Econ Problem Set Ppt NEW
70
Chan Yeung Chuen Yeung Tse Fung
Transcript of Econ Problem Set Ppt NEW
Chan Yeung Chuen
Yeung Tse Fung
Problem Set Q1.1
Question
“According to the definition of opportunity cost, the more alternatives that we have given up in the undertaking an action, the higher the opportunity cost.” Please make a critical comment on this statement and explain your answers using examples.
Opportunity cost
The opportunity cost of any choice (the next-best alternative) is what we forgo when we make that choice.
Opportunity cost cannot be infinity
Part time job
Part-time job
waiter clerk sales
value $30 per hour
$50 per hour
$40 per hour
priority 3 1 2
Opportunity cost =$40
Part-time job
waiter clerk Sales steward
value $30 per hour
$50 per hour
$40 per hour
$20 per hour
priority 3 1 2 4
Opportunity cost =$40
Part-time job
waiter clerk sales steward
tutor
value $30 per hour
$50 per hour
$40 per hour
$20 per hour
$45 per hour
priority 4 1 3 5 2
Opportunity cost =$45
Definition – wrong
But possible!
Problem Set Q1.2
Suppose you are considering whether to go to Paris with a group of classmates during your summer
holidays. The round trip airfare from Hong Kong to Paris is $6,000, but you can select to pay this airfare with a frequent-flyer coupon. All other
relevant costs for the vacation in Paris are $10,000. The most you would be willing to pay for the Paris vacation is $19,000. This amount is your benefit of taking the vacation in Paris. Your only alternative use for your frequent-flyer coupon is your trip to
New York after summer holidays and this is a trip that you must make. The Hong Kong-New York
round-trip airfare is $8,000.
Part a
What is the economic surplus of your trip to Paris if you do not use the frequent-flyer coupon for the trip? Explain your answer and show your calculation.
Economic surplus
The economic surplus from taking any action is the benefit of taking that action minus its cost. (1)
=benefit – (explicit cost + implicit cost)
Benefit=The most I would like to pay for the trip
Explicit costThe actual payments a firm makes to its factors of production and other suppliers.(2)
Implicit costsThe opportunity costs of the resources supplied by the firm's owners. (3)
Part a
Economic surplus (trip to Paris ,do not use the frequent-flyer coupon)
=benefit – (explicit cost + implicit cost)
=19000-(6000+10000)=3000
Part b
What is the economic surplus of your trip to Paris if you use the frequent-flyer coupon for the trip ? Explain your answer and show your calculation.
Part b
Economic surplus (trip to Paris ,use the frequent-flyer coupon) The benefit for trip to Paris = 19000 The explicit cost for the trip = 0 The implicit cost for the trip = 10000 + 8000
benefit – (explicit cost + implicit cost)
= 19000 – (0 + 10000+8000)
=1000
Part c
Should you use the frequent-flyer coupon for the trip to Paris or use it for the trip to New York ?
The cost-benefit principle:
An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.
Economic surplus (trip to Paris ,do not use the frequent-flyer coupon)
=19000-(6000+10000)= 3000
V.S
Economic surplus (trip to Paris , use the frequent-flyer coupon) = 19000 – (0 + 10000+8000)= 1000
Part c
Conclusion
Frequent-flyer coupon should be used for the trip to New York.
Problem Set Q.1.3
Background Albert make all his decisions based on
economic rationale and his sole objective is to maximize his economic surplus. He is required to undertake a minor surgical operation and he can select to have it done in the private hospital or in the government-subsidized hospital. He is willing to pay a maximum of $65,000 for having the operation done in the private hospital and $60,000 for having the operation done in the government-subsidized hospital. The fee charged by the private hospital equals $30,000 and the fee charged by the government-subsidized hospital equals $10,000.
Part (a) question
Explain whether Albert should undertake the operation in the private hospital or in the government-subsidized hospital.
Cost-Benefit principle
An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.
