TUTORIAL QUESTIONS FOR BUSINESS ECONOMIC ANALYSIS

CHAPTER 1: INTRODUCTION

QUESTION 2
Describe some of the trade-offs faced by each of the following:
a. A decision by an entrepreneur starting a small business to borrow some start-up
capital from a bank or raise the funds through borrowing from friends and relations.
b. A member of the government deciding how much to spend on some new military
hardware for the defence industry.
c. A chief executive officer deciding whether to invest in a new more efficient heating
system for the company’s headquarters.
d. A worker in a hotel deciding whether to accept the offer by her manager of extra shifts
in the restaurant.

QUESTION 1
(a) Draw and explain a production possibilities frontier for an economy that produces milk
and cookies. What happens to this production possibility frontier if a disease kills half of
the economy’s cows?

(b) Draw and explain what happens if the economy grows and start to produce more of both
goods.

(c) The first principle of economics discussed in Chapter 1 is that people face trade-offs. Use
the production possibility frontier to illustrate society trade-off between two goods – a
clean environment and the quantity of industrial output.

i. What do you suppose determine the shape and position of the PPF?
ii. Show what happens to the PPF if engineers develop a new way of producing
electricity that emits fewer pollutants to the environment.

(d) Assume you are studying an economy that produces cars (000s) and wheat (000s of
tonnes)
Cars (000s) Wheat (000s of tonnes)
0 16
1 15
2 13
3 10
4 6
5 0

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 i. Draw the production possibility curve for cars and wheat.
ii. Show and explain the efficient points? iii. Illustrate and
explain an inefficient point iv. Illustrate and explain an
unattainable point.
v. What is the opportunity cost of increasing car production from 1 to 4?
vi. What is the opportunity cost of increasing wheat production from 0 to 10?

CHAPTER 2: MARKET FORCES OF DEMAND AND SUPPLY

QUESTION
1. How are the following demand curves likely to shift in response to the indicated changes?
i. The effect of a drought on the demand curve for umbrellas
ii. The effect of higher popcorn prices on the demand curve for movie tickets

iii. The effect on the demand curve for coffee of a decline in the price of cocoa. iv. The
effect of income on the demand curve of cars.
v. The effect of prices that are expected to increase in three days on demand for fuel.

2. Consider the market for large family saloon cars. For each of the events listed here,
identify which of the determinants of supply or demand are affected. Also indicate
whether supply or demand is increased or decreased. Then show the effect on the price
and quantity of large family saloon cars.
a. People decide to have more children.
b. A strike by steel workers raises steel prices.
c. Engineers develop new automated machinery for the production of cars.
d. The price of estate cars rises.
e. A stock market crash lowers people’s wealth.

QUESTION
1. Discuss the likely effects of the following:
i. Rent ceilings on the market for apartments
ii. Price floors on the wheat prices on the market for wheat.
Use supply and demand diagrams to show what may happen in each case.

2. Seafront properties along the coast in Swakopmund have an inelastic supply, and cars
have an elastic supply. Suppose that a rise in population doubles the demand for both
products (that is, the quantity demanded at each price is twice what it was).
a. What happens to the equilibrium price and quantity in each market?
b. Which product experiences a larger change in price?
c. Which product experiences a larger change in quantity?
d. What happens to total consumer spending on each product?

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QUESTION
(a) On a supply and demand diagram, show equilibrium price equilibrium quantity and
the total revenue received by the producers.
(b) Discuss why the government levy taxes on beer and spirits whose demand curves are
inelastic. Why is it difficult for the government to target levy taxes on goods whose
demand curves are relatively more elastic?

QUESTION 6
Suppose the government requires beer drinkers to pay $2 tax on each case of beer purchased.
(a) Draw the demand and supply diagram of the market for beer without tax. Show the price
paid by consumers, the price received by producers and the quantity of beer sold. What is
the difference between the price paid by consumers and the price received by producers?

(b) Now draw the demand and supply diagram for the beer market with the tax. Show the
price paid by consumers, the price received by producers and the quantity of beer sold.
What is the difference between the price paid by consumers and the price received by the
producers? Has the quantity of beer sold increased or decreased?

ELASTICITY

1 What if high street clothes retailer is planning its summer sales campaign and wants to
cut prices to help it get rid of stock and also increase footfall (the number of
customers entering its premises) and revenue. It knows of the concept of price
elasticity of demand but how does it set about estimating the price elasticity of
demand for its products so that it can more accurately set price cuts which will
achieve its aims?

