hey, could someone please give me some tips for the following questions. iv got a test coming up, and one of these 4 questions will be in it.....
so i have to write 4 essays n learn it. i just need a few points to put my essay together.
thanks in advance.
1.
'Consumers maximise utility subject to a budget constraint. Firms maximise output subject to a cost constraint'.
Outline how the analysis of the firm's behaviour in terms of isoquant and isocost analysis parallels the analysis of consumer behaviour in terms of indifference curve and budget
constraint analysis.
To what extent does this type of analysis indicate the meaning of the basic economic problem.
2.
Why does trade of any type take place? Illustrate your answer by reference to each of the
following"
(a) Market exchange in which price is determined by demand and supply. (Refer in your answer to producer and consumer surplus).
(b) Exchange between two individuals based on differences in tastes given a fixed endowment of two goods.
(c) International trade.
3."In both monopoly and perfect competition the profit maximising output is at the level at
which MR = MC, but only in the latter is the optimum output level such that P = MC".
Explain the above statement by comparing the model of perfect competition with that of
monopoly.
4. "Prices contribute to the efficient production and distribution of goods and services by embodying vast amounts of knowledge not available to any individual … prices lead to
social outcomes that take account of producers' costs and consumers' preferences in ways that no individual planner could hope to accomplish".
S.E. Landsburg
(a) Outline the various roles played by prices in a market economy.
(b) In what way does the presence of externalities result in price information being
"inaccurate"? Illustrate your answer by considering:
i. The case of research and development expenditures, and
ii. The problem of traffic congestion.
All good fundamental microeconomic questions, Your question is rather open ended, so, a few tips as you requested.
1) the basic economic problem is how to allocate resources most effectively. Isoquants and isocost lines provide an analysis for maximizing output subject to fixed total cost constraint. With any other solution besides the optimal one you derive, a person/firm could be better off by moving to the optimal solution.
2) The whole reason why exchange exists is that both parties are better off with the exchange.
3) With a monopoly, output is set at a point where price is greater than marginal cost. Thus, we have a an inefficient solution; somebody is willing to pay for a good that is in excess of what it costs, at the margin, to make that good.
4) with a pure private good, the consumer pays the entire cost of the good and receives the entire benefit from consumption. With negative externalities, some person or group outside the transactions bears some of the cost. With positive externalities, some other person outside the transaction benefits.
I hope this helps. Lotsa luck.
thanks for the tips n luck, haha i'll need it.
Can you please elaborate on what you wrote Mr Economyst?
Ciao~
rofl..
Hey guy. it is just what I am dealing with. it is really a pain for me to cope with microecon. do you mind to show me what you ve done?
Certainly! Here's a more detailed explanation for each of the questions:
1. The analysis of the firm's behavior in terms of isoquant and isocost analysis is similar to the analysis of consumer behavior in terms of indifference curve and budget constraint analysis. In both cases, the objective is to maximize either utility for consumers or output for firms, while taking into account the constraints they face. Isoquant analysis shows the different combinations of inputs that can produce a certain level of output, similar to how indifference curve analysis shows the different combinations of goods that can give a certain level of utility. Isocost analysis shows the different combinations of inputs that can be obtained with a certain budget, similar to how the budget constraint analysis shows the different combinations of goods that can be obtained with a certain income.
This type of analysis indicates the meaning of the basic economic problem, which is the allocation of limited resources to satisfy unlimited wants. By studying how consumers and firms optimize their choices within their respective constraints, we gain insights into the trade-offs and decision-making processes involved in resource allocation.
2. Trade takes place because it allows individuals and firms to benefit from specialization and comparative advantage. Through market exchange, where price is determined by demand and supply, individuals can engage in transactions that result in gains from trade. Producer surplus represents the difference between the price at which producers are willing to supply a good and the price they actually receive. Consumer surplus represents the difference between the price at which consumers are willing to demand a good and the price they actually pay. Both producer and consumer surplus indicate the net benefits gained from trade.
Similarly, trade can occur between two individuals who have different tastes or preferences for certain goods. Given a fixed endowment of two goods, individuals can exchange their goods in order to increase their overall satisfaction or utility by obtaining a combination that better aligns with their preferences.
International trade occurs because it allows countries to specialize in producing goods and services in which they have a comparative advantage, and then trade with other countries for goods and services in which they have a comparative disadvantage. This enables countries to benefit from economies of scale, access a wider variety of goods, and increase overall welfare.
3. In both monopoly and perfect competition, the profit-maximizing output level occurs where marginal revenue (MR) equals marginal cost (MC). However, in perfect competition, the optimum output level is such that price (P) also equals MC.
Under perfect competition, the market is characterized by many buyers and sellers, and no individual firm has the power to influence the market price. Therefore, each firm in perfect competition operates as a price taker, taking the market price as given. The demand curve faced by each firm is perfectly elastic, which means that any deviation from the market price will result in the firm losing all of its customers. In this case, the profit-maximizing output level occurs where MR equals MC, and since P equals MR, the optimum output level is such that P equals MC.
In contrast, a monopoly exists when there is only one seller in the market with significant market power. The monopolist sets the price in the market and faces a downward-sloping demand curve. The profit-maximizing output level occurs where MR equals MC, but since P is determined by the monopolist's pricing decision, it is higher than the MC. Therefore, the optimum output level under monopoly is such that P is greater than MC, leading to an inefficient allocation of resources.
4. Prices play various roles in a market economy. They act as signals, conveying information about scarcity, demand, and costs. Prices provide incentives for market participants to allocate resources efficiently, as they reflect the relative scarcity of goods and services. Prices also provide a mechanism for resource allocation, as they guide the flow of resources to their most valued uses.
However, in the presence of externalities, which are costs or benefits resulting from economic activities that are not borne by the individuals involved in the transaction, price information may be inaccurate. Externalities can result in market failures, where prices do not fully reflect the social costs or benefits of production or consumption.
For example, in the case of research and development expenditures, such activities generate positive externalities as they often lead to knowledge spillovers and benefits for the wider economy. Since the private market does not take into account these benefits, firms may underinvest in research and development, leading to an inefficient outcome. Similarly, the problem of traffic congestion represents a negative externality, as the costs imposed on other drivers are not fully captured in the price of using the road. As a result, congestion may persist, leading to suboptimal resource allocation.
I hope this explanation helps you in preparing your essays. Good luck with your test! If you have any further questions, feel free to ask.