HI 5003: Economics for Business

Solution 1

i.

Price elasticity demand for petrol

Petrol

P1=1.35 P2=1.45

Q1=2500 Q2=2450 Midpoint formula is = ΔQ/ΔP. Pm/Qm

Where Qm is midpoint quantity 2500+2450/2=2475

Where Pm is midpoint price 1.35+1.45/2=1.4 2450-2500/1.45-1.35*1.4/2475=-

50/0.1*1.4/2475=0.28 Elasticity of Petrol is 0.28

For Hyundai 7.5 Kw inverter split system Air conditioner

P1=950 P2=990

Q1=2500 Q2=2000

Pm=950+990/2=970

Qm=2500+2000/2=2250 ΔQ/ΔP.Pm/Qm=2000-2500/990-950*970/2250=5:38

Elasticity of Hyundai: 7.5 Kw inverter = 5.38

ii.

The demand price of gasoline (0.28) is less than 1, so it’s inelastic.

The demand price of a modern 7.5 KW inverter is (5.38), because it is bigger than one, so it’s

elastic. This is as small price changes can lead to biggest quantity changes.

iii.

When the government raises gasoline taxes, consumers’ tax burden is greater than that of

producers due to the lack of elasticity of demand (Figure A) When the government increases

taxes on modern 7.5kW inverters, the impact of taxes on producers is greater than on consumers

due to the elasticity of demand. (Picture B)

Solution 2
 

The table Sum up and retrieve the accounting profit of James 

Total Revenue $(100000+180000+ 250000) = $530000

  $

a. Equipment's 50000

b. salary & wages 130000

c. Transportation charges 110000

d. Loan Interest (8% of 40000) 3200

Total Explicit Cost $293200

Accounting profit $236800

 

From above profit, following costs are subtracted to find economic profit -

1. Imputed rent =$11000

2. Opportunity cost of interest foregone on $50000 = 5% of 50000 = $2500

3. Opportunity cost of leisure = $75000

4. Tuition cost for skill development = $3000

5. Opportunity cost of job as a teacher for 1 year 3 months =  $67500

Let’s assume that James resigned and started the catering tuition.

Total implicit costs = $159000

Economic profit =$236800- $159000 =$ 77800

Note: This profit exceeds the total capital invested.

Since the kiosk business has generated enough revenue to cover the hidden costs, but the

negative number (-56400 $) cannot be used to pay for the explicit expenses, James should keep

his teaching job.

Solution 3

i. We have determined the revenue maximization level of monopoly price and output. How does

the monopolist identify about accurate level? How is the revenue-maximizing output level

correlated to the value charged and the price elasticity of the demand? This segment will reply

these questions. The price elasticity of demand of company reflects how customers of goods

react to price changes. So, the price elasticity of demand itself reflects the most significant

customer a company may understand: how consumers will react when commodity prices change.

In order to maximize revenues, the company has to ensure that any certain level of output incurs

at slightest costs, and then select a price-output pattern so that the total revenue exceeds the

maximum amount of total cost. With this in mind, the second module of the "market forces"

course introduces how companies can most effectively convert inputs into final outputs, and then
how to determine the company’s best price output combination. The elasticity of monopoly is

given by the inverse of the Lerner index. Lerner index is used to measure monopoly power

(L = (P-MC) / P ----- so the opposite is -P / P-MC ---- p = price; MC = marginal cost

So the elasticity is P = 47 MC = 35 -47 / 47-35 = -3.91 this is inelastic demand 

ii. Monopoly market is the market where only single company provides a certain service/product.

The monopolistic market composition has the features of complete monopoly, means; a single

company completely regulates the market furthermore ascertain the price as well as supply of

services or products. Thus, the monopoly marketplace is completely non-competitive market. In

an extremely competitive market, there are many companies offering the same services and

goods. Demand curve of this type of market is flat, while, the demand curve of monopoly market

is downward slanting. Companies working in a highly competitive market may sell any required

amount at the market prices. The subsequent are the elements of a monopoly market:

 The monopoly market is controlled by a sole supplier. Thus, the market demand for products or

services is demand for products or services given by the company.

