Intermediate Microeconomics ECC2000 Discussion

[UBS]

Thought I might start a thread, they've set quite a few tough h/w questions...

Q. As East European nations transform from centrally planned to market economies, the prices of most goods are rising faster than the incomes of most households.  Yet many commentators assert that, even in the short run, most households are better off.  Give two reasons why this might be the case despite the fact that consumers are facing higher face-value prices of goods?

Completely lost here.

[bobbyz0r]

From what my tutor said, anything reasonable is acceptable for that question.

Think of advantages of free market trade (competition) as well as the characteristics of CPEs (centrally planned economies) like price ceilings.

[Sam_95]

I've got a couple too, if anyone could help me out

c.   Give one example of the ‘more is better’ assumption being violated for a good (not including things that are inherently unappealing such as rubbish or insulting remarks)

Can't think of anything other than the likes of pollution, disease etc, but those are unacceptable.

[sluu001]

2 left shoes, or 2 left handed gloves, etc. If you look at it as indifference curves, they would be 90 degree perpendicular lines.

There is no extra utility gained from having an extra shoe or glove for one limb.

[sluu001]

In regards to the 1st post. Think back to your basic demand/supply graph. The change in prices is essentially the result of adjustments in either the demand or supply curve. This means that the original allocation of goods must have not been socially or economically at equillibrium (ie. such as a price ceiling as mentioned earlier by another poster).

The change in price is therefore simply a representation of goods and services moving towards a socially optimal allocation level. Hence, theoretically society (ie. households) as a whole, are better off.

Whether it really is, is another story. Since, we are placing an assumption that the only demand on such g&s are from the households only; and we disregard any external factors (ie. foreign demand).

[d300812345]

How about the following question?

Sometimes it makes sense to think about commodities that are goods up to a certain point, but once you consume a certain amount become bads (an example of this sort of good might be alcohol: If you go out one night, the first 7 or 8 drinks increase your utility, but once you hit th 8th one, drinking more makes you feel worse, not better).  If commodities x and y are both of this type, what would your indifference curves over these goods like? Draw them and explain

[Sam_95]

Ahh yup, makes sense, thanks a lot sluu

[sluu001]

How about the following question?

Sometimes it makes sense to think about commodities that are goods up to a certain point, but once you consume a certain amount become bads (an example of this sort of good might be alcohol: If you go out one night, the first 7 or 8 drinks increase your utility, but once you hit th 8th one, drinking more makes you feel worse, not better).  If commodities x and y are both of this type, what would your indifference curves over these goods like? Draw them and explain

Wow, thats a tricky one. Its a little hard to explain in words, but I "think" that it would simply be:
- Indifference curve with the highest utility (ie. the furthest one from the x & y axis) terminating at x=8 & y=0 at one end; and x=0 & y=8 on the other. (Ie.the points where the utility starts decreasing)
- Then you have a series of lower utility lines representing the higher bundles (ie. x>8 and y>, with x=y=[1,8] cut out from the middle of these lines (since they obviously give you a higher utility)

Not sure if im totally correct (especially with the 2nd point); or that i could even adequately explain in properly (without a picture). But id consult with your tutor about this one. (Plus the question needs some clarification - does utility decrease when the TOTAL consumption (ie. x&y) hits 8 drinks; or is it 8 drinks each?)

[sluu001]

Btw that smiley face is an "8" (iphone fail)

[Sam_95]

More a macro questions, but could use some help nonetheless:

'An increase in demand that increases real domestic output towards the full-employment level may generate instability in the price level. Explain why.'

Obviously due to inflation, but I don't have a particularly in depth reason why.

[bobbyz0r]

More a macro questions, but could use some help nonetheless:

'An increase in demand that increases real domestic output towards the full-employment level may generate instability in the price level. Explain why.'

Obviously due to inflation, but I don't have a particularly in depth reason why.

As the economy gets closer to it's full capacity, input prices also increase due to shortages, therefore prices of goods/services also increase.
Pretty much look up demand-pull inflation in the lecture slides/textbook. It should set out all the different factors which cause demand-pull inflation.

I'm assuming this is for the ECC1100 tute tests this week. In that case, make sure to have clear diagrams with labels, and explains shifts in AD-AS.
They mark these pretty tough (to get full marks).

[sluu001]

Not sure how in depth you need to get into it. And im not sure if monash talks about this in their intermediate econ classes; but you may also look at it as "decreasing marginal factors of production".

As you get closer towards steady state production levels (ie. full employment etc.); the productivity level decreases per capita. Asides from mathematical proofs of this (again, not sure if you need to show this - but look at the salow swan model); you can intuitively see it in areas such as perth - where the mining boom had created so many mining jobs - but relatively few skilled labourers to fill them. As such, demand for these skilled tradespeople increase --> price inflation.

[Sam_95]

Stumped with this Q:

3.   If a monopolist charges the same price for all of its output (i.e., it does not price discriminate), total revenue for the firm will be TR=P(Q)Q. 
a.   Show that total revenue is maximized when prices and quantities are set so that demand elasticity is -1 (hint: this question does not ask you to maximize profit).

[Reckoner]

Stumped with this Q:

3.   If a monopolist charges the same price for all of its output (i.e., it does not price discriminate), total revenue for the firm will be TR=P(Q)Q. 
a.   Show that total revenue is maximized when prices and quantities are set so that demand elasticity is -1 (hint: this question does not ask you to maximize profit).

Here's the intuition behind what you're showing. From first year micro, you would have learned that when the price elasticity of demand for a product is inelastic, that an increase in price will increase revenue. And for quantities where demand is elastic an increase in price will decrease revenue.

So if we are at a point that is inelastic, increasing Q will increase our revenue. If we are at a point that is elastic, then decreasing Q will increase revenue. Hence we can increase revenue by changing the quantity at all points where we are elastic, or inelastic. So the maximum would occur where we are unit elastic (where the two cases meet). This is of course assuming that the point exists (ignoring possible corner solutions, constant elasticities and stuff).

For the maths, just find MR, then set it equal to 0. Then manipulate the expression for the elasticity of demand so that you can sub it in somewhere. See here.

[UBS]

Not sure about these 2:

4. Suppose a monopolist operated in an industry where the market demand is perfectly elastic (with inverse demand given by P= 30 and its cost function is TC=100+Q + Q2. Calculate the profit maximising P and Q. Would this be any different if the industry is competitive?

Fine with calculating P & Q, but not sure about the second part of the question.

5. a.   True, False or Uncertain - and why, The difference between price and marginal cost is the amount of profit per unit of output. A monopolist will always set Q and P to make the per unit profit as big as possible