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ECONOMICS FOR MANAGERS

ECO 6073

QUESTION 1

(a) Suppose that, on the basis of a nation’s production possibilities curve, an economy must sacrifice 5000 pizzas domestically to get the 1 additional industrial robot it desires but that it can get the robot from another country in exchange for 4000 pizzas. Relate this information to the following statement:

“Through international specialization and trade, a nation can reduce its opportunity cost of obtaining goods and thus ‘move outside its production possibilities curve.’” (5 marks)

(b) Suppose the total demand for wheat and the total supply of wheat per month in the grain market are as shown in the below table.

Suppose that the government establishes a price ceiling of $3.70 for wheat.

i) What might prompt the government to establish this price ceiling? Explain carefully the main effects. Demonstrate your answer graphically. (5 marks)

ii) Suppose that the government establishes a price floor of $4.60 for wheat. What will be the main effects of this price floor? Demonstrate your answer graphically. (5 marks)

(c) Suppose the cross elasticity of demand for products A and B is -4.2 and for products C and D is +3.5. What can you conclude about how products A and B are related? Products C and D? (5 marks)

(d) The income elasticities of demand for movies, dental services, and clothing have been estimated to be +3.4, +1, and +.5, respectively. Interpret these coefficients. What does it mean if an income elasticity coefficient is negative? (5 marks)

[Total: 25 marks]

QUESTION 2

(a) A firm has fixed costs of $60 and variable costs as indicated in the table below. Complete the table. (5 marks)

(b) Graph total fixed cost, total variable cost, and total cost. Explain how the law of diminishing returns influences the shapes of the variable-cost and total-cost curves. (8 marks)

(c) Graph AFC, AVC, ATC, and MC. Explain the derivation and shape of each of these four curves and their relationships to one another. Specifically, explain in nontechnical terms why the MC curve intersects both the AVC and the ATC curves at their minimum points. (8 marks)

(d) Explain how the location of each curve graphed in question (c) would be altered if

i. total fixed cost had been $40 rather than $60

ii. total variable cost had been $10 greater at each level of output. (4 marks)

[Total: 25 marks]

QUESTION 3

(a) Draw a domestic supply and demand diagram for a product in which Zimbabwe does not have a comparative advantage. Critically explain the impact foreign imports have on domestic price and quantity.

On your diagram show a protective tariff that eliminates approximately one-half of the assumed imports. What are the price-quantity effects of this tariff on:

(i) domestic consumers

(ii) domestic producers

(iii) foreign exporters? How would the effects of a quota that creates the same amount of imports differ? (15 marks)

(b) The following hypothetical production possibilities tables are for China and the United States. Assume that before specialization and trade the optimal product mix for China is alternative B and for the United States is alternative U.

(i) Are comparative-cost conditions such that the two areas should specialize? If so, what product should each produce?

(ii) What is the total gain in apparel and chemical output that would result from such specialization?

(iii) What are the limits of the terms of trade? Suppose that the actual terms of trade are 1 unit of apparel for 1½ units of chemicals and that 4 units of apparel are exchanged for 6 units of chemicals. What are the gains from specialization and trade for each nation? (10 marks)

[Total: 25 marks]

QUESTION 4

Below is a list of domestic output and national income figures for a certain year. All figures are in billions. The questions that follow ask you to determine the major national income measures by both the expenditures and the income approaches.

(a) Using the above data, determine GDP by both the expenditures and the income approaches. Then determine NDP. (9 marks)

(b) Now determine NI in two ways: first, by making the required additions or subtractions from NDP; and second, by adding up the types of income and taxes that make up NI. (6 marks)

(c) Adjust NI (from part b) as required to obtain PI. (5 marks)

(d) Adjust PI (from part c) as required to obtain DI. (5 marks)

[Total: 25 marks]

TOTAL: 100 MARKS