Hindrance to exit and entry: Government licensing copyrights and patents, resource ownership,

reduced average total costs, and large start-up costs are some of the barriers to entering the

monopoly market.

When a provider controls the supply moreover production of the specific service or product,

other organizations will not be able to come in the monopoly market. If the government deems

that the products or services offered by monopoly are vital to the wellbeing of the people, it

might not allow the company to go out of the market. Usually, it may prevent utility companies

for example, telephone companies and power companies from leaving their individual markets.
 In the monopolistic market, companies maximize profits. It may set the price greater than the

price in the competitive market and obtain higher profits. Due to lack of antagonism, the price fix

by the monopolist will become the price of market.

 In the monopolistic market, the products or services offered by the corporation are exclusive.

There is not any close substitute in the market. Industries operating in a monopoly market can

modify the quantity or price of services or products. Whilst a company sells the related product

to diverse buyers at diverse prices, price discrimination occurs. Considering that the market is

elastic, if the cost is low, the company will sell more products, if the cost is high, and the

company will sell fewer products. The characteristic of monopoly is that prices will inevitably

change according to market demand. This means that industries will benefit once they increase

prices because they will make more profits. Companies will also benefit from economies of scale

because they can flexibly change the cost function, especially by changing the average cost that

enables them to experience economies of scale.

iii. No. It will not make a profit, because if it has made economic profits from the demand and

cost curve in the short term, this will attract new companies into the business, which will

enhance market supply, which will lead to a decrease in prices, which will lead to a decrease in

profits and Due to continuous input, it will continue to decrease until zero

iv. 

The fact that monopolists have the ability to charge prices on their own means that sometimes

they can charge consumers excessively by raising prices, thereby reducing consumers'

purchasing power. As a result, consumer surplus is reduced, so economic benefits are also
reduced, because producers benefit more from it. The existence of a monopoly market is due to

the following reasons: The Company regulates key natural resources or might restrict the supply

of resources to other organizations. Therefore, it regulates the concluding prices in market.

The government grants the corporation the exclusive right to produce products or services.

Increased returns to scale may result in a supplier's higher efficiency. This leads to a natural

monopoly. Lack of alternative products or services; therefore, lower demand elasticity let the

industries to charge the prices greater than the marginal costs. Technological features and

innovation might sometimes lead to market monopoly and legal barriers including copyrights,

patents, and licenses.

  Solution 4
Solution 1

Solution 2

Gross domestic product is core indicator that determines the economic strength of a nation.

There are 2 different kinds of GDP: nominal GDP as well as real GDP. To better understand the

universal economy, it’s significant to comprehend how to compute and use both GDP’s.

Nominal gross domestic product is utilized to assess how much is used up on production. For

instance, in 2015 in Canada, \ text {CAN} \ $ 1 {,} 994.9 \ text {billion} CAN $ 1,994.9 billion

starting text, C, A, N, space, ending text, dollar sign, 1 , Comma, 994, dot, 9, start text, space, b,

i, l, l, i, o, n, end text is used up on services and goods produced in the Canada. The Nominal

GDP uses present prices to calculate total output. In other words, these statistics reveal the prices

that Canada used up on Canadian products in 2015. Real Gross Domestic Product is the measure

of actual output. Real GDP uses constant prices to measure total output, thereby eliminating the

impact of modifications in the complete price level. For instance, in year 2015, the Canadian
output value expressed at constant prices in 2010 is \ text {CAN} \ $ 1 {,} 857 \ text {bilion}

CAN $ 1,857 billion starting text, C, A, N, space , End text, dollar sign, 1, comma, 857, start

text, space, b, i, l, i, o, n, end text.

