Question & Answer

Are there any goods or services where consumers do not experience diminishing marginal utility?

Do you ever purchase things irrationally? If so, what are they and why is your behaviour irrational?

Compare the relative merits of

(a) quotas on output,

(b) limits to the amount of land used for a particular product and

(c) farmers being required to take land out of food production.

What would be the amount paid out in Figure 3.14 if instead of the government buying the surpluses, export subsidies were given to farmers so as to guarantee them a price (plus subsidy) of P_min?

How would Figure 3.3 change if the government were able to sell the surplus food on the world market?

Why don’t farmers benefit from a high income elasticity of demand for convenience foods?

Why is the supply curve drawn as a vertical straight line in Figure 3.10?

What are the arguments for and against making the sale of alcoholic drinks illegal? To what extent can an economist help to resolve the issue?

Under what circumstances would making a product illegal (a) cause a fall in its price; (b) cause the quantity sold to fall to zero?

Schooling is free in state schools in most countries. If parents are given a choice of schools for their children, there will be a shortage of places at popular schools (the analysis will be the same as in Figure 3.8, with the number of places in a given school measured on the horizontal axis). What methods could be used for dealing with this shortage? What are their relative merits?

Demonstrate with a supply and demand curve diagram the incidence of a subsidy when demand is price elastic and supply is price inelastic.

Supply tends to be more elastic in the long run than in the short run. Assume that a tax is imposed on a good that was previously untaxed. How will the incidence of this tax change as time passes? How will the incidence be affected if demand too becomes more elastic over time?

(Looking at the Maths) Assuming that the pre-tax equations were:

      Q_D = 120 – 10P and Q_S = 10 + 5P

What is (a) the consumer share of the tax and (b) the producer share?

Every year the number of people who want to run the London Marathon far exceeds the number of places available. For example, 457 861 applicants were willing to pay £39 to enter the 2020 event. Unfortunately, there were only 17 500 places for these applicants and so the majority ended up very disappointed. Find out the different methods used by the organisers to allocate all 40 000 places and consider their advantages and disadvantages.

Draw a supply and demand diagram with the price of labour (the wage rate) on the vertical axis and the quantity of labour (the number of workers) on the horizontal axis. What will happen to employment if the government raises wages from the equilibrium to some minimum wage above the equilibrium?

(Threshold Concept 7) 1. What market failures could be corrected by the use of welfare benefits? Does the payment of such benefits create any problems for society?

(Threshold Concept 7) 2. Assume that the government sees litter as a market failure that requires government action. Give some examples of policies it could adopt to reduce litter.

Give some examples of decisions you have taken recently that were made under conditions of uncertainty. With hindsight do you think you made the right decisions?

Redraw Figures 2.23 and 2.24 assuming that the initial change in price was caused by a shift in the supply curve.

Estate agents consistently ‘talk up’ the housing market, often predicting price rises when other commentators are more cautious. Explain why they might have a vested interest in doing so.

In Figures 2.21 and 2.22, the initial change in price was caused by a shift in the demand curve. Redraw these two diagrams to illustrate the situation where the initial change in price was caused by a shift in the supply curve (as would be the case in the wheat market that we have just considered).

(Threshold Concept 6) 1. What would you understand by the ‘wage elasticity of demand for labour’? How would the magnitude of this elasticity affect the working of the market for (a) plumbers and (b) footballers?

(Threshold Concept 6) 2. How can income elasticity of demand help explain how the structure of economies changes over the years.

Which are likely to have the highest cross elasticity of demand: two brands of coffee, or coffee and tea?

Look ahead to Table 3.1. It shows the income elasticity of demand for various foodstuffs. Explain the difference in the figures for milk, fish and fruit juice..

(Looking at the Maths) Given the following supply schedule:

(a)  Draw the supply curve.

(b)  Using the arc method calculate price elasticity of supply (i) between P = 2 and P = 4;

                     (ii) between P = 8 and P = 10

(c)  Using the point method calculate price elasticity of supply at P = 6.

(d)  Does the elasticity of the supply curve increase or decrease as P and Q increase? Why?

(e)  What would be the answer to (d) if the supply curve had been a straight line but intersecting the horizontal axis to the right of the origin?

Calculate price elasticity of demand between points n and l using the arc method. Does this give the same answer as by the point method? Would it if the demand curve were actually curved?