Economic surplus : The economic surplus from taking
any action is the benefit of taking that action minus its cost.
Economic surplus equation = Benefit – Opportunity Costs
Part (a)
What is the maximum price Albert willing to pay for having the operation done in private hospital and government-subsidized hospital?
Part (a)
Maximum price of taking operation in private hospital
= $65,000
Maximum price of taking operation in government-subsidized hospital
= $60,000
Benefit of taking operation in private hospital
= Maximum price of taking operation in the private hospital
= $65,000
Benefit of taking operation in government-subsidized hospital
= Maximum price of taking operation in government-subsidized hospital
= $60,000
Part (a)
What is the opportunity costs taking operation in private hospital and government-subsidized hospital?
Opportunity costs= the fee charged by the hospital
• Opportunity costs of taking operation in private hospital
= the fee charged by the private hospital
= $30,000
• Opportunity Costs of taking operation in government-subsidized hospital
= the fee charged by the government-subsidized hospital
= $10,000
Taking operation in private hospital
Economic surplus = $65,000 – $30,000 = $35,000
Taking operation in government-subsidized hospital
Economic surplus = $60,000 – $10,000= $50,000
Part (a)
Part (a) answer
Albert should undertake operation in government hospital.
Reason: Economic surplus of taking operation in
government-subsidized hospital ($35,000)
> Economic surplus of taking operation in private hospital ($50,000)
Additional background Now suppose Albert has purchased a health
insurance policy and paid three months ago. The increase policy entitles Albert to claim 50% of any expense incurred in a private hospital and 40% of any expense incurred in the government-subsidized hospital. However, the annual premium for the next year will be increased by $3,000 if he has made a claim in the current year. Albert has already decided that he will definitely continue to purchase the insurance policy for the next year.
Part (b) Question
Explain whether Albert should (i) undertake his operation in private
hospital and make the claim to the insurance company
(ii) undertake his operation in government-subsidized hospital and make the claim to the insurance company
(iii) maintain its decision as in the answer (a) (undertake his operation in government-subsidized hospital) and not make any claim to the insurance company
(i) undertake his operation in private hospital and make the claim to the insurance company
Opportunity Costs= 50% of the fee + annual premium for
the next year will be increased = $30,000 x 50% + $3,000= $18,000
(i) Undertake his operation in private hospital and make the claim to the insurance company
Economic surplus= $65,000 – $18,000= $47,000
Failure to ignore sunk cost
Sunk cost:- Costs incurred in the past- Cost cannot be recovered at the
moment a decision is made- irrelevant to decision of whether to
take the action
(ii) undertake his operation in government- subsidized hospital and make the claim to the insurance company
Opportunity cost
= 60% of the fee + annual premium for the next year will be increased
= $10,000 x 60% + $3,000
= $9,000
(ii) Undertake his operation in government-subsidized hospital and make the claim to the insurance company
Economic surplus= $65,000 – $9,000= $51,000
(iii) maintain its decision as in the answer (a) (undertake his operation in government-subsidized hospital) and not make any claim to the insurance company
Economic surplus = $50,000
Part (b) answer
Albert should undertake his operation in government-subsidized hospital and make the claim to the insurance company.
Reason: Highest economic surplus of (i)
($51,000)
Part (c) question
Suppose all the above information is known to the manager of the private hospital. Calculate the maximum fee that he can change Albert for having Albert agreeing to undertake the operation in his hospital.
