BAM020 Economics for Managers Assignment Sample

BAM020 Economics for Managers Assignment

Question 1

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a.

In the graph below, we can see the domestic supply curve for strawberries (S_d), which depicts that at a price of £950 per ton, 328 tons of strawberries are supplied per year.

b.

Similarly, in the graph below, we can see the 2 supply curves (S_d & S_f), which depict the domestic and foreign supplies of strawberries, respectively.

The foreign suppliers, supply 110 tons per year at the same market price of £950 per ton.

Therefore, the total quantity of strawberry supplied in the market by domestic and foreign producers, will be given by>d + S_f.

Such that = 438 tons per year.

However, with an imposition of Quota, the foreign producers can only supply 65 tons of strawberry in the market,

Therefore, the total supply of strawberry in the market would decrease, such that,

• After the imposition of the quota, the shape of the foreign supply curve would change, this is because they have to supply a fixed quantity of strawberries, irrespective of the price in the market. Therefore, the supply curve would become vertical (parallel to the Y axis), thereby, depicting that the foreign supply curve has become perfectly inelastic. (Supply is said to be perfectly inelastic, when the change in price of a commodity, does not bring about any change in its quantity supplied.)

• When an import quota is applied, it leads to an increase in the domestic prices, while the prices of foreign supplied goods decrease. As a result, after the imposition of quota, the price of foreign supplied strawberries will decrease. 

(c)

UK total supply curve with the quota is depicted as follows, which is calculated by the aggregate of domestic supply and foreign supply.

The domestic producers, supply 328 tons per year at a market price of £950 per ton, whereas, the foreign producers, supply 110 tons per year at the very same market price.

However so, once the quota is imposed, the total supply decreases, such that domestic producers supply the same amount of strawberries at £950 per ton, but the foreign producers, due to quota restrictions can only supply 65 tons of strawberry, and they do so at a lower price of £700 per ton.

The above graph shows the supply curve after the imposition of quota, the difference between the S_Q curve and S_d curve is the quota amount, which the foreign producers can supply which will be equal to (393 – tons per year).

Henceforth, the quota quantity, i.e. the quantity equal to 65 tons per year, will be supplied by foreign producers at a price of £700 per ton, however so, 328 tons per year, will be supplied by domestic producers at a price of £950 per ton.

As a result, the overall quantity supplied in the market after the imposition of quota will be lower than the quantity which was supplied without the imposition of quota.

i.e. Quantity supplied without imposition of tons per year

and, Quantity supplied after the imposition of tons per year.

Question 2

a

The above table, uses the following formulas,

• Total x Output

• Average Total Cost/Output

• Average Variable Variable Cost/Output

Revenue – Total Cost

• Marginal Revenue)_N – (Total Revenue)_N-1

• Marginal Cost)_N – (Total Cost)_N-1

(b)

The profit maximisation condition for any firm under perfect competition is when Marginal Cost (i.e. when>

However so, from the above table and graph, we can clearly see that MR never equal MC, therefore it is clear that the firm is not able to maximise its profits.

Furthermore, we can see that the firm makes losses consistently from the start till the end.

However so, the MR and MC values come very close to each other at 20 units of output.

Also, the Average Total cost curve, lies above the Average Variable cost curve, this proves the fact that total cost is always more than the variable cost.

It can also be seen that the shape of Average total cost and Average Variable cost is similar to each other.

c.

(i)

As the price is below the Average Variable Cost & Average Total cost, the firm should definitely shutdown as it will only incur loss and not be able to cover up the variable costs.

This is according to the perfect competition theory, which says that if a firm is producing at a level, where its price is below the average total cost, it will incur losses.

Now, according to this theory, a firm should shut down if the price of output is less than the average variable cost. As we can see from the table, that the price of firm’s output is less than the average variable cost from the very start and it is incurring losses relentlessly, therefore, it would be better for the firm if it did shutdown 

(ii)

According to the perfect competition theory, the short run supply curve is nothing but the MC curve which is placed over the shut down point. However, in our example, the shut down point of the firm will be at the very start, as the price is less than the average variable cost since the very inception. Therefore, the short run supply curve will be the Marginal Cost curve in the graph.

The firm will not have a long run supply curve as it will exit the market in the short run due to the fact that it will incur losses in the short run. Hence, it is not possible for one to derive the long run supply curve.

Question 3

a.

The formulae used are:

• Average Product of>

• Average Product of>

• Marginal Product of>

• Marginal Product of> 

b.

The average product of labour is the product of labour, per unit of output produced.

Whereas, the marginal product of labour is the increase in the output, as an additional unit of labour is used.

In the event that the Marginal product of Labour (MP_L) is higher than the Average product of Labour (AP_L), then by employing each extra unit of labour, productivity can be increased.

When Marginal product of labour is greater than the average product of labour, the average product of labour will increase as well. Whereas, if marginal product of labour is lower than the average product of labour, then the average product of labour will decrease.

The point of efficiency in employing labour is reached, when the average product of labour is equal to the marginal product of labour (i.e. _­AP_L>L), at this level the productivity is the maximum.

Adding labour beyond this point will lead to a lower level of productivity.

c.

Alpha (α) & Beta (β), are used to depict the elasticity of output, which is the degree of responsiveness in output with respect to a change in the input.

Alpha is the elasticity of output with respect to Labour, whereas Beta is the elasticity of output with respect to Capital.

Alpha means that 1% change in the use of labour, would lead to 0.8% increase in the output.

Beta means that if there is 1% change in the use of capital, the output would increase by 0.7%.

As, α + + which is greater than 1,

Therefore, the production function shows increasing returns to scale.

(this happens only when α + β > 1)

References

Azevedo, E.M. and Gottlieb, D. (2017), Perfect Competition in Markets With Adverse Selection. Econometrica, 85: 67-105

Kreps, David M.. "Chapter Eight: The competitive firm and perfect competition". A Course in Microeconomic Theory, Princeton: Princeton University Press, 2020, pp. 263-298

Miceli, Thomas J.. "1. Perfect Competition Versus Monopoly". The Economic Approach to Law, Third Edition, Redwood City: Stanford University Press, 2020, pp. 336-341.

Mohammad Javad Dordkeshan, Mad Nasir Shamsudin, Zainalabidin Mohamed & Alias Radam (2017) Assessing the Impact of Rice Import Quota Policy on the Malaysian Rice Sector, Journal of Food Products Marketing, 23:8, 890-900

On Cobb-Douglas production function model, AIP Conference Proceedings 2177, 020040, (2019)

Qichen Zhang, Weihong Dong, Chuanlei Wen, Tong Li,Study on factors affecting corn yield based on the Cobb-Douglas production function, Agricultural Water Management, Volume 228, 2020, 105869, ISSN 0378-3774,