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Kochi And Production Efficiency Or Allocative Efficiency Economics Essay

What Dr. Kochi talked is allocative efficiency, because we know that when the goods or services are produced at the lowest possible cost and the quantity that provide the greatest possible benefit, then we reach the allocative efficiency. In this case, Dr. Kochi reported that current tools can eliminate malaria cases 90 percent, the rest 10 percent is a hard work and very expensive. As we can see, eliminating 90 percent of malaria cases is the greatest possible benefit in the lowest possible cost.

(b) Make a graph with the percentage of malaria cases eliminated on the x-axis and the marginal cost and marginal benefit of driving down malaria cases on the y-axis. On your graph:

i. Draw a marginal cost curve that is consistent with Dr. Kochi’s opinion reported in the news clip.

ii. Draw a marginal benefit curve that is consistent with Dr. Kochi’s opinion reported in the news clip.

iii. Identify the quantity of malaria eradicated that achieves allocative efficiency.

Malaria case eliminated (percent)

Marginal cost and marginal benefit of driving down malaria cases

0

90

(iii)

100

MB (ii)

MC (i)

Question 2

(a) Draw a graph of the market for downloads of the artist, Avril Lavigne, with a price of 99¢ per track from iTunes and a zero price from other sites. Show consumer surplus and producer surplus and, if there is one, the deadweight loss.

(b)If the price of downloads of Avril Lavigne from all sites was 25¢, how would consumer surplus, producer surplus, and the deadweight loss change?

(c) When and why are consumers likely to be willing to pay a price above zero to download a track?

(d)Construct the market for Avril Lavigne’s album CD. What is the effect of the fall in the price of downloads (as expressed in (b)) on the market for her album CD?

(e) What is the effect on consumer surplus and producer surplus on the Avril Lavigne’s CD market?

Question 3

(a) The price of HD DVD player on eBay? Indicate why you believe the price would increase/decrease/stay constant?

The cost of producing HD DVD will fall when Toshiba announced their new achievement for this technology, then the minimum price that Toshiba produce each quantity of HD DVD decreases, so it will increase the supply of HD DVD, the supply curve will shift to right, also the demand is unchanged. As a result, the price of HD DVD will be increased.

(b) The price of Blu-ray players?

The state and quality of Blu-ray will trend to be developed after Toshiba succeed in this technology. In other words, the monopoly of this technology has been broken, and the number of Blu-ray player suppliers is now increasing. In this situation, the supply of Blu-ray players goes up, so the supply curve will shift rightward, the demand remains the same. Hence, the price of Blu-ray players will be expected to decrease.

(c) The demand and supply for Blu-ray format movies?

From above, the price of Blu-ray player is expected to go down. And also Blu-ray player is the complement of Blu-ray format movie in production. Therefore, the demand for Blu-ray format movie will increase, and the supply for it will decrease as well.

(d) The market price and quantity of Blu-ray format movies?

When the demand increase and supply decrease, the market equilibrium price of Blu-ray format movie will raise, however, the equilibrium quantity is unknown because it depends on extend of increasing demand and decreasing supply. If increasing demand is larger than decreasing supply, the quantity will increase. On the contrary, if decreasing supply larger than increasing demand, then it will decrease quantity.

The table below sets out the demand schedule for Blu-ray players.

(a) What happens to total revenue if the price falls

(i) From $400 to $350 a player?

When the price is $400 per player, the quantity of players demanded per year is 30 million, the total revenue (TR) = 400*30=12000 million

When the price is $350 per player, the quantity of players demanded per year is 35 million, the total revenue (TR) = 350*35=12250 million

Hence, if the price decreases from $400 to $350 a player, then total revenue will grow.

(ii) From $350 to $300 a player?

When the price is $350 per player, the total revenue is 12250 million. (Proven)

When the price is $300 per player, the quantity of players demanded per year is 40 million, the total revenue (TR) = 300*40=12000 million

Hence, if the price decreases from $350 to $300 a player, then total revenue will reduce.

(b) What is the responsiveness of quantity demanded to the price decreases as expressed in (i) and (ii) above?

The quantity demanded of players increase when the per unit price of player decrease,

(c) At what price is total revenue at a maximum?

When the price is $350 per player, the total revenue is largest, it reaches the maximum value.

(d) At an average price of $350, is the demand for players elastic, inelastic, or unit elastic?

Because when the price decreases to $350 per player, the total revenue stops increase, it begins to decrease, so we can say the demand for players is unit elastic at price of $350.

