Question

1. Long-run real interest rates are expected to increase. An accountant and an MBA student (who just finished his course of Managerial Economics) were interviewed regarding the effect of this increase. Keeping all else constant, their answer would likely differ. How do you guess the interviewed will answer? Does the difference in response matters? If yes, why? If not, why not? (20 points)

2. Many cities have experienced a substantial decrease in the amount of garbage being collected after they changed from levying a flat tax on each household to a system where the homeowner is charged a fee for each bag or can picked up. Would this have been the result of a change in demand or a change in the quantity demanded? Would you recommend the flat fee or the fee per bag? Why? (20 points)

3. Define three types of elasticity of demand. Indicate how you would use information from recent research paid by your company that the own price elasticity of your product is -1.2 and not -0.8 as previously thought. (20 points)

4. A magazine, in an article dealing with management, wrote, “When he took over the furniture factory three years ago … [the manager] realized almost immediately that it was throwing away at least $100,000 a year worth of wood scrap. Within a few weeks, he set up a task force of managers and workers to deal with the problem. And within a few months, they reduced the amount of scrap to $7,000 worth [per year].” Was this necessarily an economically efficient move? Explain your answer. (20 points)

5. If all the assumptions of perfect competition hold, why would firms in such an industry have little incentive to carry out technological change or much research and development? What conditions would encourage research and development in any of the competitive industries? (20 points)

Answer 1

1. Certainly, there is different between accountant’s answer and MBA student’s answer. Because accountant and Economics have different emphasis on the long-run real interest rates which rate is related to the inflation rate. Accountant would focus on the data demonstrated by the accounting statements and adjust the data cause by the raise of the interest rates. MBA student would focus on the principle of real interest rate. The formula of real interest rate = Nominal interest rate - Expected inflation, change in the long run real interest rates would mean permanent changes that will affect the interest rates. MBA student would consider the changed of output of firm and pricing power of the firm which influenced by real interest rate and the macro control for the firm.Yes, there is the emphasis on real vs. nominal interest rates, and also the difference in explicit and implicit costs.

2. It would reduce their solid waste by the traditionally adopted the tax as mechanism to encourage the residence. The fees charging have seen more rapid reduction in solid waste by household than the tax mechanism. And the garbage fees charge will cause the change in bag demand. Rise in price will result in decrease in demand based on the theory of demand and supply.No, there is a decrease in the quantity demanded given an increase in price.This is the law of demand.The garbage fee or price will goes up when the garbage is charging for more bag. People will throw less garbage so as to reduce cost If ihe garbage fee increased. Moreover,the fees charged are voluntary in nature rather the tax compulsion nature.

3. There are three types of Elasticity of Demand :

1. Price Elasticity of Demand: Price elasticity of demand is the The ratio of proportionate change in the quantity demanded of a good caused by a given proportionate change in price. The formula for measuring price elasticity of demand is:

2. Income Elasticity of Demand: Income elasticity of demand is the ratio of percentage change in the quantity of a good purchased, per unit of time to a percentage change in the income of a consumer.The formula for measuring the income elasticity of demand :

3. Cross Elasticity of Demand: Cross elasticity of demand is the percentage change in the demand of one good as a result of the percentage change in the price of another good.The formula for measuring the Cross elasticity of demand :

Price Elasticity Of demand are of five types. They are as follows along with their coefficient:

• Perfectly inelastic(E_d = 0)
• Relatively inelastic (-1 < E_d < 0)
• Unitary elastic (E_d = -1)
• Relatively elastic ( -∞ < E_d < -1)
• Perfectly elastic (E_d is − ∞)

Now, recent research paid by your company that the own price elasticity of your product is -1.2 and not -0.8 as previously thought. So it can be said said that according to the research the price elasticity of demand is Relatively elastic instead of Relatively inealstic. So product is Relatively elastic means the percentage change in quantity demanded is greater than that in price. Hence, when the price is raised, the total revenue falls. But we thought that the product will be Relatively inelastic which means the percentage change in quantity demanded is smaller than that in price. Hence, when the price is raised, the total revenue increases.