From Part (b): The highest economic surplus (undertake his operation in
government-subsidized hospital and make the claim to the insurance company)
= $51,000
Two ways
1) take operation in private hospital and do not claim for it
2) take operation in private hospital and claim for it
1) take operation in private hospital and do not claim for it
Let Y be the maximum fee charged by private hospital
51000 = 65000 - Y Y = $14,000
2) take operation in private hospital and claim for it
Let X be the maximum fee charged by private hospital
$51000 = $65000 - X/2 - $3000 X = $22,000
Maximum fee charged of (1)= $14,000Maximum fee charged of (2)= $22,000
Maximum fee charged= $22,000
Problem Set Q2.1
Question 2.1(A)
Stock Close($) Vol(1,000$)
HSBC 70.20 14,015
ICBC 5.74 187,611
MTRC 27.35 1,784
20 July 2010Stock Close($) Vol(1,000$)
HSBC 75.80 15,894
ICBC 5.79 152,647
MTRC 27.25 1,941
21 July 2010
State whether each stock has experienced a decrease in demand, increase in demand, decrease in supply or increase in supply, assuming there were changes in either the demand or supply curves but not both.
From the table,
•The closing price of each stock can be known as the aggregated market equilibrium price (EP)
•The volume of each stock can be known as the aggregated market equilibrium quantity (EQ)
Analysis of HSBC
Stock Close($) Vol(1,000$)
HSBC (20 July) 74.20 14,015
HSBC (21 July) 75.80 15,894
• The price increases.
• And the volume transacted also increases.
P1 74.20 Q1 14,015
P2 75.80 Q2 15,894
The price increased from P1 to P2 while the quantity transacted increased from Q1 to Q2.
P
The demand curve shifts to the right.
Increase in demand
Analysis of ICBC
Stock Close($) Vol(1,000$)
ICBC (20 July) 5.74 187,611
ICBC (21 July) 5.79 152,647
• The price increases.
• But the volume transacted decreases.
P1
5.74 Q1 187,611
P2
5.79 Q2 152,647
The price increased from P1 to P2 but the quantity transacted decreased from Q1 to Q2.
D
P1
P
The supply curve shifts to the left.
Decrease in supply
Analysis of MTRC
Stock Close($)
Vol(1,000$)
MTRC (20 July)
27.35 1,784
MTRC (21 July)
27.25 1,941
• The price decreases.
• But the volume transacted increases.
P1 27.35 Q1 1,784
P2 27.25 Q2 1,941
The price decreased from P1 to P2 but the quantity transacted increased from Q1 to Q2.
S1
P2
D
The supply curve shifts to the right.
Increase in supply
Question 2.1(B)
Stock Close($)
Vol(1,000$)
ICBC 5.74 187,611
20 July 2010
21 July 2010
Explain how you conclude about the shifts of its demand and supply curves between 20 and 21 July 2010.
Stock Close($)
Vol(1,000$)
ICBC 5.74 152,647
Analysis of ICBC
Stock Close($)
Vol(1,000$)
ICBC (20 July)
5.74 187,611
ICBC (21 July)
5.74 152,647
• The price remains unchanged.
• But the volume transacted decreases.
P
Q
D1
S1S2
D2
P
Q1Q2
As the price remained the same but the quantity transacted decreased from Q1 to Q2.
Both the demand and supply curves shift to the left.
Decreased in both demand and supply
Question 2.1(C)
Stock Close($)
Vol(1,000$)
HSBC 74.20 14,015
20 July 2010
21 July 2010
Explain how you conclude about the shifts of its demand and supply curves between 20 and 21 July 2010.Stock Close($
)Vol(1,000$)
HSBC 75.80 14,015
Analysis of HSBC
Stock Close($)
Vol(1,000$)
HSBC (20 July)
74.20 14,015
HSBC (21 July)
75.80 14,015
• The price increases.
• But the volume transacted remains unchanged.
P
QD1
S1S2
D2
P1
Q
As the quantity transacted remained unchanged but the price increased.
P2
The demand curve shifts to the right while the supply curve shifts to the left.
Increase in demand but decrease in supply
(1) Frank, Robert H., and Bernanke, Ben S., Principles of Economics, Fourth edition, McGraw Hill, 2009, 6
(2) & (3) Frank, Robert H., and Bernanke, Ben S., Principles of Economics, Fourth edition, McGraw Hill, 2009, 204
Reference
