TUTORIAL PROGRAM 2007

For each topic use myeconlab for additional exercises and solutions to the end of chapter problems TUTORIAL 1 TOPIC Opportunity Cost and PPFs Use diagrams wherever appropriate Group Discussion (a) Describe some of the trade-offs faced by:

• a family deciding whether to buy a new car • a politician deciding whether to increase spending on national parks • a company director deciding whether to open a new factory

(b) What is meant by “opportunity cost”? What would you be doing now if you were not studying at CSU? What then is the opportunity cost associated with you studying?

Go to for additional exercises. Try to solve problems at the end of the chapter 1.

Question 1 (a) Using a PPF, illustrate (1) constant and (2) increasing opportunity costs. Explain why

opportunity costs can be increasing. (b) Explain, using a diagram, the connection between scarcity, opportunity costs and

the PPF. Question 2 Indicate whether the following statements are true or false. Provide a clear explanation indicating why they are true or false. (a) An economy must be using its resources efficiently to be operating on its production

possibilities frontier (PPF). (b) If an economy is operating within its PPF it does not face opportunity costs. (c) The production possibilities frontier is a straight line if the trade-offs between the

production of any two goods is constant. (d) Both an increase in technology levels and an increase in soil erosion across Australia

cause the production possibilities frontier for the economy to move outwards. (e) If an economy is operating inside its production possibilities frontier, it must produce

less of one good in order to produce more of another good. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) All of the following are examples of opportunity cost except A) the leisure time sacrificed to study for an exam. B) the room and board fees paid to a university rather than a private apartment. C)

the income that could have been earned by a university student had he or she worked full time instead of attending university. D) the building that could have been built with the construction materials and labor used to build a new university library. 2) The fallacy of composition is the false belief that A) because event A occurred before event B, event A caused event B. B) what is true for each part is also true for the whole. C) because event A occurred after event B, event A caused event B. D) the ceteris paribus condition does not apply. 3) A student is studying for an exam for two hours a day and is debating whether to study an extra hour or go out with her friends. Her marginal benefit A) depends on the grade she earns on the exam. B) is the benefit she receives from studying all three hours. C) is greater than her marginal cost. D) is the benefit she receives from studying the extra hour. 4) The problem of economic scarcity applies A) only in underdeveloped countries because there are few productive resources. B) only in industrially developed countries because resources are scarce. C) only in economic systems that are just beginning to develop because specialized resources are scarce. D) to all economic systems, regardless of their level of development. 5) A theory consists of all of the following except A) testable predictions deduced from the set of assumptions. B) a random sample of data used to test hypotheses. C) a set of assumptions that defines the limits of the theory. D) one or more hypotheses about the relationships among specified variables. Table 2.1 The following table provides data on the production possibilities frontier for a simple economy producing only two goods: pizza and beer. Production Possibilities Alternative Pizza Beer A 0 100 B 10 95 C 20 80 D 30 60 E 40 35 F 50 0 6) In Table 2.1, the production of 35 units of pizza and 65 units of beer is A) possible only if the economy produces with maximum efficiency. B) possible only if there is inflation. C) impossible unless more resources become available or technology improves. D) feasible but would involve unemployed resources. 7) A resource market is a market in which A) households buy goods and services. B) firms sell goods and services.

C) households sell the services of the resources they control. D) firms sell the services of resources. 8) To overcome __________, government action is necessary to make sure resources are used efficiently. A) market failure B) scarcity C) high opportunity costs D) comparative disadvantage 9) The social arrangements that govern the ownership, use, and disposal of property are referred to as A) property rights. B) private enterprise. C) capitalism. D) the double coincidence of wants. 10) A bank processes all of its cheques at a central facility rather than at each branch office. This is an example of a bank answering the __________ question. A) where B) when C) what D) who SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 11) What is the relationship between expenditure, income and the value of production? 12) Why is it important that economists use the idea of "ceteris paribus" when testing economic models? 13) Explain why points beyond the PPF represent production points that a country cannot reach without an increase in resources or an advance in technology. 14) What is the difference between microeconomics and macroeconomics? Give an example of each. 15) Explain how individuals or countries can change their comparative advantages. TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 16) Macroeconomics is the study of aggregate variables like inflation and unemployment. 17) "Everytime I buy shares, the sharemarket falls. So my buying decisions must be a good forecast of the market's behaviour" This statement is an example of the fallacy of composition. 18) A circular flow diagram shows the interaction of the goods and resources markets. 19) Microeconomics is the study of topics like national income and expenditure. 20) Property rights are not necessary to gain maximum advantage from trade.

TUTORIAL 2 TOPIC Demand and Supply Group Discussion 1. Consider the market for pizzas in Bathurst. Explain the effect of the following changes. In each case, describe the direction of the change Change Shift in

supply Movement along supply curve

Shift in demand

Movement along demand curve

Uni students return from holidays

A new firm “Aus Pizza” begins business in Bathurst

The price of flour increases because of the drought

Austudy increases by 20%

The price of pizzas rises by 10%

Hungry Jacks decides to reduce the price of a Whopper to $1 during March

The link between pizza eating and cholesterol is widely publicised

2. Describe the forces that move a market towards equilibrium

Question 1 Using supply and demand diagrams, show the effect of the following events on the market for houses in Bathurst: (a) A new mine opens just outside Bathurst (b) The local council decreases the number of blocks of land it is releasing (c) A large construction company enters the Bathurst home building market Question 2 The market for Magnum ice-cream has the following demand and supply schedules. Price Quantity Demanded Quantity Supplied $1.00 100 20 $1.50 80 40 $2.00 60 60 $2.50 40 80 $3.00 20 100

(a) Graph the demand and supply curves (b) What is the equilibrium price and quantity in this market? (c) If the price were above equilibrium, what would drive the price to equilibrium? (d) Suppose that initially there was only one firm in the market. Then another firm enters the market that is identical in every way to the first firm in the market. What will be the new equilibrium price and quantity?

