Tutorial Week 4 Sample Answers for Selected Practice Questions_SV2010S1

BEA683 E CONOMICS FOR M ANAGERS_________________________________________________________________________W EEK 4 TUTORIAL : C HAPTERS 2 AND 3S UGGESTED A NSWERS T O E ND O F C HAPTER R EVIEW QUESTIONSChapter 2 (continued): Short-answer Questions9. Suppose Sally earns A$500 in private income, her tax payments are A$80, and shereceives income support for A$40. Calculate her average tax.Review page number(s): 37 Answer:The average tax is the total tax bill divided by your pre-tax revenue:16.050080==Y TPrivate income is pre-tax revenue (Y). The side-payments are welfare (W), which are not included in calculating the average tax.10. Emma earns A$1000 and pays taxes of A$250. Ann earns A$900 and pays taxes ofA$225. Is this tax scheme progressive? Does your answer change if Ann pays taxes of A$240? Explain.Review page number(s): 37-38 Answer:For the system to be progressive, the average tax paid would increase with pre-tax revenue. In this case:25.01000250= and25.0900225=Therefore this scheme is flat.If Ann pays tax of A$240, then her average tax is 0.267, and therefore the system is regressive: she pays higher tax than Emma even though she earns less. A regressive tax scheme is one in which the average tax decreases with the pre-tax revenue.11. Give up to three reasons why wants and needs may be unlimited.Review page number(s): 26Answer:The text book gives the following four reasons:i) Goods eventually wear out and need to be replaced.ii) New or improved products become available.iii) People get fed up with what they already own.iv) The more you have, the more you want.12. Complete the table by filling in the last column. What does the cost per QUALY for eachintervention mean?Intervention Cost (A$) QUALY Cost per QUALY(A$) Vaccination of all children 200 000 100 000 2 Compulsory Safety Belts for all 500 000 100 5000 Cholesterol tests for all obese people 14 000 20 700 Heart transplants for all those in need 1 000 000 20 50 000 Review page number(s): 30-37Answer:The cost per QUALY represents a ratio of the Quality Adjusted Life Years gained per $1 spent. This allows the comparison of the full health benefits across a range of possible policies/health treatments. One QUALY roughly means another year of life of average quality for an average person, i.e. neither ecstatically happy nor extremely unhappy year. The costs per QUALY calculated in this table indicate that for the range of policy choices, we could spend between $2 and $50 000 to gain an extra QUALY.13. Suppose your budget is only A$200 000? What is the best intervention, or set ofinterventions, you can choose to do?Review page number(s): 30-37Answer:Vaccination of all children is the best intervention if you want to get the most QUALYs for your budget of $200 000.Chapter 3Multiple-choice Questions1. Which statements are correct?a) A buyer who is a price taker can decide whether to buy at a certain price or not.b) A seller who is a price taker cannot refrain from selling at the market price.c) Whenever a buyer and a seller bargain over a price, they are price takers.d) Under perfect competition, only buyers are price takers.Review page number(s): 48Answer: a2. Which statements are correct?a) The willingness to pay is the minimum price at which a consumer would buy a goodb) If the price of a good is below the consumer’s willingness to pay then the consumerwill not buy the goodc) The willingness to pay for each unit of a good determines a firm’s supply curved) The willingness to pay for a good depends on the price of other goods, aconsumer’s income and the taste of a consumerReview page number(s): 48-53Answer: d3. Which statements are correct?a) The demand curve shifts to the right if the price of a complement increasesb) The cross price elasticity for the price of a complement is negativec) A lower income shifts the demand curve left if the good in question is an inferiorgoodd) The income elasticity of demand is negative if a good is a normal good.Review page number(s): 51-55Answer: b4. Which statements are correct?a) The supply curve is determined by the marginal costs of productionb) The average cost is always higher than the marginal costc) If the total cost increases faster than the quantity, production technology exhibitseconomies of scale.d) Aggregate supply is the vertical sum of the supply curves of individual sellers.Review page number(s): 65-70Answer: a5. Which statements are correct?a) At the market clearing price consumer would like to buy more of the good, but nosellers would like to sell more of the goodb) If the price is higher than the market clearing price then there will be excess supplyon the marketc) Excess demand results from the quantity demanded by consumers at a certainprice being lower than the quantity supplied by sellersd) If there is excess demand, sellers have an incentive to lower their prices.Review page number(s): 70-72Answer: b6. The table on page 74 contains the willingness of Frank, Jody and Simon, to pay forslices of cake.•How many slices will Frank buy at a price of A$6.50?o None•How many slices will Jody buy at this price?o One•How many slices do they buy at a price of A$2.00?o If the price is $2, Frank buys 4 slices, Jody 3 slices, and Simon 2, in total they buy 9 slices.7. Draw their individual demand curves and the market demand curveSee the red lines in the diagram below.8. Where Frank and Jody live, slices of cakes are produced by two bakeries (Mama’s cakesand Papa’s bread). The table on page 74 gives their total costs of producing a certain number of slices of cake. Determine the fixed cost of production and fill in the marginal cost columns.Review page number(s): 65-70Answer:Fixed costs of production for Mama’s cakes are $1.50, and for Papa’s bread is $2.50.This is the cost to the business regardless of whether they produce any cake or not (Quantity=0).Mama’s cakes Papa’s breadCost of producingSlices of cake Total cost Marginal cost Total cost Marginal cost0 1.50 0.50 2.50 0.400.801 2.901 2.002 3.00 1.50 3.70 1.203 4.50 2.00 4.90 1.604 6.50 2.50 6.50 2.002.403 8.505 9.006 12.00 10.909. In the same diagram you used for the market demand of Frank, Jody and Simon drawthe supply curves of the two bakeries as well as the market supply curve. What is the market price for slices of cake?See the black lines in the diagram below. 9 cakes at a price of A$2.Note, given the limitations of drawing curves in word, the supply curves are sketches. The trick is to draw the marginal cost curve, given the values calculated in the table. Here we assume that marginal costs are increasing in linear fashion.With respect to the demand curve, the table provides you with the willingness to pay for the first slice of cake (A$ 6 for Frank, A$7 for Jody, A$ 5 for Simon). If the price is higher than this, they will buy no cake. Hence the vertical line on the y-axis. At the price of A$6 (A$7, A$5) Frank’s (Jody’s, Simon’s) demand jumps to one slice and stays there unless the price drops to A$5 (A$4,A$4) in which case Frank (Jody, Simon) would buy a second slice (and thus demand two slices in total). You need to continue this exercise to get the figure.。