Principle Of Economics

Questions & Answers

Chris talked to some major suppliers to see if they could somehow improve the flow of materials into the company. Unhappily, while he was talking to one company, they raised the question of late payments. This was contrary to McDonald Timbers policy of immediate payment of invoices, so he asked the accounting section for an explanation. He was given the unwelcome news that The company's inventory and transport costs are so high that we are short of cash. We are delaying payments to improve our cash flow. As it is, we had to use a bank overdraft to pay suppliers for last month.' Later that day, Chris found that the late customer deliveries which had started his investigation were actually caused by poor sales forecasts by the marketing department. They had seriously underestimated demand, and planned production was too low. Questions ● Why do all the logistics costs seem to be rising at the same time when the quantity of the order is reduced? What do you think are the basic problems in McDonald Timbers? What would you recommend Chris to do?

Exercise 1 In class, you were told about comparative advantage with examples given of businesses and industries. Yet, the idea that people specialize into their comparative advantage and then trade with others who have a different comparative advantage can also be applied inside families and partnerships. In this exercise, I would like you to write a story. I want you to pick a relationship between two people you know well. They could be husband and wife, brother and sister, close friends, business partners, or any other close pairing. You can pick a relationship you are part of, but it could also be a relationship between others, like friends you know, family you know, or any other relationship you know well. Describe that relationship in terms of the comparative advantages had by each side and the trade that there then is between them in terms of goods and services produced by each side. This means you must describe the things that each side of that relationship is good at and what they thus produce that is then shared (traded) with the other. Bear in mind that trade does not always need to involve money, but there has to be a clear exchange of a good or service. Also bear in mind that trade is different from co-production (like doing an activity together). 20 points. Then discuss whether the trade you have described is on the basis of static comparative advantage or dynamic comparative advantage. Motivate on the basis of the lecture slides on the dynamic comparative advantage topic. 10 points. As with all the concepts we discuss, I would like you to be able to recognize in the real world the phenomena that we discuss in class. This leads to a more systematic way of perceiving the reality. The goal of this exercise is not to explain what a comparative advantage is; it already is explained above. Rather, the goal is for you to reflect on your own experiences and memories to find examples from your own life of the concepts discussed in class. I am hoping to read some interesting stories.

Exercise 2 Read the slides and background literature on the topic of different types of economies of scale. Then please think of the organization you work for or one that you know well (like a previous job or the job of your partner, or some other organization you know a lot about). (15 points) Describe at least 3 diseconomies of scale in that organization. (5 points) Then make a judgment on whether you think the organization as a whole enjoys economies of scale overall at the margin': would the organization produce more than 10% extra if its size (in terms of people working for it, machines, offices, etc.) was 10% bigger? Argue why you think that is the case.

Exercise 3 (50 points) You were told in class about the difference between picking winners and supporting winners. Please re- read the lecture slides on the Italian fashion industry, dynamic comparative advantage, and the principles of taxation. Consider then the rapid recent growth of the fashion industry in Saudi Arabia. Answer these questions: (10 points) How large is the fashion industry currently in Saudi Arabia. Give a clear source and definition. (10 points) If you wanted to support the growing domestic fashion industry, should the government give subsidies to failing fashion firms or try to help the new firms in the industry? Motivate your answer by referring to the lessons on dynamic comparative advantage and the role of the state versus private business. (10 points) If the government believed the domestic fashion industry could grow much bigger than it is now, but it wanted to eventually tax that industry, is it better to have a fixed tax that does not change over time, to start with high taxes than then reduce, or low taxes that increase when the industry is mature? Motivate your answer by referring to the lessons on taxation and industry. (20 points) Name 3 new things the government could do that you think would be likely to help speed up the development of the fashion industry in a way that leads to competitive companies emerging and thriving. Motivate your answer by referring to the lessons on the Italian fashion industry, dynamic comparative advantage, the lessons on education, equity markets, and/or Silicon Valley. Do not name things the government is already doing.