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Figure 4.1

1) Referring to Figure 4.1, The Market for Hamburgers, which panel shows the effect of a decrease in the price of a hamburger complement such as hamburger buns? A) Panel A B) Panel B C) Panel A and B D) Panel D 2) Which of the following is a "ceteris paribus" condition on the supply side of the market? A) the price of the commodity B) the number of buyers in the market C) the income levels of the buyers in the market D) the technology with which the commodity is produced 3) Every spring, motorists do more driving than during the winter months. At the same time, the price of petrol increases and the motorists buy more of it. This experience suggests that A) the law of supply does not always hold for necessities like petrol. B) the law of demand does not always hold for necessities like petrol. C) the laws of supply and demand are both contradicted for petrol, though only during the Spring driving season. D) none of the above 4) If the demand curve for plum jam shifted rightward every time the supply curve of peanut butter shifted leftward, this would suggest that the two commodities are A) complements. B) never complements and never substitutes. C) sometimes complements and sometimes substitutes. D) substitutes. Figure 4.3

5) Referring to Figure 4.3, the Market for Oranges, which panel shows the effect of all existing orange growers increasing the size of their orange groves? A) Panel A B) Panels B and D C) Panels A and C D) Panel D 6) A change in which of the following shifts the demand curve? A) the price of inputs used to produce the commodity B) the tastes and preferences of consumers C) the technology with which the commodity is produced D) the number of sellers in the market Figure 4.2

7) Referring to Figure 4.2, the Market for Gasoline, which panel shows the effect of motorists suddenly increasing their demand for taking the bus to work? A) Panel A B) Panel B C) Panel C D) Panel A and C 8) A basic theoretical requirement for the "law of demand" to hold true is A) quid pro quo on the demand side of the market. B) quid pro quo on the supply side of the market. C) ceteris paribus on the demand side of the market. D) ceteris paribus on the supply side of the market.

9) In the market for raisin bran cereal, which of the following events would provide an opportunity to watch the "law of supply" in operation? A) a new wage increase for all workers in food processing plants B) a new federal excise tax on all breakfast cereals C) a decrease in the price of raisins due to an unexpectedly large supply of raisins this year D) a highly publicized report in The New Medical Journal of Australia that raisin consumption can reduce both cholesterol levels and stress levels for adults under forty years of age 10) Which of the following can shift the demand curve for movie rentals rightward? A) a decrease in the price of cable TV service B) a decrease in the rental price of a movie C) an increase in the quantity and quality of programming included in the basic cable TV service package D) a nationwide increase of 10% in household incomes SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 11) What will happen to equilibriu m price and quantity in the market for shredded wheat if (a) the producer purchases and applies the "crunch enhancer" food additive to shredded wheat and (2) consumers begin to eat more shredded wheat because they like the way the crunch enhancer keeps it crisper longer in milk. 12) During the real estate boom of the mid-1980's, the prices of new and existing homes rose year after year yet people purchased more homes year after year. Can this be explained as an exception to the law of demand? 13) Will a fifty percent decrease in the price of cigarettes definitely cause an increase in the number of smokers, nation-wide? 14) What does an economist mean by saying "ceteris paribus" on the supply side of the market? 15) If the market equilibrium relative price for a two-litre bottle of Coca-Cola is $1.99 today, just like it was ten years ago, can we safely say that all supply and demand conditions in the market for Coke have remained very stable all these years? TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 16) "Ceteris paribus" on the demand side of the market means the supply curve can shift but the demand curve cannot. 17) An increase in the legal driving age to twenty-one would cause a leftward movement along the demand curve for used cars, whereas lowering the age to fifteen would cause a rightward movement. 18) If house purchases and home unit rentals are substitutes, then an increase in new house prices will cause an increase in home unit rents. 19) "Ceteris paribus" on the demand side of the market means the demand curve can shift but the supply curve cannot. 20) To see the "law of supply" in operation, price would have to increase or decrease giving producers an incentive to produce more or less.

TUTORIAL 3 TOPIC Elasticity Use diagrams wherever appropriate Group Discussion (a) What is the difference between the price elasticity of demand and the income elasticity of demand? What are the determinants of the price elasticity of demand? (b) At what values is the price elasticity of demand considered to be elastic, inelastic and having unit elasticity? (c) If demand is elastic, how does a price increase change total revenue? If demand is inelastic, how does a price increase change total revenue? Explain. (d) Why is the price elasticity of supply larger in the long run than in the short run?

Question 1 Rex Airlines have estimated the following demand relationships for business travellers and those visting friends and relatives (VFR) for the daily route between Sydney and Bathurst. Price Quantity demanded

(Business Travellers) Quantity demanded (Visiting Friends

and Relatives) $150 210 100 $175 200 80 $200 190 60

$225 180 40 (a) As the price of tickets rises from $200 to $225, what is the price elasticity of demand for (i) business travellers and (ii) those visiting friends and relatives? Interpret these results. (b) Why might those visiting friends and relatives have a different elasticity to business travellers? (c) If you were going to provide advice on price setting for fares, what price would you recommend for each sort of fare? Question 2 Suppose your demand for DVD per month is as follows:

Price of New Release DVDs

Quantity Demanded of New Release DVDs

Quantity Demanded of Old Release DVDs

$4 11 0 $6 8 2 $8 5 4 $10 3 7 $12 1 9

(a) Calculate the price elasticity for New Release DVD’s for a price increase from $8 to

$10.

