Economic Principles Analysis: Base Version - Essay Example

? MAE101 – Economic Principles Assignment: Base Version Insert (s) MAE101 – Economic Principles Assignment Base Version Question 1: Choices at the margin a) Given that a parking fine brings in revenue of $75, and that on average Deakin Parking inspectors issue 0.7 fines an hour when conducting random checks, what is the expected return for an hour’s work inspecting cars for permits? The total revenue obtained from fines= $75 (price) and the inspectors issue 0.7 fines in one hour. Revenues= price x quantity. Expected return for an hour’s work = 0.7 x75= $ 52.5 b) Assume that Deakin’s parking inspectors are paid $35 an hour for checking cars for permits. What is the marginal cost and marginal benefit of another hour’s ticket inspecting? ? PAY/?HOURS=0. However, the marginal benefit for the first hour is high, while the marginal cost is low. In the second hour, the marginal benefit is high but lower than the marginal benefit obtained in the first hour (Heijdra and Ploeg, 2002, p.124). On the other hand, the marginal cost for the second hour is higher than the marginal cost of the first hour. This trend continues as the number of hours progresses. Thus, parking inspectors can only increase or decrease the number of checks depending on their levels of satisfactions. c) What would happen to Deakin’s revenue from parking (income from permits and fines) and to Deakin’s costs of enforcing parking restrictions if the likelihood of being fined if you don’t have a permit is 100%? What about if it is 0%? The revenues of the company are likely to increase if a fine for lack of permits is 100%. However, people may become vigilant and decide to obtain the permits. In such a case, the revenues would only depend on individuals found without permits. The costs would still remain the same since the company would have finances for its operations. In case the fine for not having permits is 0%, the revenues of the company would decline. It would depend on other revenue streams. Additionally, costs for offering parking services would use up the finances of the company. d) Minimizing the costs of parking Daily fees =$ 6 Total number of days =96. Total cost of parking for the student = cost of daily fees x number of days attended =6 x96= $596. The student is better off not buying daily permits because it will cost higher than the inclusive triple Tri-semester parking fee which is =$125. On the other hand, the student will be better of buying the yearly permit which costs $250. This is because in a year, Tri-semester fees will cost 125 x3= 375. Question 2: Prices and revenue a) Draw demand and supply diagrams to illustrate these two different markets. Make sure you label your diagrams, their axes and all relevant points. Price/charge supply curve y P2 P1 x Original dd curve 0 A2 A1 Number of car park permits According to the advice by the economists, reducing the number of permits from A1 to A2 would result in to more revenues. At A1 number of permits, the revenues that Deakin collects is represented by area A1 0 P1 X. When the number of permits is reduced to the level A2, t he price/charge increases from P1 to P2. The revenue collected after the change in number of permits is represented by A2 0 P2 Y. The economists estimates that the area A2 0 P2 Y will be larger than A1 0 P1 X. If it is larger, then the Deakin’s can increase revenues by reducing the number of permits. In other words, incase the recommendations by the economists is implemented, the quantity of permits will reduce, the prices charged will increase and the revenues will increase. b) Why does restricting the number of permits increase revenue for Deakin, but reduce it for the council? Explain what factors might bring about the different results in the two markets. According to the advice given to the local council, reduction in the number of permits will result in to reduction of revenues. This means that, if the council reduces the number of permits from A1 to A2, then the area A1 0 P1 X would be larger than the area A2 0 P2 Y. IN other words, the reduction of number of permits from A1 to A2 cannot be off set by the increase in price. The implication is that reduction in number of permits leads to increase in price, and decline in quantity hence low revenues. Question 3: Changing conditions a) Assume that the car parking areas lost to building works are not replaced, and that, after lobbying by students, the price of a parking permit is maintained at its initial level. What will happen to the equilibrium quantity and price of parking permits? Illustration using demand and supply diagram Supply 1 Price P2 P1 Demand A2 A1 Quantity /Space Before the parking spaces are not replaced by buildings, the price charged is P1. The spaces available are A1. When the new buildings were constructed over the existing parking areas, the space for parking reduced from A1 to A2. However, price was maintained after lobbying by the students. Thus price maintains at P1. The supply curve shifts to left due