Economics Coursework

STX1130: Financial and Quantitative Aspects of Business

STX1130: Financial and Quantitative Aspects of Business

Part A

Question 1

Auto Sales Worst Since 1983," by David Kiley and David Welch, BusinessWeek, November 3, 2008 http://www.businessweek.com/lifestyle/content/nov2008/bw2008113_624857.htm

In October, 2008 consumers, scared by the economy and layoffs, became reluctant to buy cars. Even the people who might have wanted to buy an automobile had a tough time getting auto loans. As a result, GM sales fell by 45%, Ford by 30%, and Toyota by 23%.

Draw a supply-demand diagram for the automobile market under typical circumstances. Label the point of market equilibrium, the equilibrium quantity and the equilibrium price.

Draw the demand curve for automobiles in October 2008, after consumers got scared and it became harder to get loans. Does it lie to the left or to the right of the original demand curve?

There has been a decrease in demand of automobiles due to which the demand curve has shifted towards left. This shift in demand is occureed because consumers got scared and it became harder to get loans.

Did the auto dealers lower their prices in response to the weak sales in October 2008? Give an example from the article.

Since auto dealers in UK are operating in a competitive market, it might not be possible for them to change the price in order to increase sales. For the purpose of shifting the demand, the auto dealers could take other measures to improve the purchasing power of the consumer and increase the demand. For instance, offering flexible financing terms and conditions to consumer. This strategy will not only reduce the loan burden from the consumers but also persuade them to purchase the automobile.

Suppose that some auto factories and auto dealerships closed. Would that affect the supply curve or the demand curve?

If some auto factories and auto dealerships get closed, there will be a decrease in supply, this decrease will lead the shift curve to move towards right side.

What do these events suggest about the income elasticity of new cars? Give a brief explanation of your reasoning.

The artilce suggest the car has become a neccessity product, as the demand for necessacity will increase with income but at a slower rate, therefore the income elasticity of new cars will be decreased

Question 2

Before the change in the price of butter, margarine sellers were selling 3500 kilos at a price of 25 cents a kilo, for revenue of $875. After the change in the price of butter, margarine sellers are selling 2940 kilos at a price of 25 cents a kilo, for revenue of 735p - a drop of 140p.

Revenues from the sale of butter would increase by $102; Revenues from the sale of margarine would decrease by $140; No, total revenues would decrease by $38.

Question 3

Below is the cost function for a business producing overhead projectors:

Quantity of OHPsTotal Cost (£)Marginal Cost (£)

06060

1260 200

2480 320

3720240

4980260

1260280

Fill in the missing marginal cost values.

Assume the business is operating under conditions of perfect ...