ECON1010 Sample Paper

how to calculate opportunity cost?

OC^place/person_product = productivity of other product/productivity of product

what is absolute advantage?

having higher productivity for each product

when should someone specialise (using theory of comparative advantage)?

whoever has the lower opportunity cost per product

when should someone sell their product?

if P* > their opportunity cost

when should someone want to buy a product?

when P* < their opportunity cost

how to find a consumption bundle with trade outside a PPF?

1. split the labour hours provided into 2

2. find Q_RICE and Q_FISH using hours

what is the relationship between supply and demand?

inversely proportional - as supply decreases, demand increases, hence price increases

what are substitutes?

alternative products or services that can be used in place of one another to satisfy a similar consumer need or want

what happens to the substitute when you increase the price of a product?

increase in substitute quantity

how to draw supply and demand graphs?

supply: positive linear

demand: negative linear

how to find price elasticity demand?

PED = %ΔQ_D/%ΔP

= 1/slope x P/Q

what is elastic demand?

consumer demand changes significantly when prices or economic factors change, where |PED| > 1

what is inelastic demand?

demand stays relatively constant despite price fluctuations, where |PED| < 1

what is the formula for the change in total revenue?

%ΔTR = %ΔP + %ΔQ

what is the formula for total revenue using PED?

%ΔTR = (1 + PED) x %ΔP

how to increase R with inelastic demand?

by increasing P and decreasing Q

how to increase R with elastic demand?

decreasing P and increasing Q

what type of demand is in the long-run?

elastic since consumers can change habits and substitutes

where does the MC curve cut ATC?

at ATC’s minimum

what is greater, ATC or AVC?

ATC >= AVC

when is profit maximised?

when P = MC (choose quantity at this value) and in long-run, profits = 0

how to find P^*_LR?

ATC = MC (at intersection between the 2 curves)

how to find average fixed costs?

AFC = ATC - AVC where AFC = FC/Q

what happens when a firm shuts down?

profits = 0 - fixed costs

what happens if a firm continues production?

profits = TR - (variable + fixed costs aka TC) and if these profits are more than if you shut down

when should a firm shut down?

when P < min AVC

what is the MC curve also known as?

supply curve

how to find marginal profits?

Δprofits/ΔQ = MR - MC

where = 0 is maximised, > 0 is when profits increase by increasing ΔQ and < 0 increases profit by decreasing ΔQ

when to choose a Q* for marginal profits?

when MC = MR

what is MR for a competitive firm?

MR = P*

what can a monopolist do to increase profits when MP < 0?

decreasing Q to below Q* and can maximise when MR(Q*) = MC(Q*)

how to find CB for monopolist graphically?

area under demand curve to Q*

how to find TR for monopolist graphically?

TR = P* x Q* (rectangle area)

how to find PC for monopolist graphically?

area under the MC curve

how to find CS for monopolist graphically?

triangle area under demand curve to P*/Q*

how to find CB under perfect market graphically?

area under D to new Q

how to find PC under perfect market graphically?

area under MC to new Q

how to find TS under perfect market graphically?

TS = CB - PC

what happens in the long-run when market is competitive?

firms =/ + profits → barriers to entry allow monopolies to make profits in LR

how to use payoff matrix?

player A is left hand side of 2 choices and is the row variable

player B is right hand side of 2 choices and is the column variable

what is a dominant strategy?

action that is always the best response

what is nash equilibrium?

outcome in which both players play their best response (don’t use numbers use variables)

when does MSB = MPB?

when there are no external benefits

how to find TSB and TSC at Q_EFF?

TSB = area under TSB

TSC = area under TSC

TSS = TSB - TSC

how to find TSB and TSC at for PCM?

TSB = area under SB

TSC = area under MSC

when is it socially optimal?

when MSC = MSB

what is the formula for MSC?

MSC = MPC + MEC

why does DWL exist?

because of negative MSS

how to eliminate DWL using taxes and subsidies?

make the socially optimal curve the competitive market outcome by shifting MPS curve upwards to intersect efficient (MPC becomes MSC) and thus becomes the new supply curve with tax

how to find new MPC with taxes?

MPC₁ = MPC₀ + unit tax (MEC)

what is formula for surplus?

surplus = commission - opportunity cost

what is the formula for a payoff?

payoff = expected sale price - commission

what is moral hazard problem?

occurs when a party changes its behavior and takes on more risk because a third party (such as an insurance company or the government) bears the negative consequences or costs of those risk