Economics Answer Note #85

Question 1 Generally, economies of scope are present when / Oor die algemeen is omvangsvoordele aanwesig wanneer A. joint output is less from a single firm than could be achieved from two different firms each producing a single product (assuming equivalent production inputs in both situations). / gesamentlike produksie is minder van 'n enkele onderneming as wat bereik kan word van twee verskillende ondernemings wat elk 'n enkele produk lewer (met die aanname van ekwivalente produksie-insette in albei situasies). B. economies of scale are constant in the joint production of two products. / ekonomie van skaal is konstant in die gesamentlike produksie van twee produkte. C. joint output is greater from a single firm producing two goods than could be achieved by two different firms each producing a single product (assuming equivalent production inputs in both situations). / gesamentlike produksie is groter van 'n enkele onderneming wat twee goedere vervaardig as wat twee verskillende ondernemings wat elkeen 'n enkele produk lewer, kan bereik (met die veronderstelling dat ekwivalente produksie-insette in beide situasies is) D. economies of scale are present in the production of two or more goods / ekonomie van skaal is teenwoordig in die produksie van twee of meer goedere Sources Answer Economies of scope are present when a single firm can produce multiple products more efficiently than two separate firms each producing one product. This typically occurs because the joint output from a single firm is greater than what could be achieved by two different firms producing the same products independently. Therefore, the correct answer is: C. Joint output is greater from a single firm producing two goods than could be achieved by two different firms each producing a single product (assuming equivalent production inputs in both situations). The short-term cost function of a company is given by the equation: TC = 325 + 75q where TC is the total cost and q the quantity of output. What is the company's average fixed cost? Die korttermyn kostefunksie van 'n onderneming word gegee deur die vergelyking: TC = 325 + 75q, waar TC die totale koste is en q die hoeveelheid produksie. Wat is die gemiddelde vaste koste van die onderneming? A. 75q B. 325 C. 75 D. 325/q Sources Answer To find the average fixed cost (AFC) from the given total cost (TC) function, we start with the equation: T C = 325 + 75 q TC=325+75q In this equation: The term 325 325 represents the total fixed costs (TFC). The term 75 q 75q represents the total variable costs (TVC), where q q is the quantity of output. The average fixed cost is calculated by dividing the total fixed cost by the quantity of output: A F C = T F C q = 325 q AFC= q TFC = q 325 Thus, the average fixed cost of the company is: D. 325 q q 325 Maryam Inc. produces leather bound books. The market is highly competitive, with books currently selling for R600. Maryam’s total and marginal cost curves are: TC = 3 000 + 100Q2 MC = 200Q Analyse Maryam Inc.’s position in terms of the shutdown condition. Should Maryam operate or shut down in the short run? Maryam Inc. vervaardig boeke met leerbande. Die mark is baie mededingend, en boeke word tans vir R600 verkoop. Maryam se totale en marginale kostekurwes is: TC = 3000 + 100Q2 MC = 200Q Ontleed die posisie van Maryam Inc. in terme van die afskakelvoorwaarde. Moet Maryam op kort termyn werk of afskakel? A. Not enough information provided to answer the question. / Daar is nie genoeg inligting verskaf om die vraag te beantwoord nie. B. P < AVC and thus the firms should shutdown. / P AVC and thus the firm should operate. / P > AVC and thus the firm should operate. D. P = AVC, it is not clear whether the firm should shutdown or continue to produce. / P = AVC, is dit nie duidelik of die onderneming moet afskakel of voortgaan om te produseer nie Sources Answer Shutdown Condition for Maryam Inc. To determine whether Maryam Inc. should operate or shut down in the short run, we need to compare the market price (P) with the average variable cost (AVC) at the profit-maximizing output level. The shutdown condition is: If P AVC at the profit-maximizing output level, then the firm should continue operating in the short run. Given: Market price (P) = R600 Total cost function: TC = 3000 + 100Q^2 Marginal cost function: MC = 200Q To find the AVC, we first need to find the variable cost (VC) and then divide it by the output (Q). VC = TC - FC VC = (3000 + 100Q^2) - 3000 = 100Q^2 AVC = VC/Q = 100Q At the profit-maximizing output level, MC = P: 200Q = 600 Q = 3 Plugging Q = 3 into the AVC equation: AVC = 100(3) = 300 Since P (R600) > AVC (R300), the firm should continue operating in the short run. Therefore, the correct answer is C. P > AVC and thus the firm should operate. Maryam Inc. produces leather bound books. The market is highly competitive, with books currently selling for R600. Maryam’s total and marginal cost curves are: TC = 3 000 + 100Q2 MC = 200Q Analyse Maryam Inc.’s position in terms of the shutdown condition. Should Maryam operate or shut down in the short run? Maryam Inc. vervaardig boeke met leerbande. Die mark is baie mededingend, en boeke word tans vir R600 verkoop. Maryam se totale en marginale kostekurwes is: TC = 3000 + 100Q2 MC = 200Q Ontleed die posisie van Maryam Inc. in terme van die afskakelvoorwaarde. Moet Maryam op kort termyn werk of afskakel? A. Not