BBA 2002

PRINCIPLES OF MICROECONOMICS

JULY 2016

CONTENT
 NO TOPIC PAGES

1 Task 1 3-4

2 Task 2 5

3 Task 3 6-8

4 Task 4 9-12

5 Task 5 13-18

6 Reference 19

7 Coursework 20-22

Task 1

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The schedule below shows the number of packs of bagels bought in Davis, California,

each day at a variety of prices.

(a) Graph the daily demand curve for packs of bagels in Davis.

Demand for bagels in Davis, CA

(b) Calculate the price elasticity of demand at the point on the demand curve at which

the price of bagels is $3 per pack.

3 1
Ea= +
9 1
3

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(c) If all bagel shops increased the price of bagels from $3 per pack to $4 per pack,

what would happen to total revenues?

The total revenues will fall from $27000 to $24000

(d) Calculate the price elasticity of demand at a point on the demand curve where the

price of bagels is $2 per pack.

2 1
Ea= +
12 1
3

0.5

(e) If bagel shops increased the price of bagels from $2 per pack to $3 per pack, what

would happen to total revenues?

The total revenues will increase from $24000 to $27000.

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Task 2
Customer Reservation price Total revenue Marginal revenue
($/day) ($/photo)

A 50x1 50 50
0
42
B 46x2 92
C 42x3 126 34
D 38x4 152 26
18
E 34x5 170
F 30x6 180 10
G 26x7 182 2

H 22x8 176 -6

Since the marginal cost is $12, it selve only the first five customer. While th reservation
price is $34. The total economic profit is $110 per day.
b. Customer surplus is generated each day at this place is
Calculation :
($50+$46+$42+$38+$34) - $170
= $40 per day

c. The socially efficent number of portraits is increase the social walfare and the
surplyer can provide minimun selling price for customers so that can provide social
walfare for every customers.

d. Economic profit = $ (50 + 46 + 42 + 38 + 34 + 30 + 26 + 22) - $96

= $ 192 per day

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e. No. Because consumer surplus is pay a price equal to reservation price.
Task 3

(a) If the jeans sell for $35 a pair and the competitive market wage is $250 per week,

how many workers should Stone hire? How many pairs of jeans will the company

produce each week?

Number of workers Jeans ( pairs / week Marginal product of VMP ( $ per week )

) labour
0 0 750
1 25 20
25 600
2 45 15 450
3 60
12 360
4 72 8 240
5 80
5 150
6 85

Stone hair should hire 4 workers and each week should produce 72 pairs of jeans.

(b) Suppose the Clothing Workers Union now sets a weekly minimum acceptable wage

of $230 per week. All the workers Stone hires belong to the union. How does the

minimum wage affect Stones decision about how many workers to hire?

The Clothing Workers Union now sets a weekly minimum acceptable wage of $230 will

do not affect Stones decision since the equilibrium wage is higher than the minimum

wage of $230 per week if all workers Stone hires belong to the union.

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(c) If the minimum wage set by the union had been $400 per week, how would the

minimum wage affect Stones decision about how many workers to hire?

If the minimum wage set by the union had been $400 per week, the minimum wage

does affect Stones decision since the union wage is higher than the market wage. Stone

will no longer hire the fourth worker. There will be 3 workers to hire.

(d) If Stone again faces a market wage of $250 per week but the price of jeans rises to

$45, how many workers will the company now hire?

Number of workers Jeans ( pairs / week Marginal product of VMP ( $ per week )

) labor
0 0 25 1000
1 25 800
20
2 45 15 600
3 60
12 480
4 72

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 8 320
5 80
6 85 5
200

The final column of the table now has VMPs of 1000,800,600,480,320, and 200. Stone

will now hire a fifth worker.

Task 4

a) Ted can wax 4 cars per day or wash 12 cars. Tom can wax 3 cars per day or wash 6.

What is each mans opportunity cost of washing a car? Who has a comparative

advantage in washing cars?

