaller than 80 (and TP of labour increases with a decreasing rate) Blue curly bracket Page 1 of 4

30 ECON12011: SMU Due November 16 th, 2010; 5:00 pm After 165 workers, MPL not only is decreeing but it is negative (having become small enough to reach zero and then become negative) Here, TP falls So it is about the production process not the quality of workers **&** After Gulliver s explanations to Blefuscans, they decided to resume the collaboration with Lilliputians, but it did not last as a Blefuscan came to him with the Table below arguing that the must send all the 100 Lilliputian workers back home Number of workers Average Production of cookies Use the figure below to help Gulliver finding an argument against the plan of firing 100 Lilliputians workers out of 180 Write no more than 3 lines labour ap mp 80 workers 120 workers 125 workers 165 workers Page 2 of 4

31 ECON12011: SMU Due November 16 th, 2010; 5:00 pm For 180 workers: MPL is negative 0 & ; 80 Before that although MPL starts falling at 120 worker, so although the contribution of all Lilliputians will be smaller than the contribution of the previous Blefuscan, their MLP up to 120 is bringing the APL (and Total Product) up **&** Gulliver managed to convince Blefuscans not to fire all the Lilliputian workers by suggesting them being only paid their extra contribution to the production of cookies (Marginal Product: MP) 3 Use the figure in Page 1 to estimate maximum number of Lilliputian workers who will be willing to work given this wage scheme (above the 80 Blefuscans that are already working) Explain why, in no more than 2 lines! MPL is greater than zero up to 165 workers so if they are paid their own contribution (MPL of the person) it is a positive number of cookies **&** Gulliver s wage scheme was later opposed by Blefuscans noticing that some Lilliputians are paid more than them Blefuscans divide the Total Product equally among Blefuscan workers (it means that they are aid the average product) 4 Use the figure in page 2 to find out how many Lilliputians are paid more than Blefuscans! Briefly explain why! It is so because even if MPL falls, APL keeps increasing given the very small MPLs at the beginning of the production process 5 The wage scheme implemented by Blefuscans for Lilliputian workers (their Marginal product) caused conflicts between them who are now paid different amounts As a result of decided to quit and the collaboration was about to end Use the figure in page 2 to explain why! Page 3 of 4

32 ECON12011: SMU Due November 16 th, 2010; 5:00 pm Lilliputians are paid their MPL and MPL is not constant It is an inverted-u shape curve, starting from zero and it can become negative in this production process **&** Gulliver, worried about the possibility of the break-up of the collaboration of Blefuscans and Lilliputians came up with a proposition He wrote in his diary: If Blefuscans limit the number of Lilliputian workers to 40 and both 40 Lilliputians and 80 Blefuscans worekrs get an equal share of the Total Production of cookies not only the wage of Blefuscans themselves increases but also no conflict will arise because of differences in wages among Lilliputians 7 Use the figure in page 2 and the Table below to verify Gulliver s statement Briefly explain why using what you have learned about marginal and average product Number of workers Total Production of cookies APL If workers=120 APL is at its maximum (348) If efficiency is judged based on the average productivity of workers in a given production plant and if wages reflect the productivity then this production scale (APL=MPL & APL at its maximum) can be considered the best Page 4 of 4

33 ECON12011: SMU Due November 30 th, 2010; Start of the lecture Last Name/ First Name/ Student ID: Assignment 5: Monopoly General Guidelines 1 No late assignment will be accepted unless there is a medical excuse 2 Assignment should be submitted individually 3 Respect the length indicated for answers if applicable (no more than the limit will be read) 4 Show your work if applicable 5 This assignment is marked out of 20 and it stands for 5% of your final grade Finctional LtD Is the only firm that produces a class of Chemicals You are consulted by them about the level of their production and their selling price Demand (Willingness to pay) and supply (marginal cost) is given below : : 1 How will you respond to the firm s executives (about Quantity and Price)? 2 What is the monopolistic profit of the firm if ATC is given n in the table below? Quantity ATC 5 $75 10 $65 30 $58 45 $55 3 Calculated the Dead Weight Loss 4 How will the firm s profits be affected if it can charge the first 10 buyers their Total Willingness to Pay? Provide a Figure showing DWL and Profits Page 1 of 1

34 ECON12011: SMU Due November 30 th, 2010; Start of the lecture Last Name/ First Name/ Student ID: Assignment 5: Monopoly General Guidelines 1 No late assignment will be accepted unless there is a medical excuse 2 Assignment should be submitted individually 3 Respect the length indicated for answers if applicable (no more than the limit will be read) 4 Show your work if applicable 5 This assignment is marked out of 20 and it stands for 5% of your final grade Fictional Ltd is the only firm producing a class of chemicals You consulted by this firm about the quantity to produce and the selling price Demand (willingness to pay: WTP) and Marginal cost (supply) are given below: : 100 : 10 1 How will you answer to the firm s executives? Answer: A monopolist chooses the quantity to put into the market in order to maximize its profit given the impact of the quantity supplied on the consumer s willingness to pay To maximize profits requires setting: Hence, we need to first find MR function (curve: dashed, blue) : $70 Page 1 of 5

35 ECON12011: SMU Due November 30 th, 2010; Start of the lecture P Q As we see below, this means a lower quantity and a higher price compared to perfect competition outcome: $55 2 What is the monopolistic profit of this firm, provided that ATC is given in the Table below Quantity ATC 5 $75 10 $65 30 $58 45 $55 Page 2 of 5

36 ECON12011: SMU Due November 30 th, 2010; Start of the lecture P Profits ATC Q Step 1: Finding Total Costs (TC) $1740 Step 3: Finding Total Revenue (TR) $2100 Step 4: Finding Profits $2100 $1740 $360 So this monopolist profits are $ Page 3 of 5

37 ECON12011: SMU Due November 30 th, 2010; Start of the lecture 3 What is the Dead Weight Loss (DWL) of this Monopoly? P DWL Q Dead Weight Loss is the quantity for which Willingness to pay of the consumers (demand) is larger than willingness to accept o producers, yet this quantity is not exchanged in the market Step 1: Finding MC at : Step 2: Finding the basis of triangle (DWL) It is noted by the vertical curly bracket: Step 3: Finding the height of triangle (DWL) It is noted by the horizontal curly bracket: Step 4: Finding the Dead Weight Loss (DWL) It is noted by the area of the shaded triangle: Page 4 of 5

38 ECON12011: SMU Due November 30 th, 2010; Start of the lecture 4 How this monopolists profit will change if the firm s executives were able to charge the first 10 buyers their total willingness to pay? P Profit Q We see that it has increased! It can be computed by adding the three shaded shapes in the above, it leads to: $50 $200 $360 $ So with this price discrimination, profits have increased by % Page 5 of 5