2 How is the price elasticity of supply calculated? Explain what these measures.

3 Is the price elasticity of supply usually larger in the short run or in the long run? Why?

4 What are the main factors that affect the price elasticity of supply? Think of some
examples to use to illustrate the factors you cover.

5 Define the price elasticity of demand and the income elasticity of demand.

6 List and explain some of the determinants of the price elasticity of demand. Think of
some examples to use to illustrate the factors you cover.

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7 If the elasticity is greater than 1, is demand elastic or inelastic? If the elasticity equals
0, is demand perfectly elastic or perfectly inelastic?
CHAPTER 3: LIMITATIONS OF MARKETS

QUESTION 1
(a) Define consumer surplus and producer surplus. Draw a diagram which shows market
equilibrium in the demand and supply setting and use it to illustrate consumer surplus,
producer surplus and economic surplus. Also, explain how consumer and producer
surpluses come about?
(b) If the government imposes a tax rate “t” in such a market, how will this affect the
consumer surplus, producer surplus and economic surplus?
(c) Which situation is more efficient between (a) and (b)? Why?

QUESTION 2
Draw a diagram to illustrate and explain the following situations:
(a) If the demand curve is more inelastic than the supply curve, who bears a bigger tax
burden between the consumers and the producers?
(b) If the supply curve is more inelastic than the demand curve, who bears a bigger tax
burden between the consumers and the producers?

MARKET FAILURE

1 Draw a demand curve for MP3 downloads. In your diagram, show a price of MP3
downloads per tune and the consumer surplus that results from that price. Explain in
words what this consumer surplus measures.

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2 Draw a supply curve for MP3 downloads. In your diagram show a price of MP3
downloads and the producer surplus that results from that price. Explain in words
what this producer surplus measures.

3 Give an example of a negative externality and a positive externality. Explain why

market outcomes are inefficient in the presence of externalities.

4 What if government imposed a subsidy on a good with a highly inelastic demand

curve but a very elastic supply curve. What do you think would be the effects in both
the short term and the long term for consumers and businesses in this market?

5 Using an appropriate example, explain the difference between a private cost and a
social cost and a private benefit and a social benefit.

6 How does a tax imposed on a good with a high price elasticity of demand affect the
market equilibrium? Who bears most of the burden of the tax in this instance?

7 What are Pigouvian taxes? Why do economists prefer them over regulations as a way
to protect the environment from pollution?

8 The government decides to reduce air pollution by reducing the use of petrol. It
imposes $0.50 tax for each litre of petrol sold.
a. Should it impose this tax on petrol companies or motorists? Explain carefully,
using a supply-and demand diagram.
b. If the demand for petrol were more elastic, would this tax be more effective or
less effective in reducing the quantity of petrol consumed? Explain with both
words and a diagram.
c. Are consumers of petrol helped or hurt by this tax? Why?
d. Are workers in the oil industry helped or hurt by this tax? Why?

CHAPTER 4A AND 4B: PRODUCTION, COSTS AND REVENUES

(a) Distinguish between accounting and economic costs.
(b) Explain the difference between short-run production and long-run production.
(c) Explain the difference between short-run production and long-run costs.

(d) Given the Figure below:

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 i. Explain the relationships among the marginal costs (MC), average total costs
(ATC) and average variable cost curves (AVC) and the average total cost
(ATC) curves.
ii. What does the gap between ATC and AVC represent? iii. Is this diagram
showing a short run or a long-run relationship? Explain. iv. What is the
formula for the total cost (TC)?

LONG RUN COSTS

Answer the following questions:
(a) Discuss the relationship between the short-run and the long-run average total costs.
(b) What do you understand by economies of scale and diseconomies of scale?
(c) Explain in detail the different types of economies of scale and diseconomies of scale.

CHAPTER 5: MARKET STRUCTURES

QUESTION 1
Discuss the characteristics of the following market structures:
(a) Perfect competition

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 (b) Monopoly

(c) Monopolistic competition.

(d) Oligopoly

QUESTION 3
Discuss the long-run profit maximisation situation for perfect competition, monopolistic
competition and monopoly. Use the long-run profit maximisation diagrams to aid your
explanations.