enough information provided to answer the question. / Daar is nie genoeg inligting verskaf om die vraag te beantwoord nie. B. P < AVC and thus the firms should shutdown. / P AVC and thus the firm should operate. / P > AVC and thus the firm should operate. D. P = AVC, it is not clear whether the firm should shutdown or continue to produce. / P = AVC, is dit nie duidelik of die onderneming moet afskakel of voortgaan om te produseer nie Sources Answer To analyze Maryam Inc.'s position regarding the shutdown condition, we need to evaluate the relationship between the market price, average variable cost (AVC), and marginal cost (MC). Given Information: Market Price (P) = R600 Total Cost (TC) = 3000 + 100Q² Marginal Cost (MC) = 200Q Step 1: Determine the Average Variable Cost (AVC) The total cost function can be separated into fixed and variable costs: Total Fixed Cost (TFC) = 3000 (constant term) Total Variable Cost (TVC) = 100Q² Average Variable Cost (AVC) is calculated as: A V C = T V C Q = 100 Q 2 Q = 100 Q AVC= Q TVC = Q 100Q 2 =100Q Step 2: Find the Profit-Maximizing Output Level To find the profit-maximizing output, set MC equal to the market price (P): M C = P ⇒ 200 Q = 600 ⇒ Q = 3 MC=P⇒200Q=600⇒Q=3 Step 3: Calculate AVC at Q = 3 Now, substitute Q = 3 Q=3 into the AVC formula: A V C = 100 ( 3 ) = 300 AVC=100(3)=300 Step 4: Compare Price with AVC Now we compare the market price with the average variable cost: P = R600 AVC = R300 Since P > A V C P>AVC (R600 > R300), Maryam Inc. is covering its variable costs and contributing to fixed costs. Conclusion Based on the analysis, since the price is greater than the average variable cost, Maryam Inc. should continue to operate in the short run. The correct answer is: C. P > AVC and thus the firm should operate. Related Hoe beïnvloed die marginale kostekurve Maryam se besluit om te produseer of te afskakel Wat is die implikasies van Maryam se totale kostekurve vir die korttermynsukses van die onderneming Hoe kan Maryam Inc. sy totale kostes verminder om in die mededingende mark te oorleef Wat is die betekenis van die afkakelvoorwaarde in 'n bedryfsanalise Hoe kan Maryam Inc. sy kostes optimaliseer om winsgewender te wees Answer Generally, economies of scope are present when joint output is greater from a single firm producing multiple goods than what could be achieved by separate firms each producing one good. This indicates that there are cost savings and efficiency gains that come from producing multiple goods together, instead of producing them separately. One of the main reasons for economies of scope is the sharing of production inputs and resources. When multiple goods are produced together, the firm can benefit from economies of scale in purchasing and using inputs such as raw materials, labor, and technology. This leads to lower average costs of production, making it more efficient for the firm to produce multiple goods. Another factor that contributes to economies of scope is the potential for cross-selling and diversification. When a firm produces multiple goods, it can offer a wider range of products to its customers, increasing its market share and potential for profits. This also allows the firm to spread its risks among different products, reducing its overall vulnerability to market fluctuations. In addition to cost savings, economies of scope can also lead to increased efficiency in resource allocation. When a single firm produces multiple goods, it can allocate resources and distribute production among different products based on their demand and profitability, optimizing its use of resources. Sources: 1. Samuelson, W. & Marks, S. (2018). Managerial Economics (8th ed.). Wiley. 2. Vassallo, H. (2016). Principles of Economics for a Post-Meltdown World. Routledge. 3. Mankiw, N. G. (2017). Principles of microeconomics (8th ed.). Cengage Learning. The short-term cost function of a company is given by the equation: TC = 325 + 75q where TC is the total cost and q the quantity of output. To find the company's average fixed cost, we need to first understand the components of the equation. TC = 325 + 75q can be broken down into total fixed cost (TFC) and total variable cost (TVC) as follows: TFC = 325 (constant term) TVC = 75q (variable cost based on quantity q) To find the AVC (average variable cost), we divide the TVC by the output q: AVC = TVC/q = 75q/q = 75 Therefore, the average fixed cost is 75. This means that for every unit produced, the average fixed cost remains constant at 75. As the quantity of output increases, the average fixed cost decreases, but the total fixed cost remains the same. Sources: 1. Pindyck, R. S. & Rubinfeld, D. L. (2017). Microeconomics (9th ed.). Pearson Education. 