Introductory Microeconomics - Assignment Example

Introductory Microeconomics [Name] [Instructor] [Institution] [Course] [Date] Question 1 Chauffeurs are luxurious vehicles that consume more fuel when compared to other personal vehicles. These individuals in high positions use the chauffeurs to move around and thus spend much money on fuels especially in the current tough economy. Considering the comparative advantage, use of managerial perks is not justifiable; instead the top officials and officers should be given more options. This would mean they get higher utility as the monetary equivalent can be added in their pay. The use of other vehicles that use less fuel would decrease the opportunity cost. The federal government has an incentive to the care of the chauffeurs. Hence, the government should specialize on other low fuel consuming vehicles in order to attain comparative advantage by avoiding misappropriating funds that are generated as surplus from their corporations. These individuals are able to use these kinds of luxurious chauffeurs because outsiders hardly observe them whereas if the value of chauffeurs is disclosed, it is underreported to stakeholders (Jensen 1986). Jensen (1986) claims that the use of chauffeurs signifies that these corporations have problem. This is the problem of having more money than a firm is able to spend and so channel it to unnecessary projects. This is a wasteful practice and hence the use of chauffeurs is unjustifiable. In my opinion, I don’t think there is any difference when a government official or a corporate official travels in a lesser fuel consuming vehicle and using a chauffer. It is not justifiable for the use because there is no value added but rather the opportunity cost is increased. Furthermore, the purpose of the meeting is accomplished despite the means of transport used. An example; assuming chauffeurs use more fuel both diesel and petrol while other personal vehicles use less amount of diesel and petrol. Let’s also assume that diesel is cheaper than petrol. Hence, the use of other personal vehicles would offer more comparative advantage if the government officials as well as managers use them instead of chauffeurs. Below is a diagram illustrating how a firm can save more by specializing and thus achieving comparative advantage. Monthly expenditure on fuel and maintenance Before specialization After specialization Chauffeurs Petrol Diesel Other personal vehicles Petrol Diesel 650 million 350 million 1.2 million 750 million The diagram shows that the government officials and others in high positions can save almost half of what they spend on fuel consumption after they specialize and thus achieve comparative advantage via decreasing opportunity cost. The inefficiency can also be explained by a ‘production possibilities frontier’ diagram thereby emphasizing that use of perks is unjustified. (Riley 2006) Question 2 Controlling the rent means putting a maximum price or price ceiling. Price ceilings affect the consumers because the supply goes down and hence the rental houses become fewer. According to Taylor (2006), price ceiling decrease efficiency because the marginal benefit of supply goes beyond marginal cost. Rent control is meant to regulate the way landlords charge for their houses. However, rent controls are bad because the conditions of living become poor since houses are not renovated or repaired this means that both quality and quantity of the rental houses are affected. The diagram below shows how price ceiling affects the market for houses. In the diagram, the equilibrium price (P1) is way ahead of price ceiling. This means that a shortage (Qs to Qd) will result. This also means that the landlords do not get enough money to spare for repairs and hence have to delay as observed in James’s case. MC represents marginal cost whereas MB represents the marginal value that the clients are able to pay at Q* (Taylor 2006). (Taylor 2006) According to Taylor (2006), controlling rent diverts investment to other sectors perceived to be better than housing. The result of this is that rental houses deteriorate; there are reduced repairs, and little maintenance. The government controls rent so as to discourage investment of individuals in residential apartments. The legal price that a landlord can charge cannot meet the expenses required to maintain and repair the premise. The fact that James has to wait for the house agent to come and repair his shower means that the rent control affects their apartments negatively. It clearly shows that his landlord does not repeal the rent and hence has to delay before repairing the shower since incentives are insufficient (Block 2008). Further, there is involvement of a third party who is the house agents who make the scenario worse. This is because the agents have to request funds which are paid earlier by tenants from the landlord in order to fix the shower. However, this is not the major cause of the delay but the fact that James’s apartment is under rent control. Hence, the fact that rent control reduces the quality or rental houses explain what fixing James’s shower has to do with rent control. Following the above analysis, rent control should be discouraged in order to promote proper maintenance of rental apartments and avoid delays in repair. Question 3 The statement that consumption must be decreased in order to increase marginal utility is not strange at all because it is not total utility increasing. However, the statement is true. The