Wax Wash Opportunity cost

Ted 4 12 Time wash a car, can wax one-third car
Tom 3 6 Time wash a car, can wax one-half car
The data given enables you to calculate opportunity costs:

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Teds opportunity cost of waxing 4 cars is not washing 12 cars. So his opportunity cost

of waxing one car is not washing 3 cars. Toms opportunity cost of waxing 3 cars is not

washing 6 cars. So his opportunity cost of waxing one car is not washing 2 cars. Tom is

the low opportunity cost waxer and it follows that Ted is the low opportunity cost

washer.

Note that Teds opportunity cost of washing one car is not waxing only one-third of a

car and Toms opportunity cost of washing one car is not waxing one-half of a car.

(b) Ted can wax a car in 20 minutes or wash a car in 60 minutes. Tom can wax a car in

15 minutes or wash a car in 30 minutes. What is each mans opportunity cost of washing

a car? Who has a comparative advantage in washing cars?

Wax Wash Opportunity cost

Ted 20 60 mins Time wash a car, can wax 3 cars

mins
Tom 15 30mins Time wash a car, can wax 2 cars

mins
Since Tom has a lower opportunity cost of washing a car than Ted does, Tom has a

relative advantage in washing cars.

(c) Toby can produce 5 gallons of apple cider or 2.5 ounces of feta cheese per hour.

Kyle can produce 3 gallons of apple cider or 1.5 ounces of feta cheese per hour. Can

Toby and Kyle benefit from specialization and trade? Explain.

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 Gallons Ounces Opportunity cost
Tobby 5 2.5 Each must give up 2.5 Ounces to produce gallons.
Kyle 3 1.5 Each must give up 1.5 Ounces to produce gallons.
Give 2 1 Each must give up 1 Ounces to produce gallons.

up
Both of them have the opportunity costs of producing apple cider and feta cheese (1/2

units of feta cheese and 2 units of apple cider respectively). They do not have a relative

advantage in producing apple cider or feta cheese over each other. Since benefits from

job rely on different opportunity costs among trading revelries, there will be no advance

from trade or specification. In other words, no comparative advantage is equal to no

gain from trade. Comparative advantage is from basis of difference in technology,

education attainment and skills

(d) Nancy and Bill are auto mechanics. Nancy takes 4 hours to replace a clutch and 2

hours to replace a set of brakes. Bill takes 6 hours to replace a clutch and 2 hours to

replace a set of brakes. State whether anyone has an absolute advantage at either task

and, for each task, identify who has a comparative advantage.

Clutch Brake Opportunity cost

Nancy 4h 2h Replacing 1 brake, can complete of clutch

replacement
Bill 6h 2h Replacing 1 brake, can complete 1/3 of a

clutch replacement
From the table above Bill has a comparative advantage in replacing brakes and

Nancy has a comparative advantage in replacing clutch. Other than that, Nancy has an

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 complete advantage over bill in replacing clutches since it takes her 2 hours less than it

takes Bill to perform job. They are same amount of time to replace a set of brakes.

(e) Consider a society consisting only of Helen, who allocates her time between sewing

dresses and baking bread. Each hour she devotes to sewing dresses yields 4 dresses and

each hour she devotes to baking bread yields 8 loaves of bread. If Helen works a total of

8 hours per day, graph her production possibilities curve.

Loaves of bread baked per day

64

Dresses sewed per day

0
32

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Task 5

Susan can pick 4 pounds of coffee in an hour or gather 2 pounds of nuts. Tom can pick 2

pounds of coffee in an hour or gather 4 pounds of nuts. Each works 6 hours per day.

(a) What is the maximum number of pounds of coffee the two can pick in a day?
There is a time restraint of 6 hours for a day. Susan can pick 24 pounds of coffee

a day (4pounds per hour x 6 hours per day).Tom can pick 12 pounds of coffee a

day (2 pounds per hour x 6 hours per day). Therefore they can gather a total of

36 pounds of coffee a day.

