SOLUTION ECONOMICS MAY MU Y Subject to the consumer s limited income P

Transcription

1 OLUTION 1 a) The law of eman tate that, all other thing being equal, an increae in the relative price of a commoity inuce a ecreae in the quantity emane per perio. In the ame vein, a ecreae in the relative price of a commoity caue an increae in the quantity emane per perio. b) A utility-maimiing conumer chooe the conumption bunle of goo (X an Y) for which each goo ha the ame ratio of marginal utility to price: in other wor, the etra utility per cei pent i the ame for all goo. That i MU MU Y ubject to the conumer limite income P P Y If, from the original equilibrium bunle, the price of one goo X (a normal goo) fall, the conumer will want to change the conumption bunle becaue MU MU Y. P P Y The reaon for thi i that the etra utility aociate with an aitional cei worth of goo X ha rien (price ha fallen but marginal utility han t change). The conumer will conume more of goo X. Auming eparable utility i.e. utility of X oe not epen on utility of Y; the conumer conume more of goo X leaing to a fall in the marginal utility of X becaue the conumer eperience iminihing marginal utility. Thi will continue to the point where the equality of marginal utility/price ratio i MU MUY retore for the two goo - ubject again to the conumer limite P PY income. In concluion a the price of goo X fall, the utility maimizing increae quantity emane of goo X. Page 1 of 9

2 OLUTION 2 (a) (b) (c) () FAL. An epecte price increae will reult in an increae in eman for the goo which will hift the eman curve to the right or outwar. An increae in the current price of the goo will reuce quantity emane. Thi will be hown a an upwar movement along the eman curve for the goo. TRU. The ubtitution effect of a price change meaure the impact on quantity emane of the goo, keeping other thing contant, incluing utility an real income The ubtitution effect i alway negative i.e., an increae in the price of a goo, keeping real income contant, will make ubtitute goo relatively more attractive, reucing the quantity emane for the goo whoe price ha rien. FAL. Marginal cot i the aition to total cot from a unit increae in output. Average cot i total cot ivie by the number of unit of output prouce. If marginal cot i greater than average cot, then the etra unit will cot more than the average unit, raiing, not ecreaing, the average cot. TRU. In perfect competition, the firm are unable to influence price: they are price-taker. Therefore, however many unit of output they prouce the market price remain the ame (the cot conition of perfect competition mean that the firm i very mall in relation to the overall ize of the market). Average revenue (eman) i equal to marginal revenue an hence the eman curve i horizontal at the market price. OLUTION 3 (a) (i) Fie Cot (FC): Thi i the total pening for engaging the ervice of fie factor. Thi i the aggregate of all eplicit an implicit cot relating to the firm' fie input. ince the level of fie factor employe oe not change with output in the hort-run, fie cot ten to be contant over time. (ii) Average Variable Cot (AVC) repreent the amount of TVC borne by each unit of output prouce. (iii) The Marginal Cot cheule i a table that recor the change in Total Cot (TC) or change in Total Variable Cot (TVC) a a reult of a unit change in output. Page 2 of 9

3 (b) Output Total Cot (TC) in cei Total Variable Cot (TVC) in cei Average Variable Cot (AVC) in cei Marginal Cot (MC) in cei Total Revenue (TR) in cei (c) (i) (ii) (i) (iii) The olution are the hae area Karen Roe i operating in a perfectly competitive market. In perfect competition, profit maimizing level of output i etermine at a point where MC = MR (P) an if output houl be increae beyon that level MC mut begin to rie. Given the P = 1200, the profit maimizing level of i 5. Maimum achievable profit occur at a point where where MC = MR (P) an if output houl be increae beyon that level MC mut begin to rie. But Profit i the TR TC. Therefore, the maimum achievable profit i Becaue TR ( ) an TC = 4000 OLUTION 4 a) (i) The cro elaticity of eman (CD) meaure the egree of reponivene of eman for one goo (X) to a given change in the price of a econ (another) goo (Y). (ii) Income elaticity of eman (ID) meaure the egree of reponivene of eman to a given change in income (Y). Page 3 of 9

4 b) (i) In equilibrium =. Therefore to etermine the equilibrium price we equate the two function an olve for price (P) 20 2P 10 3P P 2P 10 5P P P The equilibrium quantity i etermine by ubtituting P = 2 into the eman or upply function an olving for R The equilibrium price i 2 an the equilibrium quantity i 16 kilo (ii) Own price elaticity of eman i given a P P (iii) Price elaticity of upply i given a P P Page 4 of 9

5 c) 1. The trength of ubtitution: The major influence on own price elaticity of eman i whether there are cloe ubtitute for the commoity. The more cloe ubtitute a commoity ha the more elatic i the eman for the commoity. It mut, however, be note that the ubtitute mut be within the ame price range. If no cloe ubtitute eit for a commoity the eman for it i le own price elatic. The number of ubtitute a goo ha i affecte by everal factor: a. The larger the time interval coniere, or the longer the run, the more elatic i the eman for the goo b. The le a goo i coniere a neceity, the more elatic i it eman. c. The more pecifically a goo i efine; the more elatic i it eman. 2. Conumer income: Own price elaticity of eman i affecte by the trength of income effect. Thi epen on the percentage of conumer income pent on the commoity. The larger the percentage of income pent on the commoity, the greater the egree of it own price elaticity. For eample, alt account for a very mall part of many houehol total epeniture, an a relatively large percentage increae (or fall) in it price woul be epecte to have little effect on quantity bought. 3. The number of poible ue of the commoity: When a commoity ha everal poible ue, it will have a high own price elaticity. When the price of the commoity fall becaue of the many ue, the quantity emane of the commoity repon more to price change an vice vera. The fewer the number of ue a commoity ha, the lower it own price elaticity. 4. Time: In the hort perio, a fall in price may have little effect on eman, a it may take time for a change to take effect becaue of the following reaon: i. Conumer nee time to ajut their purchae. If they think that the price i likely to fall further, they will not increae their purchae. ii. ome goo are urable an conumer will obviouly not replace them until they are worn out, even if their price fall. For thee reaon, the longer the time perio, the more elatic i own price elaticity. OLUTION 5 a) (i) (ii) (iii) (iv) (v) It help to organize economic ata an activitie; It help to claify economic activitie into variou egment or ector. It help to keep track of total prouction within the macro economy, It help to etermine the economic performance of a country, It help in policy formulation an implementation. Page 5 of 9

