A) A farmer is deciding whether or not to add fertiliser to his or her crops. If the farmer adds 1 kilogram of fertiliser per hectare, the value of the resulting crops rises from $80 to $100 per hectare. According to marginal analysis when the farmer should add fertiliser?
Marginal Analysis refers to an examination of the effects of additions to or subtraction’s from a current situation. (Layton, Robinson, Tucker, 2016, p. 35) The term marginal is classified as extra. It therefore helps in deciding between options. In this situation the value of the crops is $80 without the addition of 1 kilogram of fertiliser and value rises to $100 if the farmer decides to add 1 kilogram of fertiliser per hectare. For example if the cost of fertiliser is less than $20, let’s say its $15 per hectare the farmer should add fertiliser as per the marginal analysis because the profit will increase by $5 with the addition of the fertilisers and therefore the marginal cost will increase every $20 if the fertiliser cost is set up at $15. Therefore according to marginal analysis the farmer should add fertiliser as long as the cost is less than $20 per kilogram. (Layton, Robinson, Tucker, 2016, p. 35).
B) Bill has $10 that he can spend on a Superman action figure, a Batman graphic novel or an X-Men T-shirt. Bill decides to buy the action figure, even though the graphic novel was a close second choice. What is the opportunity cost of buying the action figure?
Opportunity cost is the best alternative that is sacrificed for a chosen alternative. (Layton, Robinson, Tucker, 2016, p. 33) The opportunity cost is classified as an option that is given up as best alternative and is therefore not where Bill spends $10 to buy the action figure. As opportunity cost is the best alternative sacrificed for a chosen alternative. So therefore, in this case the opportunity cost of buying the action figure is the Batman Graphic Novel because the graphic novel is the best alternative which is sacrificed and the action figure is a chosen alternative by Bill. It cannot be an X Men T-Shirt because the graphic novel was Bill’s close second choice.
C) Wheat farmers across Australia have to sell their produce at one fixed price for all wheat produced. Thus, price does not vary in relation to the individual farmer’s quantity of wheat sold. Draw this type of wheat demand curve and decide what value the slope has
a) Explain if a firm in the perfectly competitive market would or would not innovate?
In a perfectly competitive market a firm would not innovate because they will not get a higher price for their products from the buyers because there exists to be lot of firms but they can innovate by reducing their cost and expenses in order to increase their profit.
b) What are the two main differences between monopoly and competition?
The market structure is represented by only a single seller which means there are high barriers as which makes it even difficult for new firms to enter the market (Layton, Robinson, Tucker, 2016, p. 188) The market structure is represented by a lot of firms which means there are no barriers for a firm to enter the market (Layton, Robinson and Tucker, 2016, p. 160)
The type of product is unique which means that close substitutes don’t exist. (Layton, Robinson, Tucker, 2016. p. 189) All the firms are seen as producing a homogenous (similar) product. The products and services produced by the firms are identical. (Layton, Robinson, Tucker, 2016, p. 159)
c) What happen with firm’s price and revenue operating in competitive market if the firm doubles the amount of output it sells?
Revenue in basic terminology is defined as the sum of money a firm receives. Total Revenue is calculated as price x quantity. If a firm in a competitive market doubles the amount of output it sells or in other words it can be said if the firm doubles the quantity then the revenue will then be calculated as price x quantity*2. Therefore, this is only going to double the total revenue if the firm doubles the amount of output/ quantity and the price therefore doesn’t change it remains constant.
The following table shows the quantity of a product demanded at two different prices:
P ($) Qd
a) Calculate the proportionate change in quantity demanded when price falls from $16 to $14.
The proportionate change in quantity demanded when the price falls from $16 to $14 is:
%change in quantity demanded = New-Old = 35-25 = 10/25 = 0.4
b) Calculate the proportionate change in price when price falls from $16 to $14.
The proportionate change in price when the price falls from $16 to $14 is:
%change in price = New-Old = 14-16 = 2/16 = 0.125
c) What is the price elasticity of demand between $16 and $14? Interpret the results.
The price elasticity of demand between $16 and $14 = %change in quantity demanded
%change in price
Therefore Ped = 0.4 = 3.2
In other words it can be said that it is price elastic because the price elasticity of demand is greater than 1 which is 3.2, therefore demand changes by a greater% than the price% change.
d) What is the price elasticity of demand between $16 and $14 if you applied the ‘mid-point’ formula? Interpret the results.
Mid-Point Formula = New – Old
Price elasticity of demand = %change in quantity demanded/%change in price
%change in quantity demanded = New-Old
35-25 = 10 = 10 = 0.33
(35+25)/2 60/2 30
%change in price= New-Old
14-16 = 2 = 2 = 0.13
(14+16)/2 30/2 15
Price Elasticity of Demand = 0.33 = 2.53 (Price Elastic)
a) The diagram below shows the demand for and supply of petrol. The market is initially in equilibrium at point x. To which equilibrium point (a, b, c, d, e, f, g or h) will the market move from point x after each of the following changes?
i) A rise in the cost of refining petrol.
If there is a rise in the cost of refining petrol will cause an upward movement along the demand curve which is point “h”.
ii) A fall in bus and train fares. – Point “F”
iii) A fall in the price of crude oil and an increase in the price of cars. – Point “E”
iv) A rise in tax on petrol and a reduction in tax on cars.
b) The government has decided that the free market price of cheese is too low. Suppose the government imposes a binding price floor in the cheese market.
i). Use a supply and demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold.
S of cheese
Minimum Price of cheese surplus
D of cheese
Figure A Quantity
S of cheese
Min. price of cheese Price Floor
Shortage D of cheese
The term price floor is defined as a legally established minimum price a seller can be paid. (Layton, Robinson, Tucker, 2016, p. 89) Price floors are most commonly used in agriculture industry in order to protect the farmers. Therefore in order to be effective the price floor set by the government should be on top of the price of equilibrium not below the equilibrium price because the market will not sell the cheese below the equilibrium and is also considered not relevant.
ii) Is there a shortage or a surplus of cheese sold? ?Explain
Therefore in this situation there is a surplus because the quantity demanded is less as compared to the quantity supplied.
iii) Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain.
Yes it is possible that farmers will complain the price floor has reduced their total revenue because if there is surplus the floor price which has been set up by the government will drop below the equilibrium price and in order to avoid this from happening the government must step in.
iv) In response to these complaints, the government agrees to purchase all of the surplus cheese at the price floor. Compared to the previous arrangement who benefits from this policy? Who loses?
Therefore it is a win-win situation for the farmers because they know that if the customers don’t buy the cheese when the price is above the equilibrium price the government will buy it so therefore it benefits the farmers and customers are losers because they are hence forced to buy the cheese at a higher price and there will be customers who will not buy cheese because they can’t afford it.