(b) Calculate the cross-price elasticity for Old-Release DVD’s for the same price change. Interpret your answer.

Question 3 (a) What is the formula for calculating income elasticity? How does this formula differ to the formulas for calculating price elasticity and cross price elasticity? (b) Draw graphs showing the income elasticity for a normal good, an inferior good and a luxury. (c) Income elasticities of demand for movies, dental treatment and clothing are +3.4, +1.0 and +0.5 respectively. Interpret these coefficients. What does it mean if they are negative?

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If the demand curve for movie rentals is a downward sloping straight line, which of the following would cause the greatest increase in price elasticity? A) an increase in price from $2.00 to $3.00 B) a decrease in price from $3.00 to $2.00 C) a decrease in price from $3.00 to $2.50 D) an increase in price from $2.50 to $3.00

2) Last year when a local trade union received a 14% pay increase, the average union member increased their purchase of pork chops by 6% indicating that their A) income elasticity was -1.89 B) income elasticity was -.42. C) income elasticity was .42. D) income elasticity was 1.89. 3) One year, the regulated taxi fares in Sydney were increased by 15%. The expectation was that taxi revenue would also increase by 15%. The municipal taxi commission which authorized this fare increase must, therefore, have believed that the demand for taxi service was A) relatively elastic. B) perfectly inelastic. C) unit elastic. D) relatively inelastic. 4) Barend increased his spending on steak from $7 to $11 per week due to a 12% salary increase so his A) income elasticity is 1.37. B) price elasticity is 1.37. C) price elasticity is 3.7. D) income elasticity is 3.7. 5) At a local ice cream parlor, when the price was lowered by fifty cents on 2-litre packs of all flavors, total revenue from the sale of chocolate decreased but total revenue from the sale of vanilla increased. This is a clear indication that A) there are more people who like vanilla than there are people who like chocolate. B) the demand for chocolate is price inelastic and the demand for vanilla is price elastic. C) the demand curve for chocolate has shifted leftward and the demand curve for vanilla has shifted rightward. D) the demand for chocolate is price elastic and the demand for vanilla is price inelastic. 6) If there is an increase in the price of broccoli due to disastrous weather that destroys about half of this year's spinach crop, which of the following could be true? A) The cross elasticity of demand between spinach and broccoli is negative 1.25. B) The demand curve for spinach has shifted to the leftward. C) The demand curves for spinach and broccoli have become more cross inelastic. D) The demand curve for broccoli has shifted rightward. 7) To determine the effect of a 25% increase in the price of cigarettes on the quantity of cigarettes purchased, one would have know the numerical value of A) the price elasticity of demand. B) the income elasticity of demand. C) the cross-elasticity of demand. D) the price elasticity of supply. 8) Suppose inter-city bus travel is a substitute, in the eyes of most travelers, for transportation by train or airline. Which of the following could then be true? A) the cross elasticity between bus and train and between bus and airline could be equal to 1.25. B) the cross elasticity between bus and airline could be equal to 1.0. C) The cross elasticity between bus and train could be equal to .65. D) All of the above could be true. 9) Henry Ford believed that if his assembly-line production technique could reduce the price of cars enough, he could become a wealthy man. He must, therefore, have als o believed that the demand for cars was A) perfectly elastic. B) price inelastic. C) price elastic. D) perfectly inelastic. 10) If an economist calculated and drew the supply curve of milk and saw that it was a vertical straight line, the conclusion would be that A) this supply curve has infinite price elasticity of supply. B) this supply curve does not take production time into account. C) this is a monetary run supply curve. D) this is a long run supply curve. SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 11) If the short-run supply of chocolates was highly price elastic, would an increase in the demand for chocolates cause the supply curve to move rightward?

12) How can we be sure if milk and Weetbix really are complements for breakfast cereal-eaters? After all, can't some people prefer to eat their Weetbix dry like other munchies? And can't others dislike Weetbix so that they consume their milk with other cereals? 13) Can electric utility companies can always raise their total revenue by raising their kilowatt hour rates in the belief that the demand for electricity is and always will be price inelastic? 14) If TAFEs and universities wanted to increase their revenues from tuition payments, should they increase the tuition of day and evening students alike? 15) If the owner of a local movie theatre wanted to increase his total revenue from movie admissions, what should he do with his ticket prices? TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 16) For cricket memorabilia fans, the bat with which Don Bradman hit his first test century is perfectly price inelastic in supply and in demand. 17) If studies that show that smoking is inversely related to income are correct, then smoking is an inferior good. 18) If a hot dog vendor on a street corner experiences an increase in her total sales revenue after lowering the price of her hot dogs, then the demand for her hot dogs must have been price elastic. 19) If the cross elasticity of demand between cigars and pipe tobacco is -1.66, then the two are substitutes in the eyes of smokers. 20) If the cross elasticity of demand between Jeep Cherokees and Holden Commodores is 1.55, then the two vehicles cannot be considered as substitutes in the eyes of car buyers. TUTORIAL 4 TOPIC Efficiency, governments and markets Group Discussion (a) Define in your own words and with a diagram consumer and producer surplus. What

do consumer and producer surplus show? (b) Why is the equilibrium allocation of resources efficient? (c) What is a deadweight loss? Why do taxes create a deadweight loss? What other

forms of government intervention can create a deadweight loss?