2. Parkin, M. (2017). Economics (12th ed.). Pearson Education. Analyzing Maryam Inc.'s position in terms of the shutdown condition, we first need to evaluate the relationship between the market price (P) and the average variable cost (AVC) at the profit-maximizing output level. Given the information provided, we can calculate the AVC from the total cost function: AVC = VC/Q = 100Q²/Q = 100Q To find the profit-maximizing output, we set the marginal cost (MC) equal to the price (P): MC = P ⇒ 200Q = 600 ⇒ Q = 3 Substituting Q = 3 into the AVC equation, we get AVC = 100(3) = 300. Since the market price (P) is greater than the average variable cost (AVC), the firm should continue operating in the short run. If the market price was lower than the firm's AVC, it would be more profitable for the firm to shut down in the short run. The shutdown condition is an important concept in business analysis, as it helps firms make decisions about whether to continue operating or shut down in the short run. It also allows firms to determine their break-even point, where their revenue exactly covers their variable costs. Question 2 The following table shows national income by the type of income for the hypothetical economy of Highlands. Income Data for Highlands Rent $335; Wages $751; Interest $164; Profit and losses 449; Indirect business taxes $77; Depreciation 194; Net foreign interest income $57 Enter your answers as a whole number. a. What is the value of national income for Highlands? b. Using the income approach, what is the value of nominal GDP for Highlands? Answer National income is a key indicator of the economic health and growth of a country. It is the total sum of all incomes earned by the residents and businesses within a country's borders. It includes various types of income such as rent, wages, interest, and profits. In the hypothetical economy of Highlands, the table shows the national income by type of income. Let's analyze the data and calculate the value of national income and nominal GDP for Highlands. a. The value of national income for Highlands can be calculated by adding all the types of income listed in the table. Therefore, the value of national income for Highlands is 335 + 751 + 164 + 449 + 77 + 194 + 57 = $2027. This means that the total income earned by the residents and businesses in Highlands is $2027. b. To calculate the value of nominal GDP for Highlands, we will use the income approach which measures the total income generated in an economy. It is calculated by adding all the types of income earned by the residents and businesses and subtracting indirect business taxes. In this case, the calculation would be: Nominal GDP = National Income - Indirect Business Taxes. Therefore, the nominal GDP for Highlands can be calculated as $2027 - $77 = $1950. It is important to note that the numbers used in this example are hypothetical and may not reflect the actual national income and GDP of Highlands. It is also worth mentioning that calculating national income and GDP for an actual economy requires more complex calculations and data. Question 3 Suppose that individuals differ in their relevant attributes, such as their medical history, lifestyle, and overall risk of disease. Also suppose that those differences are known to the individuals but not directly observable by insurers. If the price of health insurance is based on the average health of everyone in the population, healthy people are more likely to _____ their insurance, resulting in a _______ insurance pool. The issue in the health insurance is known as adverse selection Answer Healthy people are more likely to opt out of health insurance, resulting in a less healthy insurance pool, known as adverse selection. Adverse selection occurs when individuals with lower health risks choose to not purchase health insurance, while those with higher risks are more likely to purchase it, leading to an imbalanced risk pool and potentially higher insurance premiums for all individuals. One way to mitigate adverse selection is to have risk-based pricing, where individuals with a higher risk of illness are charged higher premiums to account for their potential higher healthcare costs. However, this can lead to affordability issues for those with preexisting conditions or lower incomes. Another approach is to have a universal mandate for health insurance, where all individuals are required to purchase insurance regardless of their health status, ensuring a more balanced risk pool and potentially lower premiums for all. Research has shown that adverse selection can have significant negative effects on the health insurance market, leading to market failures and potentially causing financial strain on both individuals and insurance companies (Perrin, 1995). In addition, a study by Einav and Finkelstein (2011) found that adverse selection can also lead to a reduction in health care usage and quality for those who do have insurance. Overall, it is important for policymakers and insurance companies to find a balance between affordability and risk-based pricing to address adverse selection and create a sustainable and fair health insurance market for all individuals. Question 4 ocial Security benefits are increased each year in proportion to the increase in the CPI, even though most economists believe that the CPI overstates actual inflation. True or False: If older people consume the same market basket as other people, then Social Security would provide an increase in their standard of living. Answer True. Social Security benefits are adjusted annually based on the Consumer Price Index (CPI) in order to account for the rising cost of living. However, many economists argue that the CPI overstates the actual inflation rate, and this has led to debates about the adequacy of Social Security benefits for older adults. Before delving into the reasons why most economists believe that the CPI overstates actual inflation, let us first understand what the CPI is and how it is calculated. The CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of goods and services. This "market basket" is meant to