Question 4

Quantity

(Per week)

Price (dollars per carton of alcopops)

0

P=0.5Q (S)

P=200-0.5Q (D)

200

100

E

180

110

90

PS

PB

PE

QE

$20 tax

Tax

Revenue(a) Calculate the amount of tax revenue collected by the government.

∵The demand function is P = 200-0.5Q, and the supply function is P=0.5Q

∴200-0.5Q=0.5Q → Q = 200 → P=0.5*200=100

∴Equilibrium price (PE) = $100/unit; Equilibrium quantity (QE) = 200 units

∵Tax = $20/unit

∴The sellers’ price (PS) = $90/unit; the buyers’ price (PB) = $110/unit

∴The quantity with taxation = 90÷0.5= 180 units

∴Tax revenue = T*Q = $20 *180 = $3600

(b) Calculate the distribution of tax payments between buyers and sellers.

Before taxation, Equilibrium price (PE) = $100/unit

With taxation, the sellers’ price (PS) = $90/unit; the buyers’ price (PB) = $110/unit

So with the taxation of $20/unit, buyers pay $10 per unit more and sellers receive $10 per unit less. Because the quantity with taxation is 180 units, the tax paid by sellers equals to 10*180= $1800, similarly, the tax paid by buyers is also $1800.

Quantity

(Per week)

Price

0

S

D

200

100

E0

180

110

90

S + tax on sellers

Po

Qo

E1(c) Based on the equilibrium price and quantity consumed before and after the tax, calculate the elasticity of demand for ‘alcopops’.

Before tax, at original equilibrium point E0, the equilibrium price is 100 and quantity is 200.

After tax, supply decreases and the supply curve shift to the left (S+tax on sellers), meanwhile, the equilibrium point move to E1. At new equilibrium point E1, the equilibrium price goes up to 110 and the quantity reduces to 180. Now we can use the point formula to calculate the price elasticity of demand for alcopops.

E = (Po ÷ Qo) * (△Q ÷ △P) = (100 ÷ 200) * [(180-200) ÷ (110-100)] = 0.5 * [(-20) ÷ 10]

= 0.5 * (-2) = -1

Finally, we should use absolute value for the result, so the price elasticity of demand for alcopops equals to 1.

(d) How do you expect that the tax on ‘alcopops’ will impact on the markets for beer and spirits?

Since the price elasticity of demand for alcopops is 1, we can say the alcopops has unit elastic demand. Therefore, we may expect that the percentage of alcopops demand will be the same with its percentage of price change. Because beer and spirits are substitutes of alcopops, when the price of alcopops increase, the demand for beer and spirits will rise in the market, and the cross elastic demand for beer and spirits with the price of alcopops is positive, so both of their price and quantity will change at the same direction.

Question 5

(a) What is the type of price control used by the Chinese government? In your answer, explain the difference between the types of price controls.

In the news report, the Chinese government fixed the fuel prices below the market equilibrium price, so they utilize the price ceilings to control the price on coal, petrol and diesel. A price ceiling is the rule of a legal highest price to sell a good in the market. On the contrary, a price floor is the rule of a legal lowest price to sell a good in the market.

(b) Explain, with the aid of the supply and demand model, how China’s price controls have created shortages or surpluses in the markets for coal, petrol, and diesel.

Since the Chinese government set the market price of coal, petrol and diesel below the market equilibrium price, it causes some fuel suppliers are not willing to provide more fuel in the market and even cut down the amount of supply which is mentioned in the news, so it will decrease the quantity of fuel supplied, then the quantity demand of coal, petrol and diesel will exceed the quantity supply of them. In this situation, there will be no enough fuel to satisfy some buyers who cannot find any fuel due to the price ceiling, it makes them worse off and the shortage of fuel is created in the Chinese fuel market. (See below)

Quantity

Price

0

Supply

Price Ceiling

Demand

QE

PE

E

Shortage

QD

QS

(c) Explain, on the same model used in (b), how China’s price controls have changed consumer surplus, producer surplus, total surplus, and the deadweight loss in the markets for coal, petrol, and diesel.

Quantity

Price

0

Supply

Price Ceiling

Demand

QE

PE

E

QD

QS

Consumer surplus

Deadweight loss

Producer surplusWhen the price ceiling of coal, petrol and diesel set below the market equilibrium price, it will reduce the quantity supply of them, then producer surplus and consumer surplus will decrease. Because the total surplus is the total of consumer surplus and producer surplus, so the total surplus will be also reduced. The deadweight loss is equal to the decrease in total surplus, so it will be extended in the market.