major reason can be supported by the law of diminishing marginal utility. Marginal utility equals the extra satisfaction one obtains from consuming an extra unit of a good over a given period of time. Marginal utility diminishes when one purchases additional goods in accordance with the diminishing law. As long as the marginal utility remains positive, consumers will opt to purchase more than less although the consumer gets lower utility for each of the consumption unit added. Consumers should aim at achieving maximum utility the point which is called equilibrium consumption level. Consumers purchase equilibrium amount when the prices are equivalent to marginal utility. Hence consumption should be decreased in order to increase marginal utility (Heavy 2008). In order to understand the effects of decreasing consumption on marginal utility through the diminishing law, this paper will give an example of listening to music as illustrated in the graph below. Listening to music illustrates well the law of diminishing of marginal utility. One can listen to music several times especially after it emerges first in the market. This happens when the music is done by ones’ preferred artiste. Assuming that one derive utility equal to 70 from listening to that music; the amount of utility derived from listening increases as the individual continue to listen to it repeatedly. At some point may be at the utility 80 as illustrated in the diagram below, one may become less satisfied by listening to that same music. If one attempts to continue listening to the music by force, the utility derived becomes negative. This is because the satisfaction level is decreased hence decreasing marginal utility as per the diminishing law. The individual should stay for a few days before listening to the music again. It would be easy to regain the original value of utility derived from the music if the song being played is really good (Heavy 2008). In the graph MU (red line) represents marginal utility, TU (blue line) represents total utility although in this study, it is ignored, Q represents the quantity consumed and U stands for the utility gained. The utility curve is the result of a plot of utility against consumption showing the relationship between the two. (Heavy 2008) Question 4 According to Kaplan (2003), the invisible hand guides the behavior of the market. However, it depends on selfish conduct of both the consumers and producers. The two enter into the market with the aims of charging the highest possible price in order to maximize profit on the producer side whereas the consumer aims at purchasing the quantity of their required wants. In the market illustrated by the invisible hand, it seems like the consumers are directed to the merciless producers who are hungry for money. This is not the scenario however because the producers do not have control of the prices they charge. If they charge high prices, the consumers search for substitutes and thus take their money in other firms. By charging high prices according to the invisible hand, the producers aim at making maximum profits to their self gain. Adam Smith’s invisible hand illustrates long-run equilibrium in an industry experiencing perfect competition by describing a world in which competition in the market eliminates behavior that is inefficient. This description aims at showing how an invisible hand leads the process of private interests so as to support the welfare of the entire society. A perfectly competitive market assumes that the organizations are the ones who take the price that the products are the same, that perfect factors are mobile and it also assume that the information is perfect. This implies that firms have an efficient scale, price is equivalent to marginal cost, organizations get no profits (p=0) and that market equilibrium is Pareto-efficient. In the long-run, organizations conform to the profit signals via exiting or entering the market and by changing the fixed factors. This is the story that assists in understanding the equilibrium in long-run competition as illustrated by the invisible hand (Firms and markets, n.d). The diagram below shows that ACmin must equal the equilibrium (p*), a point at which organizations are earning zero profit and efficiency is maximum. (Equilibrium and efficiency 2008) As far as certain industries are attaining positive economic profits in the long-run, new firms will enter whereas the inefficient ones will exit. The invisible hand is illustrated by the inefficient firms which have to exit the market in the long-run. In absence of barriers, the new organizations are able to access the most efficient technology for production in a process called efficient scale. Hence, markets conform to the invisible hands theory. (Firms and markets, n.d). References Block, W 2008, Rent control, Retrieved April 14, 2011 Equilibrium and efficiency (2008) McGraw-Hill Company Inc. Retrieved April 15, 2011 Firms and market n.d, Retrieved April 14, 2011 Heavy 2008, Law of Diminishing Marginal Utility and its application to our daily consumption Retrieved April 14, 2011 Jensen, M, C 1986, Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review: 76, 323-329. Kaplan, J 2003 Unit 3- demand, supply, and markets, Retrieved April 14, 2011 Riley, G 2006, As markets and market systems. Retrieved April 15, 2011 < http://tutor2u.net/economics/revision-notes/as-markets-production-possibility-frontier.html > Taylor, B 2006, Price ceilings, Retrieved April 14, 2011 Read More