Topic: Economy

Question (1): (In your response, be sure to draw a supply/demand graph with clearly labeled axis and curves. Be as specific as possible.)

Dynamic interaction are continuously taking place between the supply and the demand of the market under free market economies . As a result the equilibrium price and continuously adjust to the vibrations and shocks from both sides of the market. The last Eid holidays about half a million visitors came to dubai to celebrate Eid. As a demand for hotel rooms and restaurant meals increased during that period. While was a significant increase in price for an average hotel room, restaurant meal price did not increase at all. Based on the above background answer the following two questions. (2.5x 2)marks

(A) use comparative statics as a tool to analyze the hotel room market. Compare and contrast the relative elasticities of demand and supply of hotel rooms. What are the underlying factors that account for elasticities of demand and supply for any good or product? List and explain at least three factors for each of elasticity of demand and elasticity of supply.

(B) Evaluate the market for restaurant meals using the comparative statics as a tool to analyze the market dynamics. In the face of an increasing demand why the restaurant price didn’t rise ?

Question (2) :(In your response, be sure to draw a supply/demand graph with clearly labeled axis and curves. Be as specific as possible.)

This question deals with the concept of opportunity costs and the comparative advantage. John can produce 20 cups or 30 plates in a day and Peter can produce 15 cups and 45 plates . (1+1+1+2=5)

(A) Identify the opportunity cost of both of them in production of each of the two items.

(B) Strategic decisions are made based on the evaluation of comparative advantages. In this example , identify the respective comparative advantages of two persons.

(C) clearly analyze how these two individuals can make gains from trade and identify the age of possible negotiations and predict the outcomes. Will the combined daily output of cups and plates increase if they trade and specialize? Provide justifications for your conclusions.

(D) A manager has to make optimum utilization of scare resources, and in process he has to make difficult decisions about allocating resources, such as man power (skilled and Un skilled workers), space, and financial resources. Using specific examples, clearly explain the concept of opportunity cost is used by a manager to make his decisions to maximize profits for his organization.

Question (3):(In your response, be sure to draw a supply/demand graph with clearly labeled axis and curves. Be as specific as possible.)

Apples and oranges are substitutes. A freeze in Florida destroys most of the orange crop. What would you expect to happen to the market for the following:

a. Oranges?

b. Apples?

c. Orange juice?

Question (4): (In your response, be sure to draw a supply/demand graph with clearly labeled axis and curves. Be as specific as possible.)

In 1987 a 386 PC sold at a price of $6,995. Five years later, you could purchase essentially the same computer for $1,495. Today, you can purchase a faster Pentium for a fraction of the initial price of a slower 386 PC.

a. Why have computer prices fallen so dramatically?

b. What impact, if any, do you think the growing use of the Internet will have on the price of computers?

Question (5): (In your response, be sure to draw a supply/demand graph with clearly labeled axis and curves. Be as specific as possible)

Consider the market for two goods that are substitutes, such as pens and pencils. If a technological breakthrough reduced the cost of producing pens:

a. What would happen to the supply of pens?

b. What would happen to the price of pens and the quantity exchanged?

c. What effect would this change in the price of pens have on the market for pencils?

Question (6): (In your response, be sure to draw a supply/demand graph with clearly labeled axis and curves. Be as specific as possible)

“The price elasticity of demand and the price elasticity of supply for many primary commodities tend to be low”.

a. Explain, using diagrams, what is meant by this statement, and how this contributes to the problem of price instability for primary commodities and resources.

b. West Texas Intermediate crude oil price has declined from a high of more than $100 to about $50 a barrel. Using your analysis in Part (a) of this question explain what are the factors that are contributing to this sudden decline and increased volatility.

Question (7): (In your response, be sure to draw a supply/demand graph with clearly labeled axis and curves. Be as specific as possible)

Bun Master Bakery makes muffins and sells by the dozens. It has lowered its price from $5.00 to $4.00 for a box of muffins. As a result the number of muffin boxes sold increased from 200 boxes per day to 230 boxes per day. (Assume that no other factors besides the price have affected sales.)

(a) What is the price elasticity of muffins in the case? Calculate using Mid-Point formula.

(b) Is demand elastic or inelastic

Question (8) Explain why price elasticity of demand declines as we move downward along a straight line demand curve.

 

 

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