1. What economic concepts can the Production Possibility Frontier (PPF) reminds
ID: 1185695 • Letter: 1
Question
1. What economic concepts can the Production Possibility Frontier (PPF) reminds
you? List at least three and explain. (12 Points)
2. What are examples of public goods? Discuss why a public good can cause market
failure and how can government interventions correct the failure. (10 Points).
3. Suppose a market research team has come up with the demand and supply
schedules for gasoline in the table below. Use these data to analyze the situation
in the market for gasoline.
Price
(cents per gallon)
Quantity demanded
(thousands of gallons per week)
Quantity supplied
(thousands of gallons per week)
90 80 20
100 70 30
110 60 40
120 50 50
130 40 60
140 30 70
150 20 80
a) What are the equilibrium price and quantity? (10 points)
b) Suppose the price is $1.00. Describe the situation in the market and explain how
the market adjusts. (10 points)
c) The market research report also predicts that a rise in the price of crude oil will
decrease the supply of gasoline by 20,000 gallons a week at each price. Suppose the
report predicts correctly, how will the market for gasoline be affected? (10 points)
2
4. Based on the information provided, answer the following questions.
Explanation / Answer
QUESTION1------UNLIMITED WANTS
A basic condition of human existence which means that people are never totally satisfied with the quantity and variety of goods and services the consume. It means that people never get enough, that there's always something else that they would want or need
LIMITED RESOURCES
Scarcity is the fundamental economic problem of having seemingly unlimited human wants and needs in a world of limited resources. It states that society has insufficient productive resources to fulfill all human wants and needs. Alternatively, scarcity implies that not all of society's goals can be pursued at the same time; trade-offs are made of one good against others.
RESOURCES HAVE ALTERNATIVE USES
RESOURCES HAVE ALTERNATE USES
RESOURCES ARE CAPABLE OF BEING USED IN DIFFERENT WAYS. FOR EXAMPLE A PIECE OF LAND CAN BE USED TO CULIVATE DIFFERENT FOOD GRAINS, BUILDING RESIDENTIAL COMPLEX, DEVELOP A SCHOOL. THE SERVICES OF A LABOUR CAN BE USED TO IRRIGATE A FIELD, SELL FRUITS. SO HENCE WE SEE RESOURCES HAVE ALTERNATE USES.
SO THERE IS PROBLEM OF CHOICE BETWEEN UNLIMITED WANTS AND LIMTED RESOURCES WHICH HAVE ALTERNATIVE USES.
Q2------Examples of public goods
Examples of public goods include flood control systems, street lighting and national defence. Public goods (in fact most of them are services!) are not normally provided by the private sector in an economy. Partly this is because of the free-ride problem.
Public goods and market failure
Why is there market failure with public goods? The main reason is that private sector producers will not supply public goods to people because they cannot be sure of making an economic profit. This is due to the characteristics of public goods outlined earlier. Consumers can take a free ride without having to pay for the good or service.
The obvious solution is that these goods are provided collectively by the government, and then financed through taxation of individual households and businesses.
Q3------
A)EQUILIBRIUM PRICE IS 120 CENTS ANDEQUILIBRIUM QUANTITY IS 50
B)THEN DEMAND > SUPPLY. IT MEANS THERE WILL BE SCARECITY OF GOOD IN THE MARKET. TO SATISFY THE NEED PEOPLE WILL BE READY TO PAY MORE. IT IS A CASE OF EXCESS DEMAND. IT WILL RESULT IN COMPITION AMONG THE BUYERS AS EACH WOULD LIKE TO HAVE THE COMMODITY. THIS WOULD DRIVE THE MARKET PRICE UPWARD. RISING PRICE WILL REDUCE THE MARKET DEMAND. SIMULTANEOUSLY THE PRICE INCREASE MOTIVTES THE SELLERS TO INCREASE THE SUPPLY IN THE MARKET. PRICE WILL KEEP RISING AS LONG AS THERE IS EXCESS DEMAND. EVENTUALLY THE PRICE RISES TO A LEVEL WHERE MARKET DEMAND IS EQUAL TO SUPPLY IN THIS WAY EQUILIBRIUM PRICE IS ATTAINED.
C) THIS WILL CAUSE A DISEQUILIBRIUM BETWEEN SUPPLY AND DEAMND. SHORT SUPPLY WILL RESULT IN HIGH PRICES. THERE WILL BE INFLATION IN THE GASOLINE ARKET DUE TO SHORT SUPPLY OR EXCESS DEMAND
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