ECO10005-Economics for Business Decision Making

Week 5 Assignment

 Answer all 5 questions , each question is worth 2 marks.

 Total marks for this assignment 10 marks (5*2)

 You must provide your answers in the space provided underneath each
question in this same Word file.

 Your drawing can be done manually or using Excel then inserted it as a

picture where relevant in your file.

 Your assignment will be marked based on your genuine efforts in answering

the questions. If your final answer is incorrect but you are on the right track,
you can still obtain most of the marks. It is therefore important to provide all
your computations and reasonings to get full marks.

 All assignments must be submitted via Canvas (file upload)

 Submission via email will not be accepted and you will receive a zero mark.

 Please ensure your file is in Microsoft Word format and it is not corrupted
and can be opened successfully before uploading it into the canvas.

 Please make sure you include your full name (as they appear in your
academic record) and student number below.

Student full name: Jaime Durkin

(As appearing in your official record)

Student ID: 105334869

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1. You have exams in economics and statistics coming up and five hours
available for studying. The table shows the trade-offs you face in allocating
the time you will spend in studying each subject.

a. Use the data in the table to draw a production possibility frontier

graph. Label your vertical axis ‘Score on economics exam’ and
label your horizontal axis ‘Score on statistics exam’. Make sure
you label the values where your production possibility frontier
intersects the vertical and horizontal axes. (1 mark)
b. Label the points representing choice C and choice D. If you are at
choice C, what is your opportunity cost of increasing your statistics
score? (0.5 mark)
c. Under what circumstances would A be a sensible choice? (0.5
mark)

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Provide your answer below in the space provided:

a)

PPF (Economics and statistics studying hours):

b)

The 4-point increase in the statistics score from point C (84) to point D (88)
causes a four point loss in the economics score from point C (90) to D (86),
therefore the opportunity cost of increasing the statistics score is a four point
loss in the economics score.

c)

Choice A is potentially sensible when the importance of doing well on the

economics exam considerably outweighs the benefits of performing better on
the statistics exam. For example, as the exams do not make up 100 percent of
the overall score, it is possible that previous performance means that obtaining a
95 is vital to passing the subject, and that a 70 in statistics is adequate to pass
statistics already.

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 2. Use the following graph for Yolanda’s Frozen Yoghurt Stand to answer the
questions that follow.

Use the midpoint formula to calculate the price elasticity of demand for
D1 between point A and point C, and the price elasticity of demand for D2
between point A and point B. (1 mark). Which demand curve is more
elastic, D1 or D2? Briefly explain. (1 mark)

Provide your answer below in the space provided:

Price elasticity of demand for D1 between point A and C:

p 1+ p 2 3+2.5
Average P = 2
= 2 = 2.75

q 1+q 2 200+300
Average Q = 2
= 2
= 250

q 1−q 1
(
p 1− p 1
Formula: ( Average Q )/ Average P )
200−300 3−2.5 −100 0.5 −0.4
( )/ ( )=( )/( ¿= = 2.22
250 2.75 250 2.75 0.18181818181

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Price elasticity of demand for D1 between point A and C = 2.22

Price elasticity of demand for D2 between point A and point B:

The Average P = 2.75

q 1+q 2 200+225
Average Q = 2
= 2
= 212.5

q 1−q 1
(
p 1− p 1
Formula: ( Average Q )/ Average P )
200−225 3−2.5 −25 0.5 −0.11764705882
( )/ ( )=( )/( ¿= = 0.65
212.5 2.75 212.5 2.75 0.18181818181

Price elasticity of demand for D2 between point A and point B = 0.65

Which demand curve is more elastic:

0.65 < 1 so therefore it is inelastic.

2.22 > 1 so therefore it is elastic.

The Demand 1 Curve is more elastic as its price elasticity of demand is greater
than 1 (2.22), and therefore its price elasticity has been more responsive to
change, whilst demand curve two Is inelastic as its price elasticity of demand is
less than 1 (0.65).

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3. Consider the following Table, which provides total cost in the long run for
each level of output.

a) Fill in the gaps in the column for long-run average cost (i.e., average total
cost). (0.5 mark)

b) Draw the long-run average cost curve based on your calculations in (a)
above. (0.5 mark)

c) Using a relevant economic concept, describe the patterns observed in the

data for long-run average cost. Give a very brief explanation of your
answer. (1 mark)

Long-run scenarios

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Provide your answer below in the space provided:

a)

(1) (2) (3)

Total product Total cost Average Cost
(tonnes) ($) ($/tonne)

100 487 4.87

125 595 4.76

150 705 705/150

= 4.70

200 930 930/200

=4.65

250 1155 4.62

300 1380 4.60

400 1840 1840/400

=4.60

450 2079 2079/450

4.62

500 2322 4.64

b)

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Long-run average cost curve based on calculations:

Minimum efficiency scale: 300-400. No matter how much more total product
produced and total cost increased the average cost remains the same at 4.60.

c)

An evident trend observed in the data for this firms long-run average cost is at

Economies of scale. Rows 1-5 show a constant decreases of their long run

average cost ($/tonne), this is due to the scale of production, the quantity of

outputs is increasing and therefore average ATC decreases.