QUESTION 4
1. Discuss the following market structures in terms of allocative efficiency and productive
efficiency:
(i) perfect competition
(ii) monopolistic competition
(iii) monopoly
(iv) Oligopoly
NB. Use the long-run profit maximisation diagrams to do your analysis.

(v) Compare and contrast perfect competition and monopoly.

(vi) What are the advantages and disadvantages of monopoly and perfect competition?
(vii) Some economists have come up with very strong reasons why monopolies must be
regulated? Please explain these reasons in detail.

GAME THEORY
1. Explain the three components of a game and also explain the difference between a
cooperative and a non-cooperative game.

2. Why is the meaning and importance of the tit for tat strategy?

3. Use the same set of the pay-off matrix to explain how a prisoner’s dilemma game
works.
Using the same game identify:
a. Dominant strategy equilibrium
b. Nash equilibrium
c. Maximin solution

4. Distinguish between are empty threat and a credible threat. You may use payoff
matrices to aid your explanation.

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5. Tell the story of the prisoners’ dilemma. Write down a table showing the prisoners’
choices and explain what outcome is likely. What does the prisoners’ dilemma teach
us about oligopolies?

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CHAPTER 6: MACROECONOMIC ENVIRONMENT
1. What are economic indicators and why are they essential for business decision making
purposes?

2. Discuss the importance of the circular flow diagram model. Do not forget to explain
what it shows. Your discussion must also include the effects of injections and
withdrawals on the level of economic activity.

3. Discuss the four components of GDP which are derived from the four sectors circular
flow diagram.

4. Define the following terms:

a. Real GDP
b. Nominal GDP
c. GDP deflator
d. Real GNP
e. Green GDP
f. Real GDP per capita
g. Unemployment
h. Inflation/DEFLATION
5. What are the causes of and remedies of inflation?
6. What are the causes and remedies of unemployment?

AGGREAGE DEMAND AND AGGREGATE SUPPPLY

7. Explanation of the business cycle.
8. What factors affect:
a. Aggregate demand (AD)
b. Short run aggregate supply (SRAS)
c. Long run aggregate supply (LRAS) 9. Answer the following questions:
a. Illustrate using a diagram the long run equilibrium of an economy.
b. How is the equilibrium affected by a decrease in business optimism in the
economy?
c. How will the equilibrium be affected by an oil price shock which increases the
price of oil?
d. Analyse the effect of an increase in taxes on incomes of the consumers.

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CHAPTER 8: MACROECONOMIC POLICIES

1. Define:
i. Monetary policy
ii. Fiscal policy
iii. Supply-side policies

2. Discuss in detail the objectives of economic policy for any country.

3. Answer the following questions:

(a) What is the primary function performed by commercial banks?
(b) What are the functions of the central bank?
(c) What do you understand by central bank independence? Give four examples of
central banks that are independent and another four examples of central banks
that are not independent.

4. Answer the following questions:

(a) Discuss how the instruments of fiscal policy and monetary policy can be used as
expansionary policies.
(b) Under what circumstances may the government use expansionary monetary and
fiscal policy?
(c) Should government print money to pay its debts?
(d) Should government print money to take care of both vulnerable people and
companies that may be struggling during a recession?

CHAPTER 10: INTERNATIONAL TRADE

1. Answer the following questions:
(a) Define exports and imports

(b) Give ten examples of Namibia’s exports and ten examples of Namibia’s
imports.

(c) Explain the difference between absolute advantage and comparative

advantage.

(d) What do you understand by protectionism? What policies are used by the
government to protect domestic producers? What are some of the popular
arguments for protectionism?

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2. Assume that Namibia is isolated from the rest of the world and that it produces grapes.
It does not trade its grapes with other countries.
(a) Draw a diagram of demand and supply which shows domestic equilibrium for
grapes in Namibia and explain the implications of this equilibrium.

(b) Draw the graph, which shows the case where Namibia starts to trade with the rest
of the world in the situation where the price of grapes in Namibia is lower than the
world price of grapes.
i. Explain the effect of trade between Namibia and the rest of the world on
consumers, producers and the Namibian economy.
ii. If Namibia imposes a tariff on imports of grapes if the world price for grapes is
below the domestic equilibrium price, explain the impact of the tariff on the
consumers, producers and the Namibian economy.

(c) What is the importance of trade to the Namibian economy?

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