Problem Study Microeconomics

ProblemStudy Microeconomics

Tradeand Specialization

Thisis a PPF/ PPC that plots the values of output of clothing againstoutput of food. Reviewing the economy it can be said to be veryefficient given that it cannot produce more of clothing withoutdecreasing the production of food. In calculating the opportunitycost of food in terms of clothing when the production of food isincreasing we use the gradient method in the curve.

Havingthe line of gradient at point at y axis =15 then calculating theslope of the gradient we have the x values as 5 and 28 and the yvalues as 5 and 25

Gradient=change in x/change in y

(25-5)/ (28-5) = 20/23=0.8696

iii.Given that the production of clothing is on the x-axis, when thecountry becomes better at production of food, the PPC willincreasingly curve outside. The PPC will shift to the right relativeto the increase in quantities of food production increase (Rochet &ampTirole, 2006).

iv.In the event that the country gets better at production of both foodand clothing, there will be a shift in the PPC to the right. This isindicative of the general economic growth.

b)Country B: PPF

Toget the opportunity cost of food we have change in x against changein y

OpportunityCost= change in x/ Change in y

Weuse gradient at point, y=15 and x= 14, then we have x value as 8 and28 and y values as 5 and 20

Hencethe opportunity cost= 28-8/20-5= 1.333

Combined PPF

Clothing

Output of Food

53

0

46

11

34

23

25

31

15

37

0

43

CountryA has a comparative advantage as compared to country B in productionof clothing while country B seems to have a comparative advantageover country A in the production of food. The total production ofclothing stands at 173 units of clothing and 145 units of food.

Question2: Supply and demand problems

Price

Quantity Demanded

Quantity Supplied

0

80

-20

5

70

-10

10

60

0

15

50

10

20

40

20

25

30

30

30

20

40

35

10

50

40

0

60

Forthe quantity demanded, the sign of the slope is negative while forthe quantity supplied, the sign of the slope is positive. This infersthat for demand, increases in price reduces the quantity demanded andvice versa at ceteris paribus while for the supply an increase inprice increases the quantity supplied and vice versa at ceterisparibus.

c)The market is at equilibrium when the price is at 25, at this pointthe quantity supplied equals the quantity demanded.

d)The reservation price is at 40, when it is raised by even 0.01 thequantity demanded goes to zero.

e)Results

price

P(Qd)

P(Qs)

0

80

-20

2

76

-16

4

72

-12

6

68

-8

8

64

-4

10

60

0

12

56

4

14

52

8

16

48

12

18

44

16

20

40

20

22

36

24

24

32

28

26

28

32

28

24

36

30

20

40

32

16

44

34

12

48

36

8

52

38

4

56

40

0

60

42

-4

64

44

-8

68

46

-12

72

48

-16

76

50

-20

80

52

-24

84

54

-28

88

56

-32

92

58

-36

96

60

-40

100

62

-44

104

64

-48

108

66

-52

112

68

-56

116

70

-60

120

72

-64

124

74

-68

128

76

-72

132

78

-76

136

80

-80

140

82

-84

144

84

-88

148

86

-92

152

88

-96

156

90

-100

160

92

-104

164

94

-108

168

96

-112

172

98

-116

176

100

-120

180

Comparingthe two results, there is consistency in calculations and even themarket demand and supply is equal, hence the market is at equilibriumat same points in both cases.

g)New Price Values using the demand function: P = 80 – 0.25Qd

D`: P = 80 – 0.25Qd

New Price

80

60

76

61

72

62

68

63

64

64

60

65

56

66

52

67

48

68

44

69

40

70

36

71

32

72

28

73

24

74

20

75

16

76

12

77

8

78

4

79

0

80

-4

81

-8

82

-12

83

-16

84

-20

85

-24

86

-28

87

-32

88

-36

89

-40

90

-44

91

-48

92

-52

93

-56

94

-60

95

-64

96

-68

97

-72

98

-76

99

-80

100

-84

101

-88

102

-92

103

-96

104

-100

105

-104

106

-108

107

-112

108

-116

109

-120

110

Question3

  1. Total Revenue

Price

Quantity Demanded (Business Travellers)

Quantity demanded (vacationers)

Revenue (Traveller)

Revenue (Vacationers)

225

2700

1500

607500

337500

300

2500

1200

750000

360000

375

2300

1100

862500

412500

450

2100

900

945000

405000

525

1900

600

997500

315000

total

4162500

1830000

  1. Price elasticity of demand

PED=

Ed&nbsp=

Change in Quantity Demanded

÷

Change in Price

(Qi&nbsp+ Qf) ÷ 2

(Pi&nbsp+ Pf) ÷ 2

BusinessTravellers

(-200/(2600))/ (75/ (262.5)

=-0.076923/0.2857=-0.2692

Vacationers

Ed&nbsp=

Change in Quantity Demanded

÷

Change in Price

(Qi&nbsp+ Qf) ÷ 2

(Pi&nbsp+ Pf) ÷ 2

-300/(1500+1200/2)/ 75/ (225+300)/2)

-0.2222/0.2857

=-.7777

PED=Change in Quantity Demanded/ Change in Price

(-300/1500)/ (75/225) = -0.2/0.333 =-.6

  1. Reviewing the revenue values, the values obtained is consistent.

  2. Price Change from 450 to 525

Businesstravellers

Ed&nbsp=

Change in Quantity Demanded

÷

Change in Price

(Qi&nbsp+ Qf) ÷ 2

(Pi&nbsp+ Pf) ÷ 2

(-200/2000)/(75/487.5) = -0.1/0.1538 =-0.65

Vacationers

Ed&nbsp=

Change in Quantity Demanded

÷

Change in Price

(Qi&nbsp+ Qf) ÷ 2

(Pi&nbsp+ Pf) ÷ 2

(-300/750)/(0.1538) = -.4/0.1538 =-2.6

v) Comparing the values at higher prices to that at lower prices, it isestablished that it is more responsive at higher values in comparisonto the lower values. This is because the degree of change is greaterat higher values compared to lower values (Rochet &amp Tirole,2006).

vi)The vacationers have different values compared to the businesstraveller because of the differences in their respective quantitydemanded.

References

Rochet,J. C., &amp Tirole, J. (2006). Two‐sidedmarkets: a progress report.&nbspTheRAND Journal of Economics,&nbsp37(3),645-667.