Assignment

Assessment item 1 — Assignment



Assessment item 1 — Assignment

Question 1

Consider the following production possibilities frontier data in the table below.(5 marks)

A

B

C

D

E

F

Capital goods

30

28 

24 

18

10

0

Consumer goods

0

2

4

6

8

10 

Draw a diagram with appropriate labels. Indicate attainable, unattainable, efficient and inefficient areas on the diagram.

D = Unattainable point (Outside the curve)

X = Inefficient point (Inside the curve)

B & C = Pareto Efficient points

A = Attainable point

Explain the concept of increasing opportunity costs using data provided.

A

B

C

D

E

F

Capital goods

30

28 

24 

18

10

0

Consumer goods

0

2

4

6

8

10 

Opportunity Cost

-2

-4

-6

-8

-10

According to economic theory, the increases in the production of one good will lead to a decline in the other good. In the data provided, the consumer goods are increasing at the cost of capital goods, it must sacrifice more of the capital goods. Due to the increasing opportunity cost, the PPF curve is concave to the origin. The gradient of the PPF gets steeper as more consumer goods are produced, indicating a greater sacrifice in terms of capital goods foregone.

Using the data provided draw a new diagram showing growth in the resource base. Explain the changes to the production of both goods.

Assume that the decision is made to invest more in capital goods than in consumption goods. Using the data provided draw a diagram and explain the impact of this decision on future production capacity.

Suppose demand (QD ) and supply (QS) in a market can be expressed by these equations:

QD= 170-1.5*P

QS= 50+2.5*P

Complete the table. What is the equilibrium price and quantity? If the prevailing market price is $60, what are the quantity demanded and the quantity supplied?

P

QD

QS

$10

155

75

$20

140

100

$30

125

125

$40

110

150

$50

95

175

$60

80

200

At price $30 the QD and QS are in equilibrium state and at $60 there is an excess in Qs.

P

QD

QS

$10

195

75

$20

190

100

$30

185

125

$40

180

150

$50

175

175

$60

170

200

If Qd changes so here equilibrium reached at $50 as Qd increases than Qs will have increase to achieve equilibrium state, so all these situation means there must be increase in price.

Draw the diagram and calculate the change in the equilibrium if supply changes to QD= 200-0.5*P. Explain why the change could occur (with examples).

Utilise the demand-supply market models (for each market below) to graphically illustrate and explain the following scenarios (in the short run). Identify for each scenario what the effects on price and quantity are likely to be and show the effects on the diagram. State your assumptions.

The market for luxury cars if there is an increase in households' income.

Assumption: As, there is an increase in the households' income, the market for luxury goods rises even more

The market for housing if there was an increase in electricity prices.

Assumption: The market for housing decreases, when the electricity prices increases and it loses the interest of the customers. The market for tea if the price of milk increases.

Assumption: As, both are complementary goods, therefore when the prices of milk increases then the prices of tea also increases. It is because complementary goods move in the same direction.

The market for iPad 2 as the price of Ipad mini decreases.

Assumption: The market for iPad 2 declines, as the price of iPad mini ...