5°B Economics Homework

Dear pupils:

The following activities are due by July 15,2009.Send your works to this e mail sandra.castro99qgmail.com

1 Work on the photocopy handed out on thrsday July 2 nd class.

2 Answer the following questions on the recent topics covered in class:

a) What is "crowding out" and why do some economists consider it important (10marks)

b) The government of a less developed countrydecides to reduce the extent of income and wealth inequality.What methods could the government use to achieve its goal? (10 marks)

c)Distinguish between a progressive tax system and a regressive tax system (10 marks)

d) Using a diagram ,explain the concept of the Laffer curve.(10 marks)

3 Read syllabus's point 4.1 , Reasons for trade, pages 384 to 406 from textbook.
Teh ,work on the following
questions:

a) Explain the benefits that can be gained as a result of international trade.(10 marks)

b) Using a diagram,explain the concept of comparative advantage. (10 marks)

4° Year B Homework

Dear pupils you must work on the following worksheets as an application of your background knowledge on the theory of the firm.Use your class notes and the book for your work .Send your works to the e mail written below.
Deadline July15.
Email: sandra.castro99@gmail.com

Worksheet n°6 Theory of the firm.

Read the following business case and then tackle the exercises that follow.

Wok,Stock and Barrel is a small family run engineering company with a production capacity of 9,000 units per year.Market research suggests that the market will take up all of this output at a price of $8.The firms cost structurs is as follows:

• direct labour $1.50
• raw materials $0.50 per unit
• other variable costs $1.00 per unit
• the total fixed costs are $27,000 a year

a) Calculate:

• AFC,
• AVC,
• ATC.
• AR

b) If the factory produced its capacity output,what would the firm's abnormal profit be?

c) Suppose that consumer tastes change away from the product and the firm has to reduce the price to $6 in order to get rid of unsold stock.What situation is the firm now in?

Worksheet n°7: The price system and the theory of the firm.

Read the case below and then tackle the exercises that follow.



The car industry : competitive or co-operative?



There are 26 firms of different sizes producing cars for the European market but the top 6 have 79% of the total market sales.Most of the others are small in global terms but Fiat,Toyota,Daimler,Chrysler,and Honda are: substantial players in world markets.The big firms would all like to produce cars for a global market but the problem is that variations in consumer tastes make it necessary to produce specific models for particular markets.

As yet there is no such thing as a world car.Not all of the major car companies have been successful in terms of profit because the industry shows signs of overcapacity and is vulnerable to economic downturns.They all want a higher volume of sales because this will alow them to obtain technical economies of scale and these can increase a firm's competitive edge.The market is clearly competitive but several firms see the creation of alliances with other firms as the quickest way to achieve growth in sales revenue and profits.General Motors has linked up with Fiat and yet both are bidding to take over Daewoo,the Korean car producer.This illustrates that oligopolists may compete in certain areas but it may be in their best interests to co-operate in others.Co-operation involves firms using some common modules,such as engines and floors,and working together on research and dvelopment.Having standardised components allows the assembly lines to produce a range of models,allowing them to quickly alter the mix if demand changes.The economic problem is how to cut the cost of production whilst increasing the range of models offered to the consumer.In a recent repot,the Competition Commission in Briatin analysed the nature of competition between the big players.It conclided that the main companies appeared to set their list prices at about the same level for equivalent models.They compete through other means,such as marketing, quality,product specifications and temporary offers.

In the world market,General Motors'alliances will give them 23% of car sales whilst the Ford group will have 20%.The fastest growing markets are predicted to be in China,Mexico,Brazil,Thailand,Poland and Russia in the next few years.Both goups will be hoping to break the Japanese monopoly of the south-east Asian market.Price will be a major factor in this competition and all the firms will be looking for production platforms in countries that offer the combination of hich productivity and low wage costs.In rich western countries the car firms may focus on the market segment where prices can be raised in order to increase the profit margin.Product innovation will continue to be a big part of competition.The trick will be to find the kind of vehicle that will be populatr in each country whilst differentiating it from similar models offered by their rivals.



a) What effect will overcapacity have on the market price of cars?



b) Explain the nature of the economies of scale that the car firms might hope to achieve.



c) Apart from economies of scale,suggest gour ways in which a car firm can try to reduce its average costs.



d) What is the danger of cutting the price of a car to increase sales?



e) Why might there be further horinzontal integration in this industry in the future?