Examples of potential increases to production could be the specialisation and

the division of labour or new technologies:
Row 1. TQ(tonnes):100, ATC ($/tonne):4.87

Row 3. TQ(tonnes):150, ATC($/tonnes):4.70

Row 5. TQ(tonnes) 250, ATC($/tonne) 4.62)

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 4. Suppose that the local government in your city has just announced a
proposal to assist low-income families by imposing rent controls (i.e., rent
ceilings).

a. Will all low-income families be better off if rent controls are

implemented? Use relevant concepts and diagrams that have been
introduced in the course so far to explain your reasoning. (1 mark)

b. Are there any potential problems with rent controls? (1 mark)

Provide your answer below in the space provided:

a)

Rental controls would allow for the housing market to become more accessible
to lower-income families. For example, with an implementation such as rental
ceilings, the pricing of houses will be capped. According to the law of demand
if the price of rental homes were to fall, then the quantity demanded for the
product would therefore increase. This is likely because lower income families
would see this as an opportunity to access the housing market.
However, there are drawbacks to the introduction of rental ceilings, as the
increased quantity demanded would exceed the current quantity supplied and
therefore lead to a shortage of rental homes. This is represented through the law
of supply; a decrease in the price of a product causes a decrease in the quantity
supplied.

For example, Landlords could potentially no longer profit from renting out the
properties, leading them to cease renting or significantly lowering the quality
and maintenance of homes. Therefore, potentially low-income families may not
feel they are benefited by such rental controls.

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The effects of surpluses and shortages on the rental marketplace:

The rental market is experiencing a shortage where the quantity demanded for
the rental homes is greater than the quantity supplied by the landlords as a result
of the introduced rental controls.

b)

Changes to regulations negatively affect businesses. An example would be

franchises leasing out properties to be used for commercial use. If these rental
controls are to include commercial leases, then this could negatively impact
businesses such as McDonalds. Their business model is made on leasing out
properties and could lead to fewer McDonalds franchises in the area. This
would be much more detrimental for smaller local franchises and could possibly
result in the loss of the businesses.

Additionally rental control could be detrimental to rental property owners in the

sense that whilst the government is trying to benefit lower income families so
they can afford houses, it consequently can negatively impact the landlord
owners who could be potentially lower income or middle class as well and have
their majority of income from these properties.

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 5. Suppose the company White Cabs is the sole authorised operator of
taxicabs in Fairville, a city of about two million people.

a) With the aid of a revenue-cost diagram, explain and illustrate the

company's decisions with regard to output (how much service it provides)
and price. What kind of market structure are you assuming here? Would
you expect White Cabs to make super-normal (or above-normal, or
economic) profit? Briefly explain the latter concept. (1 mark)

b) Now suppose the government allows the owner of any car to operate it as a
taxi without any restriction. What would happen to profitability in the
taxicab business? In particular, would the owner of a typical cab earn
super-normal profit? Draw a diagram to illustrate your reasoning. (1
mark)

Provide your answer below in the space provided:

a)

White Cabbs is a monopoly as they are the sole authorised operator of taxicabs
in Fairville. They would therefore use a cost-revenue diagram to help aid their
profit-maximising decisions in relation to output and price. In order to do this,
they would combine information on demand and marginal revenue with
information on marginal costs.

Revenue Cost Diagram for profit-maximising price and output for a

monopoly such as White Cabs:

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Point A is where the intersection of the marginal revenue and marginal cost
curves occur. This is the point at which these two curves are equal and allow for
the optimal level of output that maximises profit (the profit maximising quantity
and the profit maximizing price.)

It is expected that White Cabbs would generate a super-normal profit because

they are a monopoly. Meaning that since they are the sole authorised operator of
taxicabs within Fairville, they would be the only firm in this industry generating
income.

b)

Allowing anyone who owns a car to operate it as a taxi without any restriction
would make the ease of entry into the taxi industry high. As these drivers would
then deliver an identical service to what White Cabs provides, this would result
in White Cabs no longer having a monopoly and now following the perfect
competition market structure.

The effect of easy entry within the taxi market on economic profits:

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The graph shows that as car owners become taxi drivers and enter the taxi driver
market, the market supply curve shifts to the right from S1 to S2, decreasing the
equilibrium price and increasing the equilibrium quantity. At this point Taxi
drivers would no longer be making a super-normal economic profit but instead
just a normal profit where the firm is covering its total costs and not earning any
additional profit. Therefore, the taxi cab market would no longer be proftiable
as present firms would be existing only on normal profit.

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