ECO101 Principles Of Microeconomics

1.You and your friend Joe have identical tastes. At 2 pm, you go to your local Ticketmaster outlet and buy a $30 ticket to an AFL game to be played that night in Launceston, 200 kilometres north of your home in Hobart. Joe plans to attend the same game but, because he cannot get to a Ticketmaster outlet, he plans to buy his ticket at the game. Tickets sold at the game cost only $25, because they carry no Ticketmaster surcharge. (Many people nonetheless pay the higher price through Ticketmaster, to be sure of getting good seats.) At 4 pm an unexpected hailstorm begins, making the prospect of driving to Launceston much less attractive than it was before (but assuring the availability of good seats). If both you and Joe are rational, is one of you more likely to attend the game than the other?

 

2.Nancy and Lucy are studying economics. Nancy takes 4 hours to write an assignment and two hours to complete a set of tutorial questions. Lucy takes 6 hours to write an assignment and 2 hours to complete a set of tutorial questions. State whether either woman has an absolute advantage at either task and, for each task, identify who has a comparative advantage. Why would Nancy and Lucy never agree to specialise and then exchange economics assignments for economics tutorial questions if one economics assignment could be swapped for three economics tutorials?

 

3.The table below shows the number of croissants bought in Geelong, Victoria, each day at a variety of prices.

 

4.In which type of restaurant would you expect the service to be more prompt and courteous: an expensive gourmet restaurant or an inexpensive cafe? Explain.

The price of the ticket is $30 if it is purchased from the Ticketmaster outlet I have bought the ticket from the Ticketmaster outlet to an AFL game.

The venue of the game to be played is Launceston & the place is 200 km from my home in Hobart. If the ticket is purchased at the game then the price of the ticket would be $25. The reason behind the less ticket price is the absence of the Ticketmaster surcharge (Gopinath et al., 2014). Due to unexpected hailstorm it became difficult to drive to Launceston.

In this case it is important to calculate the opportunity cost attached to the decision taken by me & Joe. If I do not drive to Launceston, my $30 will be lost. In case of my friend Joe, he has not purchased the ticket from Ticketmaster. Hence, if he does not drive to Launceston, then he will not lose anything in terms of money (Schotter, 2008). But in case of not going there, me & Joe both will not be able to watch the game. Even if Joe did not purchase the ticket in advance, he will get good seat due to the hailstorm.

Hence, in case of me I will lose both the money in terms of the ticket price & the opportunity to watch the game. But in case of my friend he will not lose anything in terms of money but he will lose the opportunity to watch the game. Hence, my loss by not driving to Launceston is more in comparison to my friend Joe. Therefore, it is more likely for me to attend the game than my friend Joe.

Hence for both Nancy & Lucy the time required to complete the set of tutorial questions is 2 hours. But in case of Nancy she takes more time to complete the assignment.

Therefore, Nancy has absolute advantage in assignment. Since both takes same time to complete the set of tutorial questions, hence nobody has absolute advantage in tutorial questions. If we compare the time taken by both Nancy & Lucy, Nancy has comparative advantage in assignment.  

If one economics assignment is exchanged for three economic tutorials, then to complete the tutorial set it will take 6 hours (2 hours for each tutorial set). If Nancy wants to specialise in assignment then to complete the assignment task she will take 4 hours & for Lucy she will take 6 hours to complete three tutorial sets (Krugman, 2008). Hence it is not advantageous for Lucy. Again if Lucy specialises in assignment, she will take 6 hours to complete one assignment, but Nancy will also take the same time, i.e. 6 hours to complete the tutorial sets. Hence no one is in advantageous position in any case. Therefore no one wants to specialise in any particular task.

3.

In the above demand curve the slope of the demand curve is ∂p/∂q

Hence the slope of the curve is 1/3000

Therefore the price elasticity of demand at price $3 can be calculated in the following manner:

e= (∂q/ ∂p) * (p/q)

= 3000 * (3/ 9000)

= 1.

At the price $3 the number of units of croissants purchased = 9000

At the price $4 the number of units purchased = 6000

Hence the revenue at the price $3 is equal to $(3* 9000) = $ 27000.

At the price $4 the revenue is equal to $(4 * 6000) = $ 24000.

Therefore, the revenue has decreased from $ 27000 to $ 24000, i.e. by $ 3000.

d)

Elasticity at the point on the demand curve where the price is $2 can be calculated in the following way:

• e= (∂q/ ∂p) * (p/q)
• e= 3000* (2/ 12000)
• e= ½.

e)

Revenue at the price $2 = 2*12000= $24000

Revenue at the price $3 = 3* 9000 = $27000

Hence, if price increases $2 to $3, the revenue will increase from $24000 to $27000, i.e. by $3000.

4. In case of the inexpensive cafe, the cafe owner gives less importance on the quality of the service providers. Since the revenue earned from an inexpensive cafe is less, the owner will have very little amount to spend on skill development of employees of the cafe. In inexpensive cafes employees are not given any training programme, through which the skill level of employees can be enhanced. Beside this, employees get less salary & incentive in terms of money (Varian & Repcheck, 2010). This acts as a demotivating factor for employees in these cafes. All these above mentioned factors act as the hindrance in providing best quality service to customers in inexpensive cafes.

On the other hand in case of the expensive gourmet restaurant the management provides more importance on the introduction of new food items in the food menu to attract new customers. They spend large amount on the innovation of food items & at the same time on training programme of employees. They emphasise on the service quality provided to customers. These expensive gourmet restaurants know that only prompt & courteous service will attract more customers in their restaurant. If customers get prompt service & at the same time if employees show respect & behave politely with customers, this increases the reputation of the restaurant (Cowell, 2006). To run an expensive gourmet restaurant effectively, the restaurant owner has to incur large amount of cost. If the revenue earned by the restaurant is not sufficient to cover the cost, it will hamper the business. Hence, they provide large importance on the service quality to attract more customers in the restaurant. In case of the inexpensive cafe they cannot earn large amount of revenue & cannot spend large amount on the improvement of service quality & recruitment of skill employees.

References

Cowell, F. A. (2006). Microeconomics: principles and analysis. OUP Catalogue.

Frank, R. H. (2009). Microeconomics and behavior. London: McGraw-Hill.

Gopinath, G., Helpman, E., & Rogoff, K. (Eds.). (2014). Handbook of international economics (Vol. 4). Elsevier.

Krugman, P. R. (2008). International economics: Theory and policy, 8/E. Pearson Education India.

Schotter, A. (2008). Microeconomics: a modern approach. Cengage Learning.

Varian, H. R., & Repcheck, J. (2010). Intermediate microeconomics: a modern approach (Vol. 6). New York: WW Norton & Company.