Task Solutions-Analysis on Crazy Times for Tomatoes: ECON1101

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ECON1101 Microeconomics: Prices and Markets
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ECON1101 Microeconomics: Prices and Markets
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1
ECON1101Microeconomics:PricesandMarkets
StudentsName
InstitutionalAffiliation
2
ECON1101Microeconomics:PricesandMarkets
Question1:Crazytimesfortomatoes
Basedonthetomatoesmarket,thesupplyisexpectedtorisebyapproximately15000
tonnesthisyearthanthepreviousyear.Theeventswillaffectthepriceoftomatoes,asshownin
figure1.
Figure1:SupplyoftomatoesandPricechange
Thequantityoftomatoessuppliedtothemarketisexpectedtoincrease,whichwillshiftthe
supplycurvetotherighttoS1.Asaresult,thequantitydemandedwillincreasefromQ0toQ1,
andpriceswilldecreasefromP0toP1.
Question2:Elasticity
OnlinestreamingservicesandDVDs
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Thecross-priceelasticitybetweenonlinestreamingservicesandDVDsispositive
becausethesetwoproductsaresubstitutegoods.Peoplearebuyingmorestreamingservicesasa
substituteforDVDs.
Onlinestreamingservicesandbroadbandservices
Thesetwoproductsarecomplementsgoods,andtheywillhaveanegativecross-price
elasticityofdemand.Thetwogoodsareusedtogether,andifthepriceoftheonlinestreaming
servicesrises,thedemandforbroadbandserviceswillgodown.
Question3:Marketfailure
Thegovernment’seconomicrationaleforsubsidizingmedicaldegreesmorethan
accountingdegreesmighthavebeentoencouragemorestudentstojointhemedicalcourse.The
rolethatsubsidiesplayinthemarketistocorrectmarketfailures.Therefore,thegovernment
wouldhaveobservedthestudents’enrollmentinthetwodegreecoursesanddiscoveredthatthere
isalowerenrollmentinthemedicaldegreethantheaccountingdegree.Therefore,tocorrectthis
marketfailure,heavysubsidizationinthemedicaldegreewillattractmorestudentstoenrollin
thecourse.
TheeconomicargumentIwouldputforwardforthelatestmovetoreducethesubsidyfor
artsdegreesisthatthegovernmentmighthaveattaineditsgoal.Asubsidyismeanttocorrecta
marketfailureafterthemarketforceshavefailedtocorrectitthroughdemandandsupplyforces.
Therefore,thegovernmentcancomeinwithsubsidies.Whentherequiredgoalisattained,asin
whenthemarketiscorrected,thegovernmentcandecidetoreduceorwithholdthesubsidy
significantly.Therefore,themarketmighthavebeencorrectedintheartsdegree.Thenumberof
studentsenrolledinthisdegreeiswithinacceptablelimits;hence,thegovernmentdoesnotneed
toencouragemoreenrollmentobtainedthroughcuttingsubsidies.
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However,Icanstillchallengethegovernment’smovetodrasticallyreducesubsidiesfor
theartsdegree,asthiscanstillleadtoamarketfailure.Thegovernment’smovetocorrectthe
marketfailuredoesnotalwayswork.Therefore,thegovernmentcanreducethesubsidy,andthe
numberofstudentsenrollinginthiscoursewilldeclinebelowtherequiredlevel,creatinganother
marketfailure.
Question4:ProductionsandCosts
Basedontheseformulasandassumptions,thevariouscostsarecomputed
Thevariablecostiszerowhenthequantityproduced(Q)iszero(0).Fixedcosts(FC)donot
changethroughoutproduction.
TC=FC+VC
MC=ChangeinTC/ChangeinQ
ATC=TC/Q
AVC=VC/Q
AFC=FC/Q
Figure2:Costtable
OutputTFCTVCTCMCAFCAVCATC
01000100
1100251252510025125
210045145205022.572.5
3100571571233.331952.33
410077177202519.2544.25
5100102202252020.0440.4
61001362363416.6722.6739.33
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71001702703414.2924.2938.57
81002263265612.528.2540.75
91002983987211.1133.1144.22
1010039049092103949
CostCurves
MCAVCATC
2525125
2022.572.5
121952.33
2019.2544.25
2520.0440.4
3422.6739.33
3424.2938.57
5628.2540.75
7233.1144.22
923949
Figure3:CostCurves
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Question5:PerfectCompetition
Figure4:Profit-maximizingquantityofoutputinPerfectCompetitioninthelongrun
TheMCandMRcrossat$10andaquantityof50.Thisisattheequilibrium.Ifone
farmerstartstoproducealevel30andexperimentswithincreasingproductionto40,MRwill
stillbemorethanMC,andprofitswillincrease.ThefarmerwillincreaseproductionuntilMR
=MC.Increasingproductionbeyond50,theMCwillexceedMR,andthefarmerwillstart
experiencingadeclineinrevenues.Hence,inthelongrun,asinglefirminthetomatomarket
willproduceatequilibrium,whereMR=MCwhichistheprofit-maximizingpoint.
Figure3:Tomatoesmarketsupply
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Theincreaseinthedemandfortomatoeswillaffecttheindividualfarmer’soutputinthat
itwillincrease.Increasingtheproductionthatfarmersarewillingtosupplytothemarketwill
causethesupplycurvetoshifttotheright.Whenthesupplycurveshiftstotheright,thequantity
suppliedbyasinglefarmerand,ingeneral,tothemarketincreases,andthiscausesthepriceto
fallfromP0toP1.Inthelongrun,ifthedemandispermanent,anewequilibriumiscreatedat
P1Q1.
Figure4:Effectoflabor
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ThepointE0denotesthestartingequilibriuminthelongrun.Ashortageinavailable
laborintheagriculturalsectorwillmakeindividualfarmers,intheshortrun,reducethesupply
oftomatoesinthemarket.Hence,thesupplycurveofasinglefarmerwillshifttotheleft,which
affectsotherfarmers;thewholemarketwillbeaffectedinthatquantitysuppliedtothemarket
willreduce,shiftingthesupplycurvetotheleft.Inthelongrun,ifthelaborissueissolved,the
tomatomarketwillgobacktoequilibrium,andiftheproblemisnotsolved,anewequilibrium
willbeformed.Therefore,themarketwilladjusttoanewequilibriumifthelaborissueisnot
resolvedbutwillrestoretothepreviousequilibriumifthelaborissueissolved.
Figure5:BumperCrop
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Startingfromthelong-runequilibriumatE0,thenewequilibriumwillbecreatedatP1Q1,
belowtheoriginalequilibrium.Intheshortrun,abumpercropwillcauseanindividualfarmerto
increasethesupplyoftomatoestothemarket.Anincreaseinthesupplyoftomatoestothe
market,assumingthatdemandremainsconstant,willcausethepricestofallfromP0toP1.
Hence,thefarmerislikelytomakelosses.
Question6:Monopoly
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Underperfectcompetition,equilibriumpricewas$10.5andquantityinthismarketwas1250
Undermonopolyequilibriumpriceis$13,andequilibriumquantityis1000
UnderperfectcompetitionDollarvalueoftheconsumerwas($23-$10.5)=$12.5
UnderperfectcompetitionDollarvalueoftheproducerwas($10.5-$)=$7.5
UndermonopolyDollarvalueoftheconsumeris($23-13)=$10
UndermonopolyDollarvalueoftheproduceris($9-$3)=$6
Thesizeofthedeadweightlossundermonopoly=1/2(13-9)*(1250-1000)=500

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