Supply and Demand and Marks
BUECO5903
Business Economics Assignments
Part A – Microeconomics
Question 1:
(a) Explain the impact of external costs and external benefits on resource allocation; (2.5 marks)
The external cost and external benefit is a cost or benefit imposed on people other than the consumers and producers of a good or service. External cost is negative and may be detrimental to the third party, conversely, external benefits is positive and beneficial to third party. Because of this concept, it will effect resource allocation. An external cost, i.e. a negative externality, is not taken into account, so there is more production, at a higher price, resulting in an over-allocation of resources. An external benefit, a positive externality, will result in an under-allocation of resources. (b) Why are public goods not produced in sufficient quantities by private markets? (2.5 marks) Public good is a good or service that government, rather than the market, must provide if it is to be made available in sufficient quantity. So people can benefit from public good without pay, so if asked how much they were willing to pay the answer is likely to be nothing, or a very low amount. This free-rider problem means it is not possible for the private market to function effectively.
(c) Which of the following are, or are not examples of public goods (or services)? Please explain your reason. (1 mark each which includes ½ marks for each reason). (i) The Judicial system Yes/No (ii) Pencils Yes/No (iii) The quarantine service Yes/No (iv) The Great Wall of China Yes/No (v) Contact lenses Yes/No *
Question 2: (a) Suppose the income elasticity of demand for pre-recorded music compact disks is +5.0 and the income elasticity of demand for a cabinet maker’s work is +0.5. Compare the impact on pre-recorded music compact disks and the cabinet maker’s work of a recession that
Business Economics Assignments
Part A – Microeconomics
Question 1:
(a) Explain the impact of external costs and external benefits on resource allocation; (2.5 marks)
The external cost and external benefit is a cost or benefit imposed on people other than the consumers and producers of a good or service. External cost is negative and may be detrimental to the third party, conversely, external benefits is positive and beneficial to third party. Because of this concept, it will effect resource allocation. An external cost, i.e. a negative externality, is not taken into account, so there is more production, at a higher price, resulting in an over-allocation of resources. An external benefit, a positive externality, will result in an under-allocation of resources. (b) Why are public goods not produced in sufficient quantities by private markets? (2.5 marks) Public good is a good or service that government, rather than the market, must provide if it is to be made available in sufficient quantity. So people can benefit from public good without pay, so if asked how much they were willing to pay the answer is likely to be nothing, or a very low amount. This free-rider problem means it is not possible for the private market to function effectively.
(c) Which of the following are, or are not examples of public goods (or services)? Please explain your reason. (1 mark each which includes ½ marks for each reason). (i) The Judicial system Yes/No (ii) Pencils Yes/No (iii) The quarantine service Yes/No (iv) The Great Wall of China Yes/No (v) Contact lenses Yes/No *
Question 2: (a) Suppose the income elasticity of demand for pre-recorded music compact disks is +5.0 and the income elasticity of demand for a cabinet maker’s work is +0.5. Compare the impact on pre-recorded music compact disks and the cabinet maker’s work of a recession that