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) There is a deadweight loss if the last unit produced has a A) marginal benefit greater than its marginal cost. B) marginal benefit equal to its marginal cost. C) marginal cost greater than its marginal benefit or marginal benefit greater than its marginal cost. D) marginal cost greater than its marginal benefit. Figure 6.2

2) What is the marginal benefit to all the people of Kaffenia from increasing their daily consumption of donuts from 250 to 300 dozen? A) $1.00 B) $300.00 C) $3.00 D) $100.00 Figure 6.3

3) What is the opportunity cost to the economy of Kaffenia of producing the 200th pound of chocolate each day? A) $250.00 B) $500.00 C) $2.50 D) $2.00 4) Adam Smith argued that each participant in a competitive market is led to promote the A) inefficient use of society's resources, even though his intention is to make society better off. B) efficient use of society's resources, because his intention is to make society better off. C) efficient use of society's resources, even though it is not his intention to make society better off. D) inefficient use of society's resources, because it is not his intention to make society better off. 5) Gina is eating two slices of pizza. Which of the following statements is true? A) Gina's marginal benefit from the second slice of pizza equals the maximum she is willing to pay for the second slice. B) Gina must have some consumer surplus from the second slice of pizza. C) Gina can not have any consumer surplus from the second slice of pizza. D) Gina's marginal benefit from the second slice of pizza is equal to the sum of the benefit from the first slice plus the benefit from the second slice. Figure 6.5

6) In Figure 6.5, the deadweight loss is zero if the price is

A) $8. B) $6. C) $4. D) $2. Figure 6.4

7) In Figure 6.4, Q1 is A) the efficient amount to produce because at Q1 marginal benefits are greater than marginal costs. B) an inefficient amount to produce because at Q1 marginal benefits are greater than marginal costs. C) the efficient amount to produce because at Q1 marginal benefits equal marginal costs. D) an inefficient amount to produce because at Q1 marginal benefits equal marginal costs. Figure 6.3

8) Which of the following conditions could cause the actual price and quantity of chocolate in Kaffenia not to be the most efficient price and quantity? A) a price ceiling set by the government at $1.50 per pound B) an excise tax of $.25 per pound, newly imposed by the government C) a price floor set by the government at $1.00 per pound D) all of the above 9) To cover all costs of production and earn a modest but normal profit, Farmer Jones knows that he must sell his tomatoes for at least $5.00 per kg. He simply cannot accept any lower price and remain in business. Fortunately, Farmer Jones sold all his tomatoes to a local canned soup producer for $5.50 per kg. How much consumer surplus did the soup company achieve? A) $.50 times the number of kilograms produced B) $5.00 times the number of kilograms produced C) $5.50 times the number of kilograms produced D) none of the above Figure 6.2

10) What is the opportunity cost to the economy of Kaffenia of producing the 250th dozen donuts each day? A) $6.00 B) $8.00 C) $7.00 D) $5.00 SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 11) Can price ceilings and price floors interfere with the efficient quantity of a commodity being produced? 12) Can both producer surplus and consumer surplus exist at the same time in a particular market? 13) What determines the maximum amount that someone is willing to pay for a commodity? 14) The new sportscar in the dealer's showroom had a sticker price of $35,900. Sally liked the car but decided she would pay no more than $32,000 for it, otherwise she would do without it. After haggling with the dealer, she purchased the car for $31,500. Did she gain any consumers surplus? If so, how much? If not, why not? 15) It cost Sally $250.00 to make a wooden doghouse, taking into account the dollar value of all resources including the value of her own labor time. She therefore decided that $250.00 was the minimum price for which she would sell the doghouse. Lucky Sally was actually able to sell the doghouse for $295.00. Did she earn any producer surplus? If so, how much? If not, why not? TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 16) It is most likely correct to say that most private schools earn some producer surplus from many of their students. 17) The opportunity cost to the firm of producing one more unit of output is also called marginal cost. 18) If the marginal benefit exceeds the marginal cost of producing the next kilowatt hour of electricity, then it is efficient to go ahead and produce as many kilowatt hours as possible. 19) If the hot dog vendors at Melbourne Cricket Ground are earning a producer surplus on each hot dog they sell, then cricket fans cannot be achieving any consumer surplus on they hot dogs they buy. 20) A consumer's demand curve for popcorn is downward sloping as is the marginal benefit of popcorn curve.

TUTORIAL 5 TOPIC Production and Costs Group discussion (a) What is a production function? (b) What is the difference between total product and marginal product? (c) What does the law of diminishing marginal returns (or product) state? (d) Define total cost, average cost and marginal cost. How are they related? (e) Draw the marginal cost and average cost curves for a typical firm. Explain (1) why the curves have the shapes that they do and (2) why they cross where they do. (f) How are the marginal product and the marginal cost curves related? (g) Define economies of scale

Question 1 Dick Smith’s Pet Food Manufacturing division has the following production function:

Number of workers hired

Output Marginal Product

0 0 1 10

2 25 3 40 4 50 5 59 6 61 7 62 8 62 9 62 10 60

(a) Calculate the values for the marginal product (b) With which worker does diminishing marginal product set in? When does marginal product become negative? Compare the two cases in terms of its effect on total output. (c) Graph the total and marginal product curves Question 2 Nimbus Pty Ltd makes brooms and then sells them door-to-door. Here is the relationship between the number of works and Nimbus’s output in a given day. Workers Output Marginal

Product MP=?TP/?Q

Total Cost Average Total Cost

ATC=TC/Q

Marginal Cost MC=?TC/?Q

0 0 1 20 2 50 3 90 4 120 5 140 6 150 7 155

(a) Fill in the column of marginal products. What pattern do you see? How might you

explain it? (b) A worker costs $100 per day and the firm has fixed costs of $200. Use this

information to fill in the column for total cost.