(b) What is the maximum number of pounds of nuts the two can gather in a day?
There is a time restraint of 6 hours for a day. Susan can pick 12 pounds of nuts a

day (2 pounds per hour x 6 hours per day). Tom can pick 24 pounds of nuts a

day (4 pounds per hour x 6 hours per day). Therefore they can gather a total of

36 pounds of nuts a day.

(c) If Susan and Tom were picking the maximum number of pounds of coffee when

they decided that they would like to begin gathering 4 pounds of nuts per day,

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 who would gather the nuts, and how many pounds of coffee would they still be

able to pick?

Susans opportunity cost of gathering nuts. There are 4 pounds of coffee

predetermined in an hour. Susans opportunity cost of gathering nuts is 2 pounds of

coffee. While Toms opportunity cost of gathering nuts. There are 2 pounds of coffee

predetermined in an hour. Toms opportunity cost of gathering nuts is 0.5 pounds of

coffee.

(d) Now suppose Susan and Tom were gathering the maximum number of pounds of

nuts when they decided that they would like to begin picking 8 pounds of coffee

per day. Who would pick the coffee, and how many pounds of nuts would they

still be able to gather?

Since Susan has a lower opportunity cost of gathering coffee than Tom, Susan

should gather coffee, Tom should gather nuts. As they now want to have 8

pounds of coffee and as many pounds of nuts as possible, so Susan will gather 8

pounds of coffee. Since it would take Susan only 2 hour to pick 8 pounds of

coffee and given the 6 hours working hours, she can still pick nuts in his 4

working hours lasting. In total, Susan will pick 8 pounds of coffee and 8 pounds

of nuts. While Tom will use all of his working hours on picking nuts. Tom will

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 pick 24 pounds of nuts. As a result, they will end up with 8 pounds of coffee and

32 pounds of nuts a day.

(e) Would it be possible for Susan and Tom in total to gather 26 pounds of nuts and

pick 20 pounds of coffee each day? If so, how much of each good should each

person pick?

This question is a request of Low-hanging fruits value. In growing the production of any

good, first employ those resources with the lowest opportunity cost, and only next turn

to resources with higher opportunity costs. Is 26 pounds of nuts and pick 20 pounds of

coffee possible? Susan should specify in picking coffee and pick nuts in the remaining

time. She will spend 5 hours on picking 20 pounds of coffee then spend the remaining 1

hour on picking nuts, (2 pounds of nuts). While Tom should specify in picking nuts and

pick coffee if he has any remaining time, he will spend all 6 hours on picking 24 pounds

of nuts. Since Susan has picked 2 pounds of nuts in her remaining time, they can get 26

pounds of nuts in total. This mixture is competent and possible.

(f) Is the point (30 pounds of coffee per day, 12 pounds of nuts per day) an attainable

point? Is it an efficient point? What about the point (24 pounds of coffee per day, 24

pounds of nuts per day)?

Is 30 pounds of coffee, 12 pounds of nuts attainable? Susan has relative advantage on

coffee and Tom has relative advantage on nut. If Susan spends 6 hour on picking coffee,

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she will get 24 pounds of coffee. Leaving 6 pounds of coffee for Tom to pick. For Tom

should spend 3 hours on picking 12 pounds of nuts. Given the 6 hours of working, Tom

is left with 3 hours on picking coffee (6 pounds of coffee). Therefore, by having Susan

spends 6 hours on picking coffee (24pounds of coffee), and Tom spending 3 hours on

picking coffee (6pounds of coffee) and 3 hours on picking nuts (12 pounds of nuts), the

point 30 pounds of coffee and 12 pounds of nuts is attainable and efficient. For Susan,

since she has comparative advantage on coffee, so she will spend 6 hours on picking

coffee and get 24 pounds of coffee. For Tom, since Tom has comparative advantage on

nuts, so he will spend 6hrs on picking nuts and get 24 pounds of nuts. Therefore, by

having each works full time at his/her activity of comparative advantage, the point 24

pounds of coffee and 24 pounds of nuts is attainable and efficient.

