Part A.

1. C
2. C
3. B
4. D
5. D
6. C
7. B
8. B
9. B
10. B
11. D
12. B
13. A
14. D
15. C
16. A
17. B
18. B
19. C
20. D

Part B.

Question 1.

A. negative externalities mean the cost to the third party, which is the cost of
pollution.

a.

If there is no regulation and no one owns the lake then the cost of producing the
pesticide is just the marginal private cost of the producer. Besides, there is also the
marginal cost to third party, and they have to pay the cost of pollution for every
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tonnes of pesticides produced. So there is another cost that exists that is Marginal
social benefit cost which is the sum of marginal cost of the producer plus marginal
external cost to the third party. But in the unregulated market the demand and
supply is at market equilibrium point where demand equals supply. So the
marginal cost .of pollution borne by the trout farmers is at the point of market
equilibrium. i.e. 167 dollars per tonnes of pesticides produced.

a. If the trout farms have the property rights on the lake, then the marginal
external cost is at the output level where MC+ MEC =MSB which is 3
tonnes of units of output. So the producers will pay 100 dollars per tonnes of
pesticides produced to the trout farms.

b. If the pesticides owner owns the lake and if a pollution free lake rents for
$1000 a week the producer will produce the pesticides until the amount
where the Marginal cost plus marginal external cost equals marginal social
benefit i.e. 3 tonnes per week and the farmers will pay amount deducting
marginal external cost of producing 3 units of output from the $1,000.in this
case:

Marginal external cost at unit 1= 33 dollars per tonne

at unit 2= 67 dollars per tonne

at unit 3= 100 dollars per tonne

total= 200 dollars

so farmers will pay $1,000 - 200,which is $800 to the factory for the use of the
lake.

At the efficient market the amount of Marginal social benefit( which is also the
demand curve) equals Marginal social cost( which is also the supply curve). All the
explanation above can be summarizes from the diagram below:

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 c. The quantity of pesticides produced is same whoever owns the lake .i.e. 3
tonnes of pesticides per week. If the factories owns the lake they bear the
cost of pollution because they receive lower income rent from the farmers in
compare to the pollution free lake. And if the farmers own the lake, the
factories bear the cost of pollution because they must pay the fee to the
society in the form of marginal external cost.

B.

Profits are calculated differently by accountants and the economists. In accounting

profit equals total revenue minus total expenses incurred while economic profits
equals revenue minus expenses including opportunity cost. The following example
will clarify the concept how accounting and economic profit differs.

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Suppose A is a lecturer with a salary of $60,000 a year

Apart from job A has a restaurant.

A's Revenue = $80,000

Expenses

Food: 7,000, Labor: 5,000, Rent: 7,000, Equipment: 6,000

Revenue - cost =80,000-25,000=35,000. This is the Accounting profit which is the

normal profit people talk about.

On the other hand,economic profit tells us whether it is sensible to run that firm or
business. While calculating the economic profit the revenue we earned remains the
same but economists use cost in terms of opportunity costs. Some of these
opportunity cost can be calculated in terms of dollars but some are less explicit. So
under opportunity cost we have explicit costs implicit costs. From the above
example:

Revenue = $80,000

Opportunity cost (O.C)

Explicit O.C = 25,000 (visible cost of operating the business)

Economists take into account implicit costs which are not a part of accounting
profit. Suppose the firm requires 'A' to focus full time in the business and maybe he
have to leave his job of lecturer. The implicit opportunity cost here is the salary
forgone.

So, Implicit O.C = $60,000

Now the economic profit = Revenue - (explicit OC + implicit O.C)

= -5,000

So there is a difference between Accounting and economic profit. One is positive

while the the other is negative . Negative economic profit does not mean that the
firm is losing money, it just suggests there's no sense in running this business. If
it's zero than it is not losing money but still makes room for other alternatives to

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consider in its place and if its positive then definitely making money for the
business.

Question no 2.

a. Two goods are considered as perfect substitutes if a person is willing to give up

same unit of one goods to consume more units of other goods. The indifference
curve for perfect substitute products is linear line because consumer is indifferent
to trade off one to other product because the total utility is the same. In the
question provided perfect substitute goods are:

 Coca-cola and Pepsi

 Panadol and Acetaminophen
 Eye glasses and contact lenses
 desktop computers and laptops computers

On the other hands goods are said to be complements when the use of one goods is
interrelated with the use of other and the demand for one goods generates the
demand for other. If two goods are complement and the price of one falls the
demand for other goods increases and vice-versa. The following goods are perfect
complements in the question. http://www.youtube.com/watch?v=kJ43GdU5Uzc

 Right gloves and left gloves

 Cricket balls and cricket bats
 Skis and ski poles

b. When two goods are perfect substitute the shape of the indifference curve is
linear because a consumer is indifferent between choice of products and is always
willing to give up same unit of one goods to consume one more units of other

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goods. When we calculate marginal rate of substitution for substitutes (MRS), it is
constant independent of the variables on the y and x axis because a change in good
X is replaced by an equal change in goods Y. It can be clarified from the diagram
below:

The shape of the indifference curve for the perfect complements is L shaped
which shows that these goods will be used in fixed proportion relation. MRS is
different along the different axis of the L shape indifference curve. It is Infinite ()
along the y- axis because change in Y does not have any change in X. Similarly on
the X axis MRS is 0 because the change is goods X has no change in goods Y. And
in case of the kink MRS is not defined.