(c) Now fill in the column for marginal cost. What pattern do you see?

(d) Compare the column for marginal product and the column for marginal cost. Explain the relationship.

(e) Compare the column for average total cost and the column for marginal cost. Explain

the relationship. Question 3 Consider the following table of long-run total cost for three different firms:

Quantity 1 2 3 4 5 6 7

Firm A $60 $70 $80 $90 $100 $110 $120 Firm B 11 24 39 56 75 96 119 Firm C 21 34 49 66 85 106 129 Does each of these firms experience economies of scale or diseconomies of scale? (Big hint: To answer this question you need to calculate the average total costs for each firm.)

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is exclusively a short run concept? A) total variable cost. B) economies of scale. C) average fixed cost. D) none of the above Table 10.1 Productivity of Jefferson's Cleaners Number of workers 0 1 2 3 4 5 6 7 8 9 Number of siutes c leaned dayly 0 12 26 46 60 73 84 94 102 109 2) If labour is the only variable factor of production, and each worker is paid $60.00 per day, what is the average variable cost to Jefferson's Cleaners of dry cleaning 100 suits each day? A) $7.50 B) $6.00 C) $4.71 D) $75.00 3) A period of time in which the quantity of at least one input is fixed and the quantity of the other inputs can be varied is called A) the market period. B) the long run. C) the short run. D) the intermediate run. 4) If General Motors Holden doubles the quantity of the capital and labour it uses to produce cars and the quantity produced increases from 100,000 to 150,000 each month, that would be an example of A) increasing marginal returns. B) constant marginal returns. C) decreasing marginal returns. D) none of the above 5) Which of the following occurs only in the short run? A) diminishing marginal returns B) diseconomies of scale C) both of the above D) neither of the above 6) When the average product of labour is greater than the marginal product of labour, A) the marginal product of labour must be increasing. B) the average product of labour is decreasing. C) there must be increasing marginal returns. D) all of the above 7) Which of the following would cause a movement rightward along the AVC curve at Barney's Bagel Bakery? A) an increase in the price of flour that Barney uses to make his bagels B) an increase in the number of bagels that Barney's produces each day C) an increase in the fire insurance premiums that Barney pays on the building he owns and uses D) all of the above 8) When long run average cost decreases as output increases there are definitely A) increasing marginal returns. B) economies of scale. C) both of the above D) neither of the above 9) A firm's total cost (TC) is equal to the sum of its A) fixed cost plus variable cost. B) fixed cost plus sunk cost plus variable cost plus marginal cost. C) fixed cost plus marginal cost. D) fixed cost plus variable cost plus marginal cost. Table 10.2 Daily Productivity of Decent Donuts Number of workers 0 1 2 3 4 5 6 7 8 9 10 Total donuts produced dayly 0 12 26 44 64 86 110 122 125 127 128

10) What is the average product of labour each day when Decent Donuts employs five workers? A) 17.2 dozen donuts per day B) 16.66 dozen donuts per day C) 20 dozen donuts per day D) 22 dozen donuts per day SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 11) What is the meaning of increasing, constant, and decreasing returns to scale? 12) What is the difference between diminishing marginal returns and diseconomies of scale? 13) Will a decrease in input prices affect the short run and long run cost curves in the same way? 14) How do the marginal and average products of labour affect a firm's marginal and average variable costs in the short run? 15) What is the difference between the short run and the long run? TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 16) Diminishing marginal returns and diseconomies of scale are two different names for the same thing. 17) When costs for a firm are being considered over the long run, the firm's total fixed cost will equal zero. 18) The marginal cost curve intersects the average fixed, average variable, and average total cost curves all at their minimum points. 19) Over the range of output for which the average product of labour is falling, average variable cost must be rising. 20) A firm's long run average cost curve is derived by adding together its short run average total cost curves. TUTORIAL 6 TOPIC Perfect Competition Group Discussion (a) Describe a firm in a perfectly competitive market. How does a firm in a perfectly competitive market set output and price? (b) Under what conditions will a firm shut down temporarily in a perfectly competitive market? Explain (c) Under what conditions will a firm exit a perfectly competitive market?

Question 1 Assume that in the Bathurst house building market building firms are making an economic (supernormal) profit. Using diagrams, illustrate and explain what will happen in this market in the long-run if it is competitive. Question 2 Assume that the market for personal computers is competitive. (a) Illustrate a long-run equilibrium for (1) a representative firm and (2) the industry. (b) Innovate Ltd has developed a new processor that will substantially reduce the cost of building computers. Illustrate and explain the (1) the short-run effect and (2) the long-run effect of this new technology on price, output and profit. Question 3 Assume that the gold-mining industry is competitive. (a) Illustrate a long-run equilibrium using diagrams for the gold market and for a representative gold mine. (b) Suppose that an increase in jewellery demand induces a surge in the demand for gold. Using your diagrams, show what happens in the short run to the gold market and to each existing gold mine. (c) If the demand for gold remains high, what would happen to the gold price over time? Specifically, would the new long-run equilibrium price be above, below or equal to the short-run equilibrium price in part (b)?