represent the typical consumption patterns of households in the United States. The Bureau of Labor Statistics (BLS) gathers data on the prices of thousands of items in the market basket and computes the CPI by taking into account the relative importance of each of these items in the average household's budget. Now, getting back to the question at hand, why do economists believe that the CPI overstates actual inflation? There are a few reasons for this. Firstly, there is a phenomenon known as "substitution bias" where consumers tend to switch to cheaper alternatives when the prices of certain goods and services increase. However, the CPI does not account for this substitution effect, leading to an overestimation of inflation. Secondly, the CPI is mainly based on the prices of goods and services purchased out of pocket, and does not take into account the impact of rising health care costs or the changing quality of goods and services over time. These factors also contribute to the overestimation of inflation by the CPI. So, how does this relate to the impact of Social Security on the standard of living for older people? Since Social Security benefits are adjusted annually based on the CPI, an overestimation of inflation would lead to smaller increases in benefits. This means that older people may not receive enough to keep up with the rising cost of living, leading to a decrease in their standard of living. However, if older people consume the same market basket of goods and services as other people, then an increase in the CPI would accurately reflect their cost of living, resulting in an increase in their standard of living. Question 5 KUALA LUMPUR: The rough seas and weather due to the northeast monsoon have affected the number of fish landings and led to price hikes in fish sales. The Fisheries Development Board (LKIM) said the monsoon phenomenon, which occurs between November to March annually, has also made fishing activities, especially at seas, difficult. The board said Kedah LKIM had reported that the number of fish landings had decreased from 3.26 million kg (worth RM11.8 million) in November to 3.1 million kg (worth RM11.44 million) in December last year. "Kedah LKIM had also conducted a price survey and reported that the average price of fish sold at retail throughout the state has increased throughout the monsoon season. "However, the price was increased slightly and on selected fish species only," LKIM said in a statement to BH recently. The board was responding to BH's news report titled 'Harga Ikan Naik Tiga Kali Ganda' published on Jan 3. LKIM said the selected fish species affected by the price hike include pelaling fish, which is now sold at RM9.20 per kg compared to RM8.20 as well as kembong fish sold at RM16.30 compared to RM12.80, previously. Source: https://www.nst.com.my/news/nation/2022/01/760851/northeast-monsoon-causes-hikefish-price a) State the reason for the high price of fish. (2 marks) b) Based on your answer in (a), what will happen to the price and quantity in the market? Draw a diagram to support your answer. Answer Kuala Lumpur is currently experiencing the effects of the northeast monsoon, an annual phenomenon that brings rough seas and inclement weather. This has resulted in a decrease in fish landings and a subsequent increase in fish prices. According to the Fisheries Development Board (LKIM), Kedah LKIM reported a decrease in fish landings worth RM11.8 million in November to RM11.44 million in December last year. a) The reason for the high price of fish is a combination of decreased fish landings and the impact of the monsoon season on fishing activities. The difficult conditions at sea have made it challenging for fishermen to catch fish, leading to a decrease in supply. With lower supply and consistent demand for fish, prices are naturally driven up. Furthermore, LKIM conducted a price survey which reported an increase in the average price of fish throughout the state during the monsoon season. This means that not only is the supply of fish reduced, but the demand for fish also remains high, contributing to the increase in prices. b) Based on the answer in (a), the market for fish is experiencing a decrease in supply and an increase in demand. This will lead to an upward shift in the equilibrium price and a decrease in the equilibrium quantity of fish. In diagram form, the initial equilibrium point is at E0 where the supply curve (S0) intersects with the demand curve (D). At this point, the equilibrium price is P0 and the equilibrium quantity is Q0. [INSERT DIAGRAM HERE] With the decrease in fish supply and an increase in demand, the supply curve shifts left to S1, and the demand curve shifts right to D1. This results in a new equilibrium point at E1 with a higher price (P1) and a lower quantity (Q1). This demonstrates the impact of the monsoon season on fish prices and quantity in the market. In summary, the high fish prices are a result of a decrease in supply due to difficult fishing conditions during the northeast monsoon season. This has led to an increase in demand and a subsequent upward shift in the equilibrium price of fish. It is important for the government and relevant authorities to continue monitoring the situation and implementing measures to support fishermen during this period. Additionally, consumers can look for alternative sources of seafood or opt for frozen fish during this time.