Suppose Norway's demand for wi-fi speakers is given by the following equation: P= 290-QD and Norwegian suppliers face the following supply equation P=20+ 0.5QS. Further suppose the world price of wi-fi speakers is PW=$60. a) Draw a graph for the above supply and demand functions. Numerically calculate social welfare (SW) in the Norwegian market for wi-fi speakers in autarky. b) What would be social welfare in Norway for wi-fi speakers under free trade? Also, label your graph in part (a) showing the level of imports. c) What would social welfare be under a tariff = $20? d) What if the Norway instituted an import quota = 90 for wi-fi speakers. What would be the resulting level of social welfare? Suppose the "quota rent" goes to foreign suppliers. e) What would be social welfare under a producer subsidy = $20? f) Which of the following trade policies would you recommend if trade in wi-fi speakers appeared to be negatively affecting Norwegian workers in the industry? Why? g) Now suppose that the US market for wi-fi speakers is dominated by a monopolist, suppose the US places a quota equivalent to the amount of imports in part (d). i) Derive the equation for the residual demand function. ii) Find the profit maximizing quantity of production for the monopolist and the profit maximizing price. iii) Calculate the loss of consumer welfare when we go from a tariff to a quota.

a. Discuss how fiscal policy may be used to stimulate the economy.

b. Using a T- account, show how the central bank can create money and calculate the total money that the bank can create.

C. Explain the impact on money creation if the central bank raised the reserved requirement to 12%

Questions: (3) What are the optimal prices for Microsoft to charge for Word and Excel if it only sells the two products separately?

(4) Can Microsoft earn greater profits if it sells the two products as a bundle?

(5) If Microsoft can only sell its products on a stand-alone basis and has already committed to the pricing calculated in Question (3) above, should WordPerfect enter the market? How should WordPerfect price its product if it does enter?

(6) Suppose Microsoft is selling Word and Excel as a bundle. Should WordPerfect enter the market in this case?

(7) What would happen if Microsoft anticipated the possibility of entry? How would this affect pricing and profits?

You are an economist working for a reputable private sector firm. Alternative energy sources have made tremendous progress, and oil prices are forecasted to keep declining for the next 5 years. Oil supply remains strong during that period. Assuming you are a citizen of a net oil-exporting economy, given these circumstances, what would be the impact on: Inflation Private Consumption Unemployment Monetary Supply Balance of Payments Gross Domestic Product (Oil) Gross Domestic Product (non-oil) You have been called in as part of a panel to assist in developing policies concerning government revenues and expenditures. The panel consists of officials from Finance, Energy & industry, and Strategic Planning professionals. What would be your policy recommendation to each of them to ensure economic prosperity considering declining oil prices? How would you ensure alignment between these policies? Bonus question If you wanted to investigate what are the causes of declining oil prices, what variables would you use to set up the equation? What would be your dependent and independent variables? How many variables would you use? What is the minimum number of observations you would need to make this assessment while ensuring there are no statistical biases?

Suppose Mindy and Tulip are roommates. Mindy works part-time at Roberto's and can bring homefour carne asada burritos for free every week. Tulip works part time at Tapioca Express and can bringhome eight steamed pork buns for free every week. Use x to denote the number of burritos, and yto denote the number of pork buns. a. Suppose Mindy is always willing to trade one burrito (x) for two pork buns (y), regardless ofhow many she has. i. Draw a couple of her indifference curves in the graph. ii. Are Mindy's preferences convex? Tulip is also indifferent between having 4 burritos and no pork buns and having 8 pork bunsand no burritos. However, she would prefer to have 2 burritos and 4 pork buns instead. i. Draw a couple of Tulip's indifference curves (what they might plausibly look like – you don't have enough information to draw them precisely) ii. Are Tulip's preferences convex? c. Might the girls decide to share/trade food with each other? Find one possible exchange so that neither of the girls is worse off, and at least one of them is strictly better off. Consider the following possible specifications of utility functions: \text { i. Which of these functions is/are consistent with Mindy's initial preferences? } ii. Which utility function(s) is/are consistent with Tulip's preferences? [Hint: consider that indifference curves may look different from the way you drew them.]

) Matching utility functions and indifference curve maps Consider the following 6 utility functions: a) For each, find the expressions for marginal utilities and the marginal rate of substitution, and determine whether monotonicity and convexity are met. b) Next, try to picture what indifference curves will look like, and see if you can find a matching graph below. [Try not to rely too much on brute force calculations of utility values – what if the grid was not shown and you couldn't easily identify the coordinates at any given point?]

Consider the following data: (a) For each level of output, calculate/state MC, TR, AR and MR (b) Graph the MC and MR curves (c) Would the profit-maximising firm produce (i) 2 units of output, OR (ii) 4 units ofoutput? Explain (hint - this could be a trick question!)[4 marks] (d) Calculate the amount of profit or loss earned by the profit-maximising firm (e) State a level of output at which the firm earns negative economic profit, and-calculate this amount[3 marks]

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