Economics Answer Note #14

Question 1 A given supply curve illustrates 15) ______ A) the effect of a change in technology on quantity supplied. B) the relationship between price and quantity supplied. C) the relationship between expected future prices and quantity supplied. D) the effect of a change in resource costs on quantity supplied. Answer The correct answer for 15) on a supply curve is B) the relationship between price and quantity supplied. This means that as the price of a good or service increases, the quantity supplied by producers will also increase, and vice versa. This relationship is shown on a graph by a positively sloped supply curve. In conclusion, the relationship between price and quantity supplied is a fundamental concept in economics and is clearly depicted on a given supply curve. A thorough understanding of this relationship is crucial in analyzing the behavior of producers and the overall market dynamics. Question 2 Whendemandforaproductisgreater than the supply of the available product, a situation of ______ exists. A Absolute scarcity B Relativescarcity C Poverty D Amarketsurplus Answer The correct answer to this question is A) Absolute scarcity. This refers to a situation where the demand for a particular good or service exceeds the available supply, resulting in a shortage of the product in the market. In other words, when the quantity demanded of a product exceeds the quantity supplied, consumers face a scarcity of the product. In contrast, relative scarcity refers to a situation where a particular good or service is scarce in relation to the demand for it, but not necessarily scarce in absolute terms. For example, a luxury item may be relatively scarce due to its higher cost, but it may not be absolutely scarce as there is still some available supply for those who can afford it. On the other hand, poverty is a condition of low income and limited resources, which may restrict an individual's ability to access goods and services, regardless of their availability in the market. A market surplus, also known as excess supply, occurs when the quantity supplied of a product exceeds the quantity demanded, leading to an oversupply of the product and potentially causing a decrease in its price. To deepen our understanding of this concept, let us consider a simple example. Suppose a new smartphone is released with high demand from consumers. However, due to production delays, the manufacturer is only able to supply a limited number of units. This creates a situation of absolute scarcity, where there is not enough supply to meet the demand for the product. As a result, consumers may have to wait longer or pay a higher price to obtain the smartphone. Question 3 Explain 3 ways briefly with one paragraph: how lending interest rate reduce inflation? Answer Reducing inflation is a critical goal for central banks and governments as it leads to a more stable and predictable economy. One effective method to reduce inflation is by adjusting the lending interest rate. The lending interest rate is the rate at which banks and other financial institutions borrow from the central bank, and a decrease in this rate can help curb inflation. Firstly, a reduction in the lending interest rate makes borrowing more affordable, resulting in an increase in consumer spending. This increased demand for goods and services leads to a rise in production and, ultimately, an increase in supply. This increased supply helps to meet the rising demand, stabilizing prices and reducing inflation. Secondly, a lower interest rate incentivizes investments, further boosting economic growth and reducing inflation. Lastly, a decrease in the lending interest rate also leads to a depreciation of the local currency, making imports more expensive and exports more competitive, which can help reduce inflation. Question 4 An external benefit implies that private markets will provide ____ of the good (relative to the social optimum), and an external cost implies that private markets will provide _____ of the good. Question 1Select one: a. too much; too much b. too little; too little c. too much; too little d. too little; too much Answer The correct answer is c. too much; too little. This concept refers to the difference between the private and social costs or benefits of a specific action or decision. Private costs or benefits are the ones that affect only the individual or entity making the decision, while social costs or benefits include the impact on the society as a whole. External costs or benefits occur when the private costs or benefits do not fully reflect the social costs or benefits, resulting in an under or overproduction of a good or service. An external benefit occurs when the social benefit of a good or service exceeds the private benefit. This means that the individual or entity making the decision will not take into account the full benefits of their action, resulting in an underproduction of the good. On the other hand, an external cost occurs when the social cost exceeds the private cost. This means that the individual or entity making the decision will not take into account the full costs of their action, resulting in an overproduction of the good. In a free market, where prices are determined by the forces of supply and demand, these externalities are often not accounted for and can lead to market inefficiency. As a result, the market will not provide the socially optimal level of a good, hence the need for government intervention through policies such as taxes, subsidies or regulations to correct these externalities. Question 5 Given the utility function of the consumer who consumes two goods x and y as: U(x, y) = (x + 2)(y + 1) If the price of good x is P_{x} = 4 birr, that of good y is P_{y} = 6 Birr and the consumers has a fixed budget of 130 birr. a) Determine the optimum values of x and y b) Calculate maximum amount of utility Answer Given the utility function of the consumer who consumes two goods x and y as: U(x, y) = (x + 2)(y + 1) If the price of good x is P_{x} = 4 Birr, and that of good y is P_{y} = 6 Birr, and the consumer has a fixed budget of 130 Birr, the optimum values of x and y can be determined as follows: a) To determine the optimum values of x and y, we can use the budget constraint formula: P_{x}x + P_{y}y = Income where P_{x} and P_{y} are the prices of goods x and y respectively, and Income is the total budget. Substituting the given values, we get: 4x + 6y = 130 To find the optimum values, we can use the Lagrange multiplier method. This method involves setting up a Lagrangian function, which combines the utility function and budget constraint: L(x, y, λ) = U(x, y) - λ(P_{x}x + P_{y}y - Income) Taking the partial derivatives of L with respect to x, y, and λ and setting them equal to zero, we get the following equations: ∂L/∂x = y + 1 - λP_{x} = 0 ∂L/∂y = x + 2 - λP_{y} = 0 ∂L/∂λ = Income - P_{x}x - P_{y}y = 0 Solving these equations simultaneously, we get x = 14.5 and y = 8.5 as the optimum values. This means the consumer should purchase 14.5 units of good x and 8.5 units of good y to maximize their utility. b) To calculate the maximum amount of utility, we can substitute the optimum values of x and y into the utility function: U(14.5, 8.5) = (14.5 + 2)(8.5 + 1) = 16.5 * 9.5 = 156.75 Therefore, the maximum amount of utility the consumer can achieve with a budget of 130 Birr, given the prices of goods x and y, is 156.75.