TUTORIAL 6 (WEEK 7)

CLASS ACTIVITIES:

Recap Lecture 6

Tutorial exercises

LEARNING OUTCOMES:

Understand the concept of elasticity, in general and why it is measured in proportionate or percentage terms.

Measure elasticity by using the mid-point (average) method.

Understand the specific concepts of price elasticity of supply.

Identify the determinants of the price elasticity of supply and explain why they affect elasticity the way they do.

TUTORIAL EXERCISES

Question 1

Define price elasticity of supply.

Question 2

Explain and illustrate the different types/degrees of price elasticity of supply.

Question 3

In each of the following cases, do you think the price elasticity of supply is;

(i) perfectly elastic; (ii) perfectly inelastic; (iii) elastic, but not perfectly elastic; or (iv) inelastic, but not perfectly inelastic? Explain using a diagram.

1. An increase in demand this summer for luxury cruises leads to a huge jump in the sales price of a

cabin on the Queen Mary 2.

1. The price of a kilowatt of electricity is the same during periods of high electricity demand as

during periods of low electricity demand.

1. Fewer people want to fly during February than during any other month. The airlines cancel about 10% of their flights as ticket prices fall about 20% during this month.
2. Owners of vacation homes in Maine rent them out during the summer. Due to the soft economy this year, a 30% decline in the price of a vacation rental leads more than half of homeowners to occupy their vacation homes themselves during the summer.

Question 4

In November 1998 Vincent van Gogh's self-portrait sold at auction for $71.5 million. Portray this sale in a demand and supply diagram and comment on the elasticity of supply. Comedian George Carlin once mused, "If a painting can be forged well enough to fool some experts, why is the original so valuable?" Illustrate to answer the question.

TUTORIAL 7 (WEEK 8)

CLASS ACTIVITIES:

Recap Lecture 7

Tutorial exercises

LEARNING OUTCOMES:

Understand how the 'rational' economic behavior of the equating of marginal benefits and marginal costs by all people, in all situations, could lead to social efficient general equilibrium.

Describe the concept of consumer surplus and producer surplus.

Identify the various types of market failure and how they lead to production and consumption being either above or below the social optimum.

Understand the concept of deadweight welfare loss and demonstrate it graphically.

Identify the various forms of intervention open to a government.

Explain how price ceiling and price floor affect the market equilibrium.

Describe the effects of a tax and its connection with the price elasticity of demand.

Identify the possible disadvantages of taxes and subsidies as a means of reallocating resources.

TUTORIAL EXERCISES

Question 1

The graph below represents the market for walnuts. Identify the values of the marginal benefit (MB) and the marginal cost (MC) at the output levels of 2,000 pounds, 4,000 pounds and 6,000 pounds. At each of these output levels, state whether output is inefficiently high, inefficiently low, or economically efficient.

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