MicroFB Critical Analysis - Essay Example

?MicroFB College: PART ONE 1A 2B 3D 4B 5B 6D 7B 8A 9C 10B 11A 12A 13B 14B 15C 16C 17D 18A 19C 20A 21C 22A 23C 24C 25B 26A 27D 28B 29A 30A 31A 32A 33B 34C 35B 36A 37A 38A 39D 40A 41B 42B 43C 44A 45A 46C 47A PART TWO Question one Law of demand in microeconomic is the notion that demand will decrease as the price of a commodity rises and the demand will increase as the price falls. For instance, if the price of pizzas rises, demand will fall as few people will but the commodity. Question two Constant returns to scale refers to the phenomenon in which a proportionate in output is brought about by the same proportionate increase in resources. For example, when a 20% increase in vehicles results from a 20% increase in investment on manufacturing equipments, then the firm could be experiencing constant returns to scale. Question three Economic profit refers to the difference between total revenue and opportunity cost. For instance, Pesso invests $1,000 to begin a business in a particular year which she earns $1,200 in profits. But if she had not begun the business she could have earned a salary of $4,500. In such a case, the economic loss is $250 (1,200 – 1000 – 450). Question four Law of diminishing marginal returns states that as new workers continue to increase, the marginal product of any additional worker will at some instant be lower than that of the previous worker. For instance, if a company employs workers to produce its commodities, at some point in time each additional worker will provide lower output than the previous worker, if all other factors remain unchanged. Question five Marginal product of labor refers to the change in output resulting from hiring an additional worker. For example, if a pizza restaurant with three employees makes 100 pizzas in a day and 120 pizzas with four employees, the marginal product of labor is 20 pizzas (120 – 100). Question six Monopolistic competition is a kind of competition (imperfect) where many competitors sell commodities that are differentiated. This means that the products are substitutes, but also differentiated. An example of monopolistic competition is the electronic market where every produce differentiates products through branding. Question seven Sunk cost refers to the unrecoverable retrospective costs. For instance, a firm that has spent $10 million acquiring a machine which is not yet installed has to consider the $10 million sunk because it cannot recover the money. Question eight The principal-agent problem refers to the conflict of interest that occurs when an agent is hired by a principal to conduct specific tasks that are extremely costly but in the best interest of the principal. For example, the problem will occur when a company hires a rating agency to set a credit rating and the agency is objective to give a higher rating than that which is deserved in fear of losing future contracts. Question nine Equilibrium price refers to the market price where demand of a good equals the supply. For example, when a market is able to produce 100 pizzas which exactly equal the demand of the pizzas, the price at which the pizzas are offered is the equilibrium price. Question ten Tragedy of the commons can be defined as the dilemma that arises from the situation in which many individuals, working independently and only consulting own interest, will eventually diminish a shared scarce resource even when it is apparent that the action is not in the long-term benefit of all. For instance, if the activities of a mining company affect a natural spring that is the source of water for local people and animals, the occurrence is a tragedy of the commons. PART THREE Question one Economies and diseconomies of scale refer to two completely opposite models. Economies of scale occur at a point when the quantity produced by a firm offers the firm the low cost advantage and the firm earns the minimum cost advantage. Conversely, diseconomies of scale occur at a point when the firm produces less than the amount of the input costs and the cost of production is high. For instance, if a restaurant purchases onions in bulk to make a sauce, it will experience economies of scale at some point. However, if it does not sustain substantial level of sales then the bulk investment is the additional cost or diseconomies of scale. Average cost Economies of scale Diseconomies of scale Q* Output Question two Government intervention can make the economy more efficient when external costs are present. This statement is true because external costs make the marginal private cost to be lower than the public costs. This implies that the public benefit becomes lower than the social cost as the free market becomes inefficient. The problem that arises is that the public buys and consumes too much of the commodity. Since negative externalities are associated with external costs, it is apparent that they are not just an ethical problem. The real problem is the gap created between public and marginal costs that cannot be resolved by the free market. It emerges to be an issue of communicating and coordinating with the public to harmonize costs and benefits. A competitive market will never solve the problem of pollution as it needs something more effectual like government intervention to discourage the externality. Question three The indifference curves are used to determine consumer purchase by explaining how a consumer chooses between two products. The objective of the consumer is to allocate income between commodities A and B to attain the highest amount of utility. That is, to attain the highest indifference curve achievable within the consumer budget constraint. Since the indifference curve is a measure of utility levels, consumers must choose a combination on the budget line that provides the greatest level of utility. Good B Y X Good A In the graph above, a consumer can choose two combinations of goods represented by X and Y because they are on the budget line and thus exhaust the income. However, combination Y does not offer the greatest level of utility. The consumer will go for combination X because it maximizes utility (budget line is tangent to the highest indifference curve). Therefore, indifference curves help consumer to identify the combination that should be purchased in order to maximize utility. Question four A tax would be efficient when either supply or demand is perfectly inelastic (Hyman, 2010, p.454). That means there is no deadweight loss created. In either case, a tax imposed does not alter the output or quantity produced and thus no deadweight loss is created. For instance, if a life saving drug was discovered, any tax imposed on the drug will not change the quantity produced because demand will be extremely high. Question five Perfect price discrimination typically happens when a monopoly compels each buyer to pay the maximum price he/she is willing to pay. If the price paid for the commodity is close to the value placed on it, the consumer surplus is small and if the price paid is not close consumer surplus is large. As the price paid nears the value placed on the commodity, the whole consumer surplus is transferred to producer surplus and eventually the consumer surplus is eliminated. Again, the producer surplus increases as the output increases to a level at which the price equals the marginal cost. As the monopoly price discriminates, his profits increases compared to a situation when all buyers are charged a single price. This effect attains efficiency by removing the deadweight loss as compared to single-price monopoly effect. References Hyman, D N 2010, Public finance: a contemporary application of theory to policy [with access code]. Cengage Learning, Florence. Read More