Question

ECONOMICS

question one, write at least 2 pages

(a) James is a well-known wine farmer from Italy who interacts with other members of the wine farmers association to agree on where to supply their farm wine. Each farming season, he gathers his fellow farmers to discuss on the best wine pricing model. As a student of Principles of Economics, assess the above scenario to discuss the above somewhat behavioral economics.

(b) Brian is a wheat farmer who sells a bushel of wheat to millers for $10.00. The miller turns the wheat into flour and then sells the flour to a baker for $30.00. The baker uses the flour to make bread and sells the bread to a student for $60.00. The student eats the bread. What is the value added by each person? Calculate GDP.

Discuss the three methods of measuring National Income?

Answer 1

(a)

It is given that a wine farmer gathers fellow wine farmers to discuss the best wine pricing model, imitates cartel behavior, where a group of independent market participants colludes with each other in order to improve their profits and dominate the market.

This practice rules out competitive pricing and promotes single price, demarcation of areas for sale for each fellow wine farmer, and defined market sharing.

(b)

Three methods of estimating national income are - Output method, income method, and expenditure method.

Output method:

Price of the final good (bread) sold to the ultimate consumer (student) = $60

Thus, $60 is the measure of national income.

Income method:

Profit earned by Brian = $10

Profit earned by miller = $30 - $10 = $20

Profit earned by baker = $60 - $30 = $30

Hence, total profit = $10 + $20 + $30 = $60

Hence, under income method, $60 is the national income

Expenditure method:

Private final consumption expenditure = $60

Hence, $60 is the national income as per expenditure method