to reduction of space. The equilibrium quantity reduces to A2, equilibrium price becomes P2. However, after lobbying by students, the price is set at P1, the original price. c) Will everyone who wants a spot continue to get one? Will this just depend on the price of a permit? What other factors might determine who gets a car park? No. Not everyone who wants a parking spot will continue to get one as the number of parking spaces is reduced. This is because the reduction in the number of parking spaces will result in increased demand (represented as a shift to the right). At each permit price point, more slots will be needed and this will eventually lead to higher equilibrium prices of the parking permits from P1 to P2. As a result of the parking permit price changes, only the individuals who will be able to afford the increased parking permit fees will continue to have parking spots. It is however worth noting that getting a parking spot will depend on a number of other factors other than the changes in the parking fees. Some of the other factors that will potentially determine who gets a car park slot include income of the individuals, taste and fashions, the number of people who need parking slots and the prices of substitute options such as public transport (Garegnani, 2001, p.412). d) Assuming that at the same time car parking spots are lost to building works, local public transport becomes cheaper and more convenient. What will the net result of these two changes be on equilibrium price and quantity of parking permits? Illustration of the situation using demand and supply diagram S D1 D2 Assuming that the local public transport become cheaper at the same time the car slots are being lost to building works and the price of the parking permits is allowed to be determined by the market forces, the two changes will act together and create a dynamic process in which the permit prices will gradually adjust until the quantity of parking permits will be equal to the to the demand for the parking slots. This is because public transport is considered to be a substitute to private cars which require parking slots. Consequently if the public transport system becomes cheaper and more convenient, the demand for parking slots will decrease and this will in turn reduce the equilibrium prices until the number of available parking slots will be equal to the demand for the parking spaces. Question 4: Other methods of allocation Other universities allocate parking spaces by making closer parking zones more expensive and more distant zones cheaper. Discuss the differences between this method of allocating parking spaces versus Deakin’s method in which students and staff both compete for the same White spaces. There are a number of differences between the competitive method of allocating parking spaces used by Deakin and the one used by other universities in which the closer parking zones are made to be expensive while the ones further are cheaper. For example by making distant packing more affordable, more people will prefer to use distant zone. This will in turn increase the demand for distant packing and reduce that of closer packing thus reducing competition for space. Comparing this type of packing with Deakin’s method where students competed for packing space with teachers, the Deaken’s method provided no form of alternative commodity making one commodity to be in high demand than it can be supplied (Snowdon and Howad, 2005, p. 88). Since the price of that commodity is also affordable to all. The principle behind the method used by other Universities to allocate their parking slots is that Generally to regulate the demand of a particular commodity the price for that commodity can be increased so that competition can be reduced and this consequently ensure that only those who really need it can be able to access it. Question 5: A further case study B Demand for Buses P2 P1 Q1 Q2 An increase in the fees imposed on cars entering London’s center results an increase in demand for buses. For example, by placing restrictions on cars through charging more for car entering from 7.00-6.00 more car owners opted to use buses as an alternative/substitute commodity making its demand to rise. This in turn reduced congestion in the town since less people prefer to use their personal car as it was expensive. Provision of a substitute form of transportation to the Deakin would also reduce congestion. Through the provision of a more affordable and convenient means of transport to the students such as a busess, less students would see the need of driving to school with their personal cars thus reducing congestion. References Garegnani, B. 2001. Heterogeneous Capital, the Production Function and the Theory of Distribution, Review of Economic Studies, 37(3): 407-436 Heijdra, B.J, Ploeg, F.D. 2002. Foundations of Modern Macroeconomics. London:  Oxford University Press Snowdon, B., Howard R.V.2005. Modern Macroeconomics: Its Origins, Development and Current State. 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