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In a perfectly competitive market, the profit maximizing firm will A) never set its price equal to its marginal revenue. B) always produce so that marginal revenue equals marginal cost. C) always produce so that price equals average cost. D) always earn profits. 2) By assuming that each firm sells an identical product, the model of perfect competition assumes that A) each firm's output is a perfect substitute for the output of any other firm. B) each firm can expect to earn some economic profit. C) the demand for each firm's product is perfectly inelastic. D) each firm will try to cut prices to increase its market share. 3) In a perfectly competitive market in the short run, as market demand increases, A) the perfectly competitive firm decreases output and profits will typically decrease. B) the perfectly competitive firm decreases output and profits will typically increase. C) the perfectly competitive firm increases output and profits will typically fall. D) the perfectly competitive firm increases output and profits will typically increase.

Figure 11.1

4) In figure 11.1, the firms total profit is equal to A) 180. B) 45. C) 225. D) MR - MC. 5) In a perfectly competitive market, the demand for a single firm's product is perfectly elastic A) only in the long-run. B) because this firm's output is a perfect substitute for any other firm's output. C) because this firm is a price taker. D) because there are many buyers in this market. 6) Which of the following would be closest to being a perfectly competitive firm A) an Australian car producer. B) an Australian wheat farmer. C) a big city newspaper. D) a pay TV company. 7) Which of the following is NOT an assumption of perfectly competitive markets? A) unrestricted entry B) complete information about prices C) new entrants have higher costs D) many buyers and many sellers 8) A perfectly competitive firm maximizes profits by A) setting the right price. B) manipulating demand. C) cutting wages. D) choosing the right level of output. 9) If a firm's accounting profit is negative, it A) cannot be earning an economic profit. B) could not possibly be a profit maximizer. C) is earning zero economic profit. D) can still be earning an economic profit. Figure 11.2

10) Figure 11.2 show the cost curves for a perfectly competitive firm. If price equals $20, which of the following statements is TRUE?

A) Over time, firms will leave this industry. B) Over time, market price will fall. C) The firm is earning zero economic profit. D) The industry is in long run equilibrium. SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 11) Why is the demand for the perfect competitor's product perfectly elastic even though the market demand is not? 12) What is a normal profit? 13) List the three conditions for resources to be used efficiently. 14) Define the shutdown point. Explain why the firm shuts down in the short run if price falls below this point. 15) What are the four assumptions of perfect competition? TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 16) In long-run equilibrium, perfectly competitive firms cannot earn economic profit. 17) Perfectly competitive firms will sometimes operate even though they incur an economic loss in the short run. 18) Entry of new firms into a perfectly competitive market raises the product's price. 19) In perfectly competitive markets, many firms sell an identical product. 20) A profit maximizing perfectly competitive firm will set price equal to marginal cost.

TUTORIAL 7 TOPIC MONOPOLY Group Discussion (a) Describe a pure monopoly and a natural monopoly. What is the difference between them? (b) Draw the demand, marginal revenue and marginal cost curves for a monopolist. Show the profit-maximising level of output and price. (c) In the diagram for part (c), show the level of output that maximises total surplus. Also show the deadweight loss. Why does this deadweight loss arise?

Question 1 Ted Grunge has just finished recording his latest CD. His record company’s marketing department determines that the demand for the CD is as follows:

Price Number of CDs Total Revenue Marginal Revenue $24 10,000 22 20,000 20 30,000 18 40,000 16 50,000 14 60,000

The company can produce the CD with no fixed cost and a variable cost of $5 per CD.

(a) Find the total revenue for quantity equal to 10,000, 20,000 etc. What is the marginal

revenue for each 10,000 increase in quantity sold? (b) What quantity of CDs would maximise profit? What would the price be? What

would the profit be? Question 3 The peppy pill pharmaceutical company has been granted a patent to produce a new non-prescriptive cure for the common cold. The following table shows weekly costs and revenue data for the firm. (a) Determine the profit maximising output and price for the firm. Comment on the efficiency of resource use by the firm. Table 1 Product Batches

Total Fixed Cost

Total Variable

Cost

Total Cost

Average Variable

Cost

Average Cost

Marginal Cost

Marginal Revenue

Price Total Revenue

0

1000 - 1000 - - -

100

200 1200 2 12 14

200

400 1400 2 7 13

300

600 1600 2 5.33 12

400

900 1900 2.25 4.75 11

500

1300 2300 2.6 4.6 10

600

1800 2800 3 4.66 9

700

2400 3400 3.43 4.87 8

(b) Following an investigation by the Environmental Protection Authority, the government offers the company two alternative methods to deal with the pollution produced by the company’s plant.

• Payment of a levy of $4 per batch sold, to finance a public pollution control scheme, or,

• Instillation by the company of pollution control equipment that would impose a cost of $2000 per week on the company.