This is one more way to consider real Gross Domestic Product: If we use the sales prices of these

goods in 2010 to add up the entire output manufactured in Canada in 2015, Canada’s GDP value

is \ $ 1 {,} 857 \ text { billion} $ 1,857 billion dollar symbol, 1, comma, 857, starting text, space,

b, i, l, l, i, o, n, ending text. However, if we combine all the productivity produced in the Canada

in 2015 and use the 2015 sales price, Canada’s GDP value is \ $ 1, {995} \ text {billion} $ 1,995

billion, 1, comma, 995, start text, space, b, i, l, l, i, o, n, end text. It means that prices have to rise

amid 2010-2015.

Though, the above technique has some problems. When real GDP is calculated by weighting the

prices of final services and goods in the base year, the growth of real GDP may be overestimated

as the price of certain goods will fall eventually. Therefore, this technique exaggerates the

development of real GDP as it seems to make the share of goods in expenditure appear larger

than their actual share.

Another way of computing real GDP includes using the GDP deflator to convert nominal Gross

Domestic Product to real Gross Domestic Product, which tracks the price change of a country’s

output ultimately. Canada’s 2010 base year GDP deflation index is 100 100 100, because this is

the year to compare prices. By 2015, the deflator rose to 107.4107.4107 points 4, representing

that the average price of Canadian output has risen by 7.4%, 7.4%7, 4,%.

Therefore, using 2015 prices to express output in 2015, Canadian output seems to have increased

by 7.4% by 7.47 points, a four-fold increase from the actual increase. The nominal GDP of

Canada may be "reduced" by dividing the nominal GDP of Canada by \ text {CAN} \ $ 1 {,} 994
\ text {billions} CAN $1.994 billion Canadian dollars, thereby making Canada’s nominal GDP

higher "Inflation" of prices. , N, space, end text, dollar sign, 1, comma, 994, start text, space, b, i,

l, l, i, o, n, end text represented by the minification character, in percent One said. Unexpectedly,

Australia’s yearly inflation rate was 0.9% in the fourth quarter of 2020, while the market accord

and the previous quarter’s data were 0.7%. Due to the increase in tobacco consumption tax and

the beginning, continuance and winding up of the childcare subsidies as well as housing

construction subsidies, this is the highest level in the three quarters. Tobacco and alcohol prices

(9.3% in the third quarter and 8.1% in the third quarter) and education prices (2.1%, compared to

1%) both increased faster. In addition, the costs of food, furniture as well as household

equipment (3.6% vs -0.1%) (3.6% vs -0.1%), insurance and monetary services (1.2% vs 1.6%)

have also increased. Simultaneously, entertainment and cultural expenses were flat (-0.7% in the

same period last year). In contrast, housing (-0.9% vs -0.2%), transportation (-4.6% vs -4%),

clothing and footwear (-1.3% vs -0.5%), and communications (-2.7% vs-) the cost is further

reduced. 3.3%). The consumer price index also augments by 0.9% in the third quarter, and by

1.6% in the third quarter, which was higher than the expected increase of 0.7%. 

Common misperceptions:

The growth of Gross Domestic Product does not inevitably mean that a country produces extra

output; it should be ascertained whether the Gross Domestic Product involved is real furthermore

nominal. Rise in nominal GDP might only mean an increase in prices, whereas rise in real GDP

must mean an increase in output.

The Gross Domestic Product deflator is the price index, means it can track the average price of

services and goods produced by various segments of a country’s economy over a period of time.

Using this indicator, the average price level change (deflation/inflation) over several years can be
computed. But, it is not the mainly utilized price index for tracing the deflation and inflation. The

CPI is the largely used price index, you will learn more about it later in this course.