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Question 3.

Given here,

Disposable income consumption expenditure

(billions of pound per year)
300 340
400 420
500 500
600 580
700 660

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a. The marginal propensity to consume is represented by MPC which is calculated
as change in consumption expenditure (C) divided by change in disposable
income (YD).

MPC = C/YD

= 580 - 500 / 600 - 500

= 0.8

b. The disposable is the sum of consumption expenditure and savings. So more the
disposable income more is the savings and if consumption expenditure is more
than the disposable income, savings is negative which is called dissaving. We can
calculate savings as YD -C.

Disposable Consumption Savings

income(YD) expenditure(C)

300 340 -40

400 420 -20

500 500 0

600 580 20

700 660 40

At the first two level f income we can see dissaving.

c. The marginal propensity to save (MPS) is the fraction of the change in

disposable income that is saved

MPS = S/ YD

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From the data above MPS can be calculated as

MPS = 20 - 0 / 600 - 500

= 20/100 = 0.2

Because an increase in disposable income is either spent on consumption or saved,

the marginal propensity to consume plus marginal propensity to save equals 1.
Therefore it follows that:

MPC + MPS =1

0.8 + 0.2 = 1

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Part C. Essay

I agree with economists who are against argument that unemployment rate in the
recent years has exerted inflationary pressure in the economy. The relationship
between price inflation and unemployment is elucidated by Philips curve. Simply
stating, it is a statistical link between price inflation and unemployment. The basic
idea of Philips curve is that as more people work the national output goes on
increasing, causing wages to increase, which in turn causes consumers to have
more money and to spend more, resulting in consumers demanding more goods
and services, finally causing the prices of goods and services to increase.
Therefore, Phillips curve shows that as inflation rise unemployment fell, and as
inflation fell unemployment rise.
From 1951 to 2013, Australia Inflation Rate averaged 5.28 % reaching the highest
point of of 23.90 % in December of 1951 and the lowest statisics of -1.30 % in
June , 1962. The inflation rate is used to measure a broad rise or fall in prices that
consumers pay for a standard basket of goods. The rate of inflation during the
recent years is depicted in the following chart:

On the other hand, the unemployment rate of Australia decreased from 5.60 % in
March , 2013 to 5.50 % in April of 2013. From 1978 to 2013, the Unemployment
Rate of Australia showed 6.96 % reaching the all time highest of 10.90 % in

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December 1992 and a lowest of 4 % in February 2008. The unemployment rate
measures the number of people actively looking for a job as a percentage of the
labour force. The recent data of unemployment rate of Australia are shown in the
following figure :

The Philips curve below shows relationship between the rate of inflation and
unemployment in Australia

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 Inflation and unemployment, Australia 1978-2013

Source: Australian Bureau of Statistics, Consumer Price Index and Labour Force.
Source: bilbo.economicoutlook.net

The figure is divided into three distinct aspects based on different time frames. The
first from March 1978 to September 1983 is defined by the starting point of the
most recent consistent Labour Force data (February 1978) and the peak
unemployment rate from the 1982 recession (September 1983).
The second period starting from December 1983 and ending at September 1993
shows the recovery phase of the 1980s and then the period to the unemployment
peak that followed the 1991 recession. The final period was from December of
1993 to December 2012.The relationship between the inflation in Australia and the
rates of unemployment and from period 1978 to 2012 can be shown with the help
of the following diagram.

The figure above depicts inverse relationship between unemployment and inflation
in Australia. Due to the the major recession that severed numerous nations in the
early 1990s, and in Australia the relationship between the annual rate of inflation
and unemployment rate moved after the recession of 1991. The recession in 1991
was severe and led to a sharp fall in the annual rate of inflation . During that
period, the companies were reducing full-time jobs and to recover it replaced it
with part-time opportunities.

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Looking at the figure (b) Australian unemployment rate is presently about 5% and
subject to fall further despite recent modest increases. But, no evidence of upward
pressure on either wages or prices is found, Some of the labour market analysts in
Australia speculate that the non-accelerating rate of inflation unemployment,
(NAIRU), could be much lower than 5% and that Australia could return to the very
low unemployment and inflation rates that was similar to the post-war era

References

Doug Mctaggart, C. F. (2010). Economics. Australia: Pearson.

L.Sexton, R. Exploring Economics, 4th edition. Retrieved from:

http://www.sparknotes.com/economics/macro/measuring2/section3.rhtml

Retrieved from: http://www.tradingeconomics.com/australia

Retrieved from:
http://search.informit.com.au/fullText;dn=111847447486005;res=IELBUS

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