As a profit maximiser which option should you choose for the company? Table 2 Product Batches

Total Fixed Cost

Total Variable

Cost

Total Cost

Average Variable

Cost

Average Cost

Marginal Cost

Marginal Revenue

Price Total Revenue

0

- - - -

100

14

200

13

300

12

400

11

500

10

600

9

700

8

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Figure 12.4

1) In Figure 12.4, a single-price unregulated monopoly will set price A) a B) h C) c D) j 2) Australia Post A) does not have any barriers to market entry. B) is a public franchise. C) enjoys economies of scale for overnight deliveries. D) has a patent on delivering letters. 3) Which of the following statements is TRUE? A) All monopolists have short run profits. B) All monopolists are perfect price discriminators. C) A monopolist does not need barriers to entry to sustain long run profits. D) A monopolist will leave the market if it incurs long run losses. Figure 12.4

4) In Figure 12.4, the transfer of consumer surplus from consumers to the producer caused by production under a single-price monopoly instead of perfect competition is the area of A) triangle egx. B) 1/2 of rectangle cexh. C) trapezoid cegf. D) rectangle cexh. 5) A perfect price discriminator A) is unable to earn economic profit.

B) charges the maximum price for each unit that consumers are willing to pay. C) disregards the market demand curve. D) is able to get consumers to pay more for each unit than they are willing to pay. Figure 12.3

6) XYZ Co. is a monopolist painter of interior walls. Figure 12.3 shows the demand curves for two different types of customers. If XYZ is a profit maximizing price discriminator, then A) price elasticities of demand will be the same in both markets. B) price elasticity of demand will be greater for homeowners than for businesses. C) price elasticity will be greater for businesses than for homeowners. D) marginal revenue will be greater for businesses than for homeowners. Figure 12.1

7) Figure 12.1 shows the demand and cost figures for a monopolist. What price will the profit maximizing firm charge? A) 12 B) 10 C) 14 D) 20 8) A monopolistic industry is characterized by A) a product for which there are no close substitutes. B) a single firm. C) barriers to entry. D) all of the above 9) If a monopolist can perfectly price discriminate, then A) it will not give a discount to those who buy in bulk. B) it will charge just two different prices in two different markets. C) there will be no consumer surplus. D) it is more likely for consumers to find the best deal.

10) If a monopolist charges a different price for each unit sold even though the costs of the units are the same, it is acting as a A) perfect price competitor. B) perfect price limiter. C) perfect price deviator. D) perfect price discriminator. SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 11) Comment on the following: "A monopolist is a firm which can raise price without experiencing a decline in total revenue." 12) Why do perfectly competitive firms maximize profits by setting price equal to marginal cost, but monopolists maximize profits by setting a price that is greater than marginal cost? 13) What factors enable a monopoly to earn economic profits in the long run? 14) Patents provide a firm with a monopoly on a given product. What is the economic rationale for granting patents? 15) In the absence of economies of scale, one must erect barriers to entry to obtain a monopoly. What is this activity called in general and what does it entail specifically? TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 16) A monopolist is the sole supplier of a product for which there are no close substitutes. 17) If economies of scope are present, a monopolist might charge a price below that of a competitive market. 18) Differences in elasticities of demand between two distinct groups suggests an opportunity for a monopoly to price discriminate. 19) Natural monopolies enjoy their monopoly status because of rent seeking. 20) The goal of the perfect price discriminator is to achieve efficiency.

TUTORIAL 8

TOPIC Externalities Group Discussion (a) What is an externality? What is the difference between a positive and a negative externality? (b) Why do externalities create market failure? (c) What is a market-based instrument?

Question 1 Many observers believe that the levels of pollution in our economy are too high. (a) If society wishes to reduce overall pollution by a certain amount, why is it efficient to have different amounts of reduction at different firms? (b) Command and control approaches often rely on uniform reductions among firms. Why are these approaches generally unable to target the firms that should undertake bigger reductions?

(c) Economists argue that appropriate Pigovian taxes or tradeable pollution rights will result in efficient pollution reduction. How do these approaches target the firms that should undertake bigger reductions? Question 2 How does allocating property rights to one party (ie the Coase Theorm) solve the problem of negative externalities? Under what conditions is this possible?

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Taxes can yield the efficient level of pollution generated by a certain activity if the tax is set equal to A) marginal social cost of the activity. B) external marginal cost of the activity. C) competitive equilibrium price of the activity. D) marginal benefit of pollution. Figure 18.3

2) Figure 18.3 shows the marginal benefits from pollution for two firms. If both firms receive a marketable permit to pollute 25 units of sulfur dioxide each, which of the following is MOST LIKELY to occur in an efficient market? A) More than 50 units of sulfur dioxide will be generated. B) Firm B will buy some pollution rights from firm A. C) Firm B will generate less than 25 units of pollution. D) Firm A will generate all of the pollution. Figure 18.5

3) Figure 18.5 shows the private marginal benefit and social marginal cost of a university education. If society's external benefits from university graduates is $10,000 per student, then what tuition would a socially optimal university system charge? A) $15,000 B) $10,000 C) $25,000 D) $20,000 4) One reason that education has external benefits is that A) property owners pay taxes to support the school system. B) knowledge has diminishing marginal productivity. C) education creates job opportunities for teachers. D) education creates better citizens. 5) Which of the following is LEAST likely to occur when copyright laws are NOT enforced? A) Consumer surplus is maximized. B) There is no output of the copyrighted product. C) Consumer surplus is minimized. D) No copyrights are requested. Figure 18.1

6) Figure 18.1 shows the marginal benefit to a firm of polluting in the local river and the marginal social cost to the neighboring properties of that pollution. Suppose the firm convinces the government to set an emission charge of $50, how much pollution will be generated? A) 2 units B) 6 units C) 0 units D) 4 units Table 18.1 Consumption and Production of Chemical Fertilizer tableau1 ( ( cell cell ) (cell cell) (cell cell) ) 7) In Table 18.1, if the market is perfectly competitive and unregulated, at the profit-maximizing output, the marginal A) private cost is less than the marginal private benefit. B) social cost equals the marginal private benefit. C) private cost exceeds the marginal private benefit. D) social cost is greater than the marginal private benefit. 8) Patents can A) make discoveries less profitable. B) allow anyone to freely use a new discovery. C) stimulate research. D) eliminate all inefficiencies. Figure 18.3

