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Questions:

Week 1: Production Possibility Frontier (PPF)

Q1.

In 2017, Nepal’s production of rice and machinery was published by the Nepal Bureau of Statistics (NBS) as indicated by the table below:

Production in Nepal

Position

 

P

Q

R

S

T

U

V

W

X

Y

Z

Rice (1000 tons)

0

10

26

37

45

50

55

59

66

77

80

Machinery (units)

90

89

85

80

75

70

65

60

50

30

0

 

Based on the table above, a production possibility frontier (PPF) for Nepal can be plotted as below:

Use the NBS production table and production possibility frontier to answer the following questions:

  1. Name positions B, V and D. Also, as indicated in the table, supposing Nepal is operating at level T, what is the opportunity cost of producing 10,000 more tons of rice?

  2. Use the graph below to answer the questions that follow:

 

B1: Suppose Nepal begins to manufacture fertilizers. Explain the impact of the discovery of fertilizers on Nepal’s economy using one of the PPF above.

B2: Also, supposing there is a discovery of steel in Nepal, explain the impact of steel on the economy of Nepal using one of the PPF above.

B3: Finally, the Minister of Finance in Nepal advices the World Bank that in order to increase rice production and machinery, each sector requires USD 50 billion, or a total of 100 billion. This 100 billion is made available by the World Bank. Explain the impact of these 100 billion budgetary allocations to the economy of Nepal. Use one of the PPF above.

Week 2: Markets in Action: Demand and Supply

Q2.

Suppose the graph below represents the demand and supply for rice at various prices, answer the questions that follow.

 

The graph above is represented in the table below. Please complete the table below identifying the shortage or surplus.

Price (10kg bag)

Demand

(10 kg bags)

Supply (SS)

(10 kg bags)

Surplus (+)

Shortage (-)

10

89

29

 

20

70

40

 

30

55

55

 

40

39

67

 

50

25

80

 

60

11

95

 

  1. Based on your findings in the table above, what is the market equilibrium price and quantity for rice?  

  2. Also, please examine the factors that can motivate the government to reduce the price of rice at $20 per 10 kg bag and the effects of that government legislation on the rice market.

Week 3: Price Elasticity of demand and supply

Q3.

The price for cigarettes sold by Big Tobacco Co Ltd was 6.00 per packet in March 2018. During the month of March, the consumption of cigarettes was 1000 packets. However, the Board of Directors of Big Tobacco Co Ltd decided to increase the price by 25% during the month of April.  As a manager you noted that price elasticity of demand was 0.8. As a manager Big Tobacco Co Ltd:

  1. Advise your management of the strategy that could be adopted by your firm to maintain sales.

  2. Also, advise your government on recommended interventions in the cigarette market. 

Week 4 :Production costs

Q4.

John was a high school teacher earning $ 80,000 per year. He quit his job to start his own business in pizza catering. In order to learn how to run the pizza catering business, John enrolled in a TAFE to acquire catering skills. John’s course was for 3 months. John had to pay $2,000 as tuition for the 3 months.

After the training, John withdrew $110,000 from his savings account. He had been earning 5 percent interest per year for this account. He also borrowed $50,000.00 from his friend whom he pays 6 percent interest per year. Further, to start the business John used his own premises. He was receiving $12,000 from rent per year. Finally, to start the business John uses $50,000 he had been given by his father to go on holiday to USA.

John’s first year of business can be summarised as follows:

Item

Amount $

Revenue- Pizza Section

400,000

Revenue- Beverages Section

190,000

2 Cashiers (wages per worker)  

55,000

Pizza ingredients

50,000

Manager

75,000

3 Pizza bakers (wages per baker)

60,000

Equipment

10,000

 

Based on your calculated accounting profit and economic profit, would you advise John to return to his teaching job?  Show your work

Week 5: Market Structure: Perfect Competition and Monopoly

Q5.

The above diagram illustrates the short run cost curves for Sarah Mat, a rice farmer in Queensland. Calculate the profit or loss for Sarah Mat and, examine the key characteristics for perfect competition firm with reference to Sarah’s farm.

 

Answer:

1.

(A) Name of point B is inefficient. Name of point A is efficient. Name of point D is unattainable.

10 units of machinery is the opportunity cost of producing 10, 000 more tons of rice when the economy of Nepal is operating at point T.

(B) (B1) Discovery of fertilizer would increase the output of rise given the amount of other things will take the economy of Nepal to PPF2.

(B2) Discovery of steel would increase the production of machinery in Nepal. Due to that, the economy of Nepal would operate on PPF3 after the discovery of steel.

(B3) The World Bank has given USD 50 billion for each of the machinery and rice sector. Due t this grant the production of these sectors in Nepal will increase. Consequently, the economy of the country will operate on PPF4.

2.

Price (10kg bag)

Demand

(10 kg bags)

Supply (SS)

(10 kg bags)

Surplus (+)

Shortage (-)

10

89

29

-60

20

70

40

-30

30

55

55

0

40

39

67

+28

50

25

80

+55

60

11

95

+84

 

(A) The market equilibrium occurs where quantity supplied is equal to quantity demanded. There, from given table, it can be inferred that equilibrium price is $30 per 10 kg bag and equilibrium quantity is 55 bags.

(B) The government is willing to reduce the price of rice to $20 per 10 kg bag in order to increase consumption and better off the consumers. There occurs shortage in the market at price $20 because at that price producers reduces quantity supplied to 40 bags of rice whereas quantity demanded increases to 70bags. Therefore, total shortage in the market of rice is 30 bags.

3.

(A)  Big Tobacco Co. Ltd decided to increase price of cigarette by 25%. It is given that the price elasticity of demand is 0.8. It means that the demand for cigarette is price inelastic. Thus, from theory of microeconomics it is known that for price inelastic product revenue increases with rise in price. Therefore, to maintain sales the firm should increase price.

(B) The interventions that government could make in market of cigarette are tax imposition and limiting production. The tax imposition will increase the price of cigarettes and there by consumption falls (Boyle et al. 2019). Alternatively, limiting production of cigarette would decrease supply and hence there will be no scope for increase in consumption.

 

4.

Calculating of total implicit cost:

 

Therefore total implicit cost accrued by John is $156500

Calculating of total explicit cost:

 

Therefore total explicit cost is $425000

Now, calculating total revenue


The economic profit of pizza catering business is found to be positive and thus John should keep doing his business and must not return to teaching job.

5.

At equilibrium, price (P) = $40 per 20 kg bag and quantity (Q) = 500 bags

Therefore,

The demand curve is horizontal and is equal to MR and AR of the market means price decision of Sarah Mat does not influence market demand. The profit is maximized where MR=MC. Profit earned by Sarah Mat is supernormal profit. Thus, the market is close to perfect competition but not exactly a perfectly competitive market (Kolmar 2017). This is because in perfection competition firms earn zero economic profit.

 

References

Boyle, R.G., Stanton, C.A., Sharma, E. and Tang, Z., 2019. Examining quit attempts and successful quitting after recent cigarette tax increases. Preventive medicine, 118, pp.226-231.

Kolmar, M., 2017. Supply and Demand Under Perfect Competition. In Principles of Microeconomics (pp. 55-82). Springer, Cham.

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