6 a) (i) Two ector cloe economy (ii) The marginal propenity to conume i 0.75 (iii) 100m (iv) The complementary i aving function i Y C Y {100m 0.75Y } Y 100m 0.75Y 100m Y 0.75Y 100m (1 0.75) Y Y (v) 1) The equilibrium aggregate national income i Y C I Y m Y m Y Y m Y 180 m 180m Y Y m 2) The equilibrium conumption epeniture i C 100m 0.75{720m} C 640m 3) The multiplier i given a K K K 1 1 MPC (vi) In equilibrium Y = C +I an Y = C+. Therefore, C + I = C+ hence in equilibrium I =. In the quetion, I = 80. But 100m 0.25{740m} 80m. From the calculation = 80m an I = 80m. In equilibrium I =. Page 6 of 9

7 OLUTION 6 a) (i) Direct Tae are tae impoe on the income or the earning of a peron or a corporate boy an are pai irectly to the government through public authoritie uch a the Internal Revenue ervice or the local authority. Uually each iniviual ta liability i aee eparately. People who pay irect tae cannot hift the incience or buren of payment to ome other iniviual. Inirect tae are tae impoe on goo an ervice an are pai only when thee goo an ervice are bought. A ta i inirect if the incience or the buren of payment can be pae to other to pay. (ii) quity implie that tae houl relate to the tapayer income. Thi mean that the ta houl be levie on each peron accoring to hi ability to pay. It houl not be a proportional or flat rate but progreive. quity in taation oe not mean that everyone houl pay the ame amount of ta. conomy implie that collection cot of the ta houl not be equal to or greater than the yiel from the ta. Thi mean that the cot of collection houl be kept at the baret minimum o that it oe not wipe out the ta revenue collecte. Aitionally, the ta houl not be iincentive to work ele there woul be a ecline in output. b) (i) Revenue: One of the olet an the mot obviou aim of taation i to raie revenue o a to pay for government epeniture in the form of eucation, contruction of roa, pipe-borne water, etc. (ii) Reitribution of Income: The government may impoe tae to reitribute income an brige the gap between the higher income earner an the lower income earner. Thi may be achieve through a progreive ta ytem. (iii)dicouraging the conumption of certain commoitie: Tae may be ue to prevent an reuce the prouction an conumption of ome commoitie in an economy. Heavy inirect tae are levie on goo whoe prouction an conumption the government want to icourage. (iv) Protection of infant inutrie: Infant inutrie are newly etablihe inutrie to prouce goo that were formally importe. A new inutrie their cot of prouction will be high an their price high renering their prouct non-competitive with the importe one. To protect them the government impoe tae on importe ubtitute that the infant inutrie prouce o a to icourage their conumption an importation. Thee tariff increae the ometic price of import renering them price non-competitive when compare with the locally prouce prouct. Page 7 of 9

8 (v) To tabilize the economy: Tae can be impoe or cut to tabilize the economy an achieve internal or eternal balance. During inflation tae are impoe on income. Thi ha the effect of reucing ipoable income, aggregate eman may fall an preure on price may ecreae. Alo when a country eperience balance of payment eficit tae can be ue to correct thi. (vi) To control reource movement: The government ta policy can be ue to control an irect reource movement. For eample, if the Government of Ghana want invetment to flow into agriculture, tae on agricultural input may be reuce, ta holiay may be grante farmer, etc. OLUTION 7 a) Inflation i a peritent an an appreciable increae in the general price level. b) (i) Year CPI Rate of Inflation % % % % CPI t CPI t The rate of inflation () i CPI t! (i) From the calculation in the table, the fall in the rate of inflation mean in 2007 on the average, price roe by 17.3%, in 2008 by 14.7% an in 2009 by 2.6%. Note: A fall in the rate of inflation oe not mean average price have fallen. c) The Phillip Curve how an invere relationhip between the rate of unemployment an the rate of inflation. The higher the rate of unemployment the lower i inflation. In other wor, there i a trae off between inflation an unemployment. Page 8 of 9

9 ) Inflation Rate (%) Figure 7: The Phillip Curve 5 C 3 B A U N = 6 PC Unemployment Rate (%) In Figure 7 the Phillip Curve (PC) ugget a trae off between inflation. If the actual rate of unemployment equal the natural rate of unemployment, the rate of inflation woul be zero. uppoe that unemployment i at 2%, lower than U N = 6%, the rate of inflation woul be 5%. If the economy want a lower inflation rate of 3% thi mut be achieve at a price. Thi price i increaing unemployment from 2% to 4% moving from point C to point B. Thi alo mean that le unemployment can alway be obtaine by incurring more inflation. Page 9 of 9