FPT UNIVERSITY - CAMPUS CAN THO

ESSAY TEST
[ECO111]

Name: Ngô Hoàng Ngọc Nhi

Code: CS170067
Class: BA1711
Mentor: NhanDH7

Cần Thơ, 3/2023

1
 TABLE OF CONTENT

1.AS OF NOW, YOU CHOSE ONE FEATURED GOOD IN YOUR LOCAL.

DESCRIBE HOW THE SUPPLY AND DEMAND DETERMINANTS CAN
AFFECT THE RICE MARKET OUTCOMES.............................................................3

2.AS WE HAVE LEARNED BEFORE, THE GOVERNMENT CAN USE SOME

POLICIES TO CONTROL THE RICE MARKET PRICE. WHICH OF THE
PRICE CONTROL POLICIES WILL LEAD TO A SHORTAGE AND WHICH
WILL LEAD TO A SURPLUS IN THE RICE MARKET? WHY?............................4

3.SHOW MC, ATC, AVC & AFC CURVES ON THE GRAPH. BRIEFLY
EXPLAIN FOR EACH CURVE.....................................................................................5

4.THE THEORY OF CONSUMER CHOICE CAN BE APPLIED IN MANY

SITUATIONS. EXPLAIN WHY HIGHER WAGES COULD EITHER INCREASE
OR DECREASE THE QUANTITY OF LABOR SUPPLIED.....................................5

2
1.As of now, you chose one featured good in your local. Describe how the supply and
demand determinants can affect the rice market outcomes. (2.5 points)

Rice is one of the most widely consumed staple foods in the world, and its market is
subject to various factors that affect its supply and demand. The following are some of
the factors that can affect the rice market outcomes:

- Supply Determinants:

+ Natural Disasters: Natural disasters such as droughts, floods, and pests can significantly
affect the supply of rice. These events can damage crops and reduce the amount of rice
available for sale in the market.

+ Changes in Production Costs: Changes in production costs, such as labor costs, fuel
prices, and fertilizer prices, can affect the supply of rice. For instance, if the cost of
production increases, rice farmers may reduce their supply of rice to the market.

- Demand Determinants:

+ Population Growth: Population growth can lead to an increase in demand for rice. As
the population grows, the demand for rice as a staple food also increases.

+ Changes in Consumer Preferences: Changes in consumer preferences can also affect

the demand for rice. For example, if consumers start to prefer other grains or foods over
rice, the demand for rice may decrease.

+ Income Levels: Income levels can affect the demand for rice. As incomes rise, people
tend to eat more varied diets that include more expensive foods, leading to a decrease in
the demand for rice.

In summary, changes in supply and demand determinants can significantly affect the rice
market outcomes. When the supply of rice decreases or the demand for rice increases, the
price of rice will typically rise. Conversely, when the supply of rice increases or the
demand for rice decreases, the price of rice will typically fall.

3
2.As we have learned before, the government can use some policies to control the
rice market price. Which of the price control policies will lead to a shortage and
which will lead to a surplus in the rice market? Why? (2.5 points)

The government can use price control policies to intervene in the rice market to achieve
specific economic goals. However, the effectiveness of these policies can vary depending
on the current market conditions and the nature of the policy.

Two of the most common price control policies that the government can use to intervene
in the rice market are price ceilings and price floors.

- Price Ceiling: the maximum price that can be charged for a good or service. When
the government imposes a price ceiling on rice, it means that rice cannot be sold
above a certain price. This policy may lead to a shortage of rice in the market if
the price ceiling is set below the market equilibrium price. This is because the
lower price incentivizes consumers to demand more rice, while at the same time,
the lower price discourages producers from supplying more rice. This creates
excess demand (shortage) for rice, which leads to a situation where not everyone
who wants to buy rice can find it.

- Price Floor: a minimum price that can be charged for a good or service. When the
government imposes a price floor on rice, it means that rice cannot be sold below a
certain price. This policy may lead to a surplus of rice in the market if the price
floor is set above the market equilibrium price. This is because the higher price
incentivizes producers to supply more rice, while at the same time, the higher price
discourages consumers from demanding as much rice. This creates an excess
supply (surplus) of rice, which leads to a situation where there is more rice
available than people are willing to buy.

In summary, a price ceiling will lead to a shortage of rice in the market if the ceiling is set
below the market equilibrium price, while a price floor will lead to a surplus of rice in the
market if the floor is set above the market equilibrium price.

3.Show MC, ATC, AVC & AFC curves on the graph. Briefly explain for each curve.
(2.5 points)

Marginal Cost (MC) Curve: The MC curve shows the additional cost of producing one
more unit of output. It is calculated as the change in total cost divided by the change in
quantity produced. The MC curve typically slopes upward, reflecting the law of
diminishing returns.
4
Average Total Cost (ATC) Curve: The ATC curve shows the total cost of producing a
unit of output, on average. It is calculated as total cost divided by quantity produced. The
ATC curve typically has a U-shape, with a downward-sloping portion at low levels of
output and an upward-sloping portion at higher levels of output.

Average Variable Cost (AVC) Curve: The AVC curve shows the variable cost of
producing a unit of output, on average. It is calculated as variable cost divided by
quantity produced. The AVC curve also typically has a U-shape, but lies entirely below
the ATC curve because it does not include fixed costs.

Average Fixed Cost (AFC) Curve: The AFC curve shows the fixed cost of producing a
unit of output, on average. It is calculated as fixed cost divided by quantity produced. The
AFC curve slopes downward as quantity produced increases, reflecting the spreading of
fixed costs over a larger output.

For example: ABC Watch Factory – Monthly cost and output

Fixed Labor Variable Total Total MPL MC AVC AFC ATC
costs units cost cost output
$5000 1 $2,000 $7,000 10
$5000 2 $6,000 $11,00 25 15 $267 $240 $200 $440
0
$5000 3 $9,000 $14,00 45 20 $150 $200 $111 $311
0
$5000 4 $12,000 $17,00 58 13 $231 $207 $86 $293
0
$5000 5 $15,000 $20,00 65 7 $429 $231 $77 $308
0
$5000 6 $18,000 $23,00 70 5 $600 $257 $71 $329
0

5
4.The theory of consumer choice can be applied in many situations. Explain why
higher wages could either increase or decrease the quantity of labor supplied. (2.5
points)

Higher wages can either increase or decrease the quantity of labor supplied depending on
the strength of two opposing effects: the substitution effect and the income effect.

The substitution effect refers to the tendency of workers to increase their labor supply in
response to higher wages because the opportunity cost of leisure increases. Workers
perceive that the relative cost of not working has risen, making leisure relatively more
expensive compared to working.

The income effect, on the other hand, refers to the impact of higher wages on the worker's
overall income. As wages increase, workers can afford to purchase more of both leisure
and goods, making leisure a more attractive option. If leisure is a normal good, the
income effect will lead to a decrease in the labor supply, whereas if it is an inferior good,
the income effect will lead to an increase in the labor supply.

The net effect of higher wages on labor supply depends on which of these two effects is
stronger. If the substitution effect is stronger than the income effect, then higher wages

6
will increase the labor supply. If the income effect is stronger than the substitution effect,
then higher wages will decrease the labor supply.

Therefore, the theory of consumer choice helps us understand that individuals make
rational decisions based on the trade-offs between the price of leisure and goods, income,
and their own preferences.