Week 10 Business Economics – seminar exercises

Once again, I do not need you to hand these in before we meet for the seminar – but you
might want to test your own progress by seeing how much you can do before we discuss
them together and you can always compare notes with those in your breakout group.
After the seminar, if you attempt to answer one of the questions under exam conditions (in
15 minutes without a book or any other help), I will mark it for you if you send it to me.
Question One

Think about the demand for the three game consoles: Xbox, PS3 and Wii. Explain the effect of the
following events on the demand for Xbox games and the quantity of Xbox games demanded, other
things remaining the same. Use appropriate diagrams to help you explain your answers.

a. The price of an Xbox falls

b. The prices of a PS3 and an Wii fall
c. The number of people writing and producing Xbox games increases
d. Consumers’ incomes increase
e. Programmers who write code for Xbox games become more costly to hire

Question two
“KeepitClean Ltd” hires refugees on the black market to clean houses and pays them €240 per
week for a 40 hour week (i.e. €6.00 per hour, which is less than the minimum wage). It leases
the equipment it needs at €500 per week. The following table sets out its total product schedule.

Labour Output
(refugees employed per week (houses cleaned per week)
1 5
2 13
3 23
4 30
5 35
6 35

a. If “KeepitClean” cleans 30 houses in a week, calculate:

a. total cost
b. average total cost
c. marginal cost
b. At what output (in terms of houses cleaned per week) is average total cost at its minimum?
c. Explain why the gap between total cost and total variable cost is the same no matter how
many houses are painted.
d. What is the relationship between diminishing returns to labour and marginal cost? (Assume
Labour is the only variable cost and all other costs are fixed).
a. “KeepitClean” is paying less than the legal minimum wage, is this;
b. Better than no job?
c. Unfair?
d. A question for politicians, not economists?
Question three

Hot Air Balloon Rides is a single price monopoly. Columns 1 and 2 of the table set out the market
demand schedule and columns 2 and 3 set out the total cost schedule:

Price (€ per ride) Quantity demanded (rides per Total Cost (€ per month)
month)
200 0 80
180 1 160
160 2 260
140 3 380
120 4 520
100 5 680

a. Construct Hot Air’s total revenue, marginal revenue and marginal cost schedules
b. Draw a graph of the market demand curve and Hot Air’s marginal revenue curve
c. Find Hot Air’s profit maximising output and price; and calculate the firm’s economic profit
d. What conditions are necessary to maintain Hot Air’s monopoly position?
e. Explain briefly how Hot Air Balloon Rides could increase profits if it could practice price
discrimination.

Question four
The demand and supply schedules for rice are:

Price (£ per box) Quantity demanded (boxes per Quantity supplied (boxes per
week) week)

3.00 3,500 500

3.50 3,250 1,000
4.00 3,000 1,500
4.50 2,750 2,000
5.00 2,500 2,500
5.50 2,250 3,000
6.00 2,000 3,500

Using the data in this schedule:

a. Calculate the price elasticity of demand for rice:-

i. as price increases from £3.50 to £4.50 – and also:-
ii. as price increases from £5.00 to £6.00
b. According to the above schedules, the market for rice will be at equilibrium at a price of
£5.00 per box and a quantity of 2,500 boxes.
c. Using clearly drawn diagrams show the new equilibrium price and quantity:
i. if the government introduces a production subsidy of £0.30 a box
ii. If the government introduces a tax of £1.50 per box.