9) Figure 18.3 shows the marginal benefits from pollution for two firms. If both firms receive a marketable permit to pollute 25 units of sulfur dioxide each, which of the following is MOST LIKELY to occur i

n an efficient market? A) Firm A will generate all of the pollution. B) Firm B will buy some pollution rights from firm A. C) Firm A will generate more than 50 units of pollution. D) 50 units of sulfur dioxide will be generated. 10) When external costs are present and government imposes a tax, then A) transaction costs will be high. B) property rights must have already been established. C) firms will move further away from efficiency. D) the marginal private cost of pollution will increase. SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 11) "The optimal level of pollution is zero." Comment. 12) Invoking the Coase Theorem, why would a firm pollute less if it owned a river as opposed to nobody actually owning the river? 13) In the market for education, does it matter whether the student or the school receives the subsidy? 14) Why should people without children pay some tax to support local schools? 15) Why do firms ignore external costs when they pollute? TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 16) Externalities are likely to occur when property rights do not exist. 17) If property rights for air and water exist, then polluters bear the costs of pollution. 18) A subsidy for education can achieve efficiency only if the subsidy is paid directly to students. 19) Patents stimulate research by allowing subsequent inventors to utilize patented inventions. 20) The optimal level of pollution is zero.

TUTORIAL 9

TOPIC Market Failure Group Discussion

(a) What is meant by a good being rival and excludable?

(b) Define and give an example of a public good

(c) What is a free-rider?

(d) Define and give an example of a common property resource. Why do people use too much or too little of these resources?

Question 1

Describe (1) a common resource, (2) a private good, (3) a pub lic good and (4) natural monopoly. Give an example of each and justify why you consider it to be a specific type of good.

Question 2

Using diagrams, show how an unregulated natural monopoly determines its price and quantity. Explain the cost to society that this involves and outline the possible pricing options available to government regulators to produce a more efficient market outcome.

Question 3 (30%)

Illustrate and explain how the government determines how much of a public good to provide?

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) An externality could be best defined as A) a party uninvolved with a transaction but affected by it.

B) an effect on a third party uninvolved with a transaction. C) a party involved with a transaction that is adversely affected by it. D) a party uninvolved with a transaction. Figure 16.3

2) Figure 16.3 shows a graph of the market for gadgets. What is the equilibrium price? A) $6 B) $8 C) $9 D) $7 Table 16.1

0-10,000 ,001-20,000 ,001-30,000 ,001 and above

(Income * .10) $1,000 + (.20 * Income Over $10,000) $3,000 + (.30 * Income Over $20,000) $6,000 + (.40 * Income Over $30,000)

3) Table 16.1 shows the income tax table for the country of Miseria. If your income is $25,000, your marginal tax rate is A) 18% B) 30% C) 20% D) 25% 4) A sales tax is A) the federal government's chief source of revenue. B) proportional. C) regressive. D) progressive. Figure 16.2

5) Figure 16.2 shows a graph of the market for widgets. If government imposes a $1 excise tax on widgets, why is the deadweight loss smaller than the decline in consumer surplus? A) Because consumers do not suffer as much as society in general. B) Because the tax revenue represents a transfer from widget consumers to somebody else. C) Because producer surplus also falls. D) All of the above are true. 6) Figure 16.2 shows a graph of the market for widgets. How large of an excise tax must government impose if it wishes to raise $10 in tax revenue? A) $1.00 B) $2.00 C) $0.50 D) none of the above Figure 16.1

7) Figure 16.1 shows the tables of marginal benefit from submarines for the only two citizens of a country. Suppose submarines cost $175 a piece. Politician A proposes 2 submarines while politician B proposes 4. Assuming a shared tax burden, which politician will win the election? A) A because she offers voters a lower tax bill. B) A because she offers voters a greater net benefit. C) B because she offers voters more submarines. D) B because she offers voters a greater total benefit. Figure 16.3

8) Figure 16.3 shows a graph of the market for gadgets. If government imposes a $2 excise tax, how much of the total amount of the tax collected is paid by consumers? A) $1.00 B) $4.00 C) $0.50 D) $8.00 9) Rational ignorance occurs, to a large extent, because of A) differences in costs and benefits of acquiring knowledge on an issue. B) real ignorance. C) defense spending. D) irrational behavior. 10) The income tax is typically A) smaller for high wage workers than for low wage workers. B) paid by both the workers and the firm. C) paid by the firm. D) paid by the workers. SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 11) Distinguish between a proportional tax, a progressive tax, and a regressive tax. 12) Why is it rational for individuals to be ignorant about public goods but not about private goods? 13) What is meant by the term "political equilibrium"? 14) How does the behaviour of politicians differ in public choice theory from the behavior of politicians in public interest theory? 15) Why do politicians propose policies that appeal to the median voter? TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 16) Because of the free rider problem, a private firm would not produce the socially optimal quantity of a public good. 17) The Australian states raise far less tax revenue than they spend. 18) Public goods create a free rider problem because most people tend to be dishonest. 19)

The efficient quantity of a public good is determined by setting society's marginal benefit from the good equal to the good's marginal cost. 20) Cable television is an example of a pure public good.