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(g) On a graph with pounds of coffee per day on the vertical axis and pounds of nuts

per day on the horizontal axis, show all the points you identified in parts (a)(f),

and Problem 10a. Connect these points with straight lines. Is the result the PPC

for the economy consisting of Susan and Tom?

Coffee (1b/day)

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 36
34

32

30

28

26

24

16

Nuts
(1b/day) 0

If they specialize, they could achieve all the different combinations on the PPF

To Check: Susan specializes on picking coffee, and Tom specializes on picking nuts, (pt.

A). Lets check pt. B, 8 pounds of coffee, 32 pounds of nuts. Susan picks 8 pounds of

coffee in 2 hours, picks 8 pounds of nuts in 4 hours while Tom picks 24 pounds of nuts

in 6 hours. Therefore, pt. B is attainable and efficient

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Similar for Pt. C, we can conclude that this PPF consists of Tom and Susan.

(h) Suppose that Susan and Tom could buy or sell coffee and nuts in the world market at

a price of $2 per pound for coffee and $2 per pound for nuts. If each person specialized

completely in the good for which he or she had a comparative advantage, how much

could they earn by selling all their produce?

The maximum amount of coffee they can buy is 48 pounds per day of coffee. The

maximum amount of nuts they can buy is 48 pounds per day of nuts. At the

world price of $2 each, 40 pounds of Coffee cost $80, 8 pounds of Nuts cost $16. So the

total cost of nuts and coffee is $96. Given the total amount of money they earn by

selling all their produce, they have $96 to spend (from 10c). Therefore, they would have

just enough money to consume this combination of goods.

Reference

1. https://www.coursehero.com/file/p6880d3/Solution-to-problem-5-3-It-does-not-

matter-what-is-on-x-axis-or-y-axis-as-long/
2. BBA 2002 textbook

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COURSEWORK

1. Please list out the main differences between microeconomics and macroeconomics.

Microeconomics Macroeconomics
Studies on distribution of income and Studies on national income and total

minimum wage rates. wages.

Analyses demand for and supply labour Analyses total employment the economy

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such as number of employees in an and also unemployment problems.

industry.
Deals with households and firms Deals with aggregate decisions.

decisions.
Studies on individual prices of goods and Studies on overall price level such as

services such as price of petrol, sugar and consumer price index, which indicates the

others. inflation rate.

Analyses demand and supply of individual Analyses aggregate demand and aggregate

goods. supply.
Studies on the production and cost in an Studies on national output such as gross

industry such as number of TVs produced domestic product and also growth rate.

in Sony company

2. Please describe advantages of market economy.

Advantages of market economy

Production according to the needs of consumers: Producers are producing goods and

services according to the tastes of consumers, which maximize the consumers needs

and satisfaction.

Economic freedom: It means the right to earn and retain property. It also means

freedom of enterprise and choices of occupation. This will lead to sourcing of the

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countrys manpower in different sectors. Therefore, there is flexible functioning of

different units of production.

Resources are efficiently utilized: Competition creates efficiency in producing quality

goods at lower cost. Consumers get the highest quality goods at the lower cost since

production techniques are more efficient.

Varieties of consumer goods: Competition takes place in all aspects such as shape,

colour, design and packaging of the products. Therefore, consumers will enjoy a wide

variety of the same product. There is also variety of consumer goods because of

freedom of enterprise, output produced by many producers.

Enhance trade, business, and research and development (R&D): Entrepreneurs or

producers always look out for new innovations to compete with other producers to

provide quality goods. This will lead to rapid expansion and an increase in employment

and income. Innovators enjoy the benefits of their research through copyright, patent,

etc.

Automatic incentives: This system provides encouragement to efficient producers.

Efficient producers will be benefited from the price mechanism compared to inefficient

producers.

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