EAns - General (Chap 1-6)

What is a commodity

Commodities: raw materials like oil, wheat = little close substitutes

State reason for YED inelastic in Japan for chicken

YED reason: Japan is very developed country and most households can already satisfy most of their needs for chicken at initial level of income -> YED inelastic 

Policies to improve self-sufficiency (increase % of good produced domestically) 

Subsidies for domestic food production technology (Eg. Development of vertical farming technology) -> increase yield from intensive production methods will increase firms ability + higher productivity will lower MCOP and increase profits -> increase firms willingness -> supply increase 

PES factors 

• Availability of inventory (semi-finished goods) VS 

• Availability of spare capacity (idle resources)

Describe Fuel duties (Petrol tax on producers) (Graph + eval)

• Price of fuel increase -> fuel and usage of cars are complements -> MCOP of using cars increase -> MPC shift upwards for every unit of car usage = MEC at Q* -> usage of cars will now fall from Q to Q’, assuming the government has perfect information on MEC

• Eval: Tax small % of TC of car -> sunk cost fallacy due to high COE price

Describe conclusion of fuel duties and high-quality public transport system

• Both fuel duties and high-quality public transport system should be implemented in tandem

• SR: Fuel duties can help to reduce car usage to by disincentivising consumers from driving

• LR: High-quality public transport system could reduce the reliance on car usage -> lower car usage to the socially optimal level Q*.

• BUT given how “consumers may prioritise convenience and comfort and prestige in owning a car”, additional measures such as higher parking fees and electronic road pricing (ERP) would also be needed to deter over-usage of cars

Explain why C larger than A

There is a net social benefit to society (Area C) from motorcycle use as some of Vietnam’s urban areas have narrow streets and long alleys which are inaccessible to cars and public transport -> C larger than A

Explain why market can be sustainable and unsustainable (When price floor is used) 

• Prices being kept at the agreed minimum price

• Sustainable: If the Chinese government is able to remove the permanent surplus by choosing to buy up the surplus between Qs-Qd -> no incentive to sell at a lower black market price

• Unsustainable: Market is in disequilibrium which might lead to the emergence of a black market -> producers selling the solar panels at a lower price below the price floor

Constraints VS costs 

• Costs = explicit - monetary, implicit - opportunity costs 

• Constraints (Def.): Factors that limit the ability of agent to make the decision  

  • Fiscal reserves 

  • If not enough, they may have to borrow, this depends on amount of financial institutions willing to lend funds to government

Larger market -> produce at larger scale -> Eg. Specialised machines -> lower unit cost -> products relatively cheaper 

1. EOS: Fall in AC must be due to expansion of firm output or industry

2. Natural monopoly = MRT 

3. Diversification = product innovation, integration 

Profit-maximising output thing (missing stuff) 

At this level of output, the firm is in equilibrium -> no tendency for the firm to want to change its output further since total profits are already maximised

Benefits of entering industry where Grab already has large market share = firm may experience supernormal profits 

• New entrant that can overcome high BOE can enter and steal market share can also earn supernormal profits 

• When a new competitor enters the industry, the size of the industry increases

• Even if the new competitor's production scale may be small -> can enjoy external EOS built up by dominant players (Eg. Skilled labour) 

Collusion graph

PS changes from FE1P1 to FDBP2