Micro Economics - Assignment Example

c) If the economy is using the resources as stated in the question then it is underutilizing the resource availability. In this case it would violate the assumption of full employment. d) This is an unrealistic situation and can be attained only in presence of foreign trade. In order to produce beyond the possibility level, the economy must be able to realize the increase in the availability of resources. Question 2 Answer: Opportunity cost is referred to as the cost of an activity which in measured in regards to the next best alternative foregone.

The condition of shortage is the root cause of opportunity cost. If shortage is absent there will be no reason to sacrifice one thing to achieve another. The opportunity cost is likely to be higher for New York City. The reason being the alternative uses for the block are of more value than the block of the suburban city. Question 3 Total Profits = Total Cost – Total Revenue Total Cost = P resource * Q resource and Total Revenue = Price * Q sold Total Cost = ($40 * 5 units of labor) + ($60 * 7 units of land) + ($60 * 2 units of capital) + ($20 * 1 unit of entrepreneurial ability) = $200 + $420 + $120 + $20 = $760.

Total Revenue = $2 * 400 loaves of banana bread = $800. Total Profits = $800 - $760 = $40. The firm will continue to produce as it is earning economic profits. If this firm is typical of the banana bread industry, more resources will flow toward banana bread as other potential firms are attracted to the economic profits in the industry. Question 4 a) For this condition the price will rise while the quantity will fall. b) For this condition the price will fall while the quantity will fall as well. c) For this condition the price will fall while the quantity will rise. d) For this condition the price is indeterminate but the quantity will rise. e) For this condition the price will rise as well as the quantity. f) For this condition the price will fall but it is not possible to determine the demand. g) For this condition the price will rise but it is not possible to determine the quantity. h) For this condition the price will remain indeterminate but the quantity will fall.

Question 5 Price falls and demand is inelastic: The total revenue will decrease in this case as demand being inelastic a price fall will bring loss of revenue for the producers. Price rises and supply is elastic: The total revenue will increase in this case as supply being elastic a rise in price will lead to increase in total revenue conditions. Price rises and supply is inelastic: The total revenue will rise in this case as well as this is the opposite case as the above question. Supply being inelastic a price rise will lead to increase in demand conditions and therefore total revenue.

Price rises and demand is inelastic: The total revenue will rise in this case. Demand being inelastic a rise in prices will lead to rise in demand and total revenue will rise. Price falls and demand is elastic: The total revenue will rise in this case. As demand is elastic a fall in price will lead to increase in demand and total revenue will rise. Price falls and demand is unit elastic: In this case the total revenue will remain the same because a fall in price will bring no change in demand conditions and therefore total revenue will remain unaffected.

Question 6 Answer: A ceiling on price that is set below the price level at