Solution 5

Part 1

Part 2

Inflation is a measure of the rate of rising prices of goods and services in an economy. If
inflation is occurring, leading to higher prices for basic necessities such as food, it can
have a negative impact on society. Inflation can occur in nearly any product or service,
including need-based expenses such as housing, food, medical care, and utilities, as
well as want expenses, such as cosmetics, automobiles, and jewelry. Once inflation
becomes prevalent throughout an economy, the expectation of further inflation becomes
an overriding concern in the consciousness of consumers and businesses alike.
Central banks of developed economies, including the Federal Reserve in the U.S.,
monitor inflation. The Fed has an inflation target of approximately 2% and
adjusts monetary policy to combat inflation if prices rise too much or too quickly.

Inflation can be a concern because it makes money saved today less valuable
tomorrow. Inflation erodes a consumer's purchasing power and can even interfere with
the ability to retire. For example, if an investor earned 5% from investments in stocks
and bonds, but the inflation rate was 3%, the investor only earned 2% in real terms. In
this article, we'll examine the fundamental factors behind inflation, different types of
inflation, and who benefits from it.

Monetary policy aims to keep inflation between 2 and 3 per cent, on average, over time, in support of the
Reserve Bank's goals of price stability and full employment. Assessing the current and expected rate of
inflation against the inflation target helps the Reserve Bank in making monetary policy decisions. When
inflation is above the target, this can be a sign that the economy is overheating. When inflation is below
the target, this can be a sign that there is spare capacity in the economy.

The cash rate is then used to dampen or stimulate economic activity so that inflation is consistent with
the target. If inflation is expected to be higher than the target for a prolonged period, the Reserve Bank
would typically increase the cash rate. If inflation is expected to be lower than the target for a sustained
period, the Reserve Bank would typically lower the cash rate. Changes in the cash rate take time to affect
the economy. That is why the Reserve Bank looks to what inflation is forecast to be in the future when
deciding on the level of the cash rate today. (To learn more about how changes in the cash rate affect
the economy, see Explainer: The Transmission of Monetary Policy.)

When deciding if monetary policy should respond to inflation – both current and expected – the Reserve
Bank Board distinguishes between temporary and persistent changes in inflation.

Solution 6

The Reserve Bank will adopt a tightening monetary policy, in which the central bank will reduce

the supply of money in an economy.

Central bank reduces the supply of money in the economy by:

a) Increase the discount rate-This is an interest rate that the central bank lends to commercial

banks. Raising the interest rate will result in a reduction in commercial banks’ borrowing from

the central bank, thereby reducing the money supply.

b) Increasing reserve requirements-each bank must reserve a certain percentage of deposits as

reserves. Increasing the reserve ratio will require banks to reserve more reserves, which can

reduce loans and thereby reduce the money supply.

c) Open market operations-sell government bonds furthermore securities to the commercial

banks and collect cash from banks in exchange, thereby reducing the money supply.

MONEY MARKET Graph

In the above graph,

Ms = Money supply

Md = Money demand.

Equilibrium is at Point E1.

The equilibrium interest rate is i1.

The equilibrium quantity of money is Q1.

The decline in money supply causes the money supply curve to shift left from Ms to Ms'
The equilibrium shifts from E1 to E2.

Quantity of money decreases from Q1 to Q2.

Interest rate rises from i1 to i2.

AS-AD Graph.

LRAS = long-run aggregate supply

SRAS = Short-run aggregate supply

AD = Aggregate demand.

The initial equilibrium is at E1.

The price level is P1.

Real GDP is at Y1

Probable GDP is Yf.

Real GDP > Probable GDP, showing an inflationary output gap.

At higher interest rates, companies will be motivated to borrow, so borrowing decreases and

spending decreases.

As a result, investment spending has declined.

Investment expenditure is part of the total demand.

The decline in investment spending has led to a decline in cumulative demand.

The aggregate demand curve moves left from AD to AD'.

The balance shifted from E1 to E2.

The price level drops from P1 to P2.

Real GDP/output fell from Y1 to Yf, and the inflation gap narrowed.

As the price level drops, the danger of high inflation is eliminated.

Therefore, a contractionary monetary policy is adopted to eliminate the risk of high inflation in

the economy.