(d) Discuss the effect of China’s price controls on the market for coal, petrol and diesel outside China.

China is not a main country of fuel exporter; however, it relies on some imported fuel from other countries, If Chinese government keeps a low price policy of fuel and regardless of floating market conditions, it will hamper some fuel imports to China. With the huge rate of consumption in the world, it is also possible to make the price of global fuel goes down in the short run. But these factors do not hold water that China’s fuel price ceiling will control the global fuel price, because the fuel price in global market is mainly controlled by some fuel exporting countries, such as Saudi Arabia, Iran and other Middle-East countries, also it is controlled by some international organizations, e.g. OPEC.

Question 6

(a) What is the marginal private benefit, marginal social cost and marginal social benefit of each fishing boat? Describe each of these marginal concepts and outline their relationships using the case of orange roughy.

Marginal private benefit (MB) is the quantity of orange roughy caught by a boat; the quantity depends on the total number of boats. For instance, to calculate the marginal private benefit when the number of boats is 5, we should divide the value of orange roughy caught (500) by the number of boats (5), which equals to $100 thousands per month.

The marginal social cost (MSC) is the sum of marginal private cost (MC) of operating a coat and marginal external cost, because the marginal cost of operating a coat is $100,000 per month and there is no external cost, so marginal social cost equals to $100 thousands per month.

Marginal social benefit (MSB) is the total increased value of orange roughy caught that result from an addition boat. To calculate, the marginal social benefit is the change in the value of orange roughy caught divided by the change in the number of boats, so when the numbers of boats increase from 0 to 5 and the value of orange roughy caught increase from 0 to 500, then the marginal social benefit should equal to (500-0) ÷ (5-0) = $100 thousands per month.

(b) With no regulation of orange roughy fishing, what is the equilibrium number of boats and the value of fish caught? Does overfishing occur when there are no regulations of orange roughy fishing in place?

The equilibrium number of boats is the number, at which marginal private benefit (MB) equals to marginal private cost (MC) of operating a boat. Since the marginal private cost of operating a boat is $100,000 per month, the marginal private benefit equals to $100,000 when the number of boats is 20.

Overfishing will occur when the maximum sustainable catch decrease. In the table, when the number of boats is the equilibrium number of 20, the value of fish caught is not greater with a smaller number of boats. Therefore, with no regulations of orange roughy fishing, the overfishing does not occur.

(c) What is the efficient number of boats value of orange roughy catch?

The number of boats is efficient when the marginal social benefit (MSB) equals to marginal social cost (MSC) of that boats. We have known that the marginal social cost of a boat is $100,000. And the marginal social benefit is $100,000 when the number of boats is 20.

(d) What is the efficient value of the orange roughy catch?

When the number of boats is 20, the efficient value of the orange roughy catch is $2,000 thousands per month, which is the highest value of orange roughy catch when MSC equals to MSB.

(e) What are ITQs? Why are they sometimes more effective than applying the Coase Theorem?

ITQs are the individual transferable quotas which are to limit the individual who is free to sell the quota to other person. ITQs are the most effective tool for solving overfishing and achieving an efficient use of the stock of fish. Coase theorem is the claim that private transaction is efficient if property rights exist, if there is only a small number of parties and if the transaction cost is low.

(f) Do you think that concerned citizens of Australia and New Zealand and the fishing industry will agree on the ITQs?

The citizens of Australia and New Zealand may not in favor of the ITQs at the beginning, because the price of fish is lower when overfishing. However, the overfishing will reduce the fish stock in the ocean, so the citizens may prefer the catch remain at sustainable level and support ITQs after they realize this problem. The fishing industry will agree on the ITQs, because at efficient quantity level, the marginal private benefit of catching more fish equals to the marginal private cost of operating a boat, so the fisherman’s revenue is not increased by catching more.

(g) If Australia and New Zealand issued ITQs so that the total catch of orange roughy will be equal to the efficient quantity, what would be the price of the ITQ?

The market price of the ITQ equals to the marginal private benefit (MB) per boat when the number of boats is 20 which is the boat efficient quantity, minus the marginal cost of operating a boat. From the table, we may find the marginal private benefit per boat is $100,000 when the number of boats is 20, and the marginal cost of operating a boat is also $100,000. Hence, the price of the ITQ should equal to $100,000 – $100,000 = 0



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