Question 1 (a) Consider the market for air travel. It is discovered that the demand for business class ticket is relatively more inelastic compared...

I need help on the following,

Question 1

(a) Consider the market for air travel. It is discovered that the demand for business class ticket is

relatively more inelastic compared to the demand for economy class ticket.

(i)

Assume that initially the equilibrium price and quantity of tickets for both classes are the

same. Use a market diagram for air travel which illustrates both the business class and the

economy class. (5 marks)

(ii)

An improvement in the technology of air travel has occurred which affects both classes

equally. Draw a suitable diagram to illustrate and discuss the effect on the equilibrium price

and quantity of business class and economy class tickets. From the diagram, explain which

class has a larger change in price and which class has a larger change in quantity after the

technological improvement. (10 marks)

(b) Evaluate the following statements and discuss whether they are true, false or uncertain. Justify

your answers.

(i)

A monopolist encounters a linear demand curve should always produce at the point where

the demand is unit elastic in order to maximise profit. (5 marks)

(ii)

Applying the rational spending rule, a consumer consuming two products A and B should

always buy more A and less B if the marginal utility of the last unit of A consumed is higher

than that of B. (5 marks)

Question 2

(a) An airline offering flight services from Singapore to Bangkok, Thailand, has two classes of seats,

business class and economy class. Due to the higher oil prices, the airline has increased the

ticket prices for both classes. The prices and tickets sold for both classes before and after the

price hike is shown in the table below.

Economy Class

Price

$300

$450

Tickets Sold

280

120

Business Class

Price

$2000

$3000

Ticket Sold

50

40

(i)

Calculate the price elasticity of demand for both classes using the mid-point formula. (6 marks)

(ii)

Given that the income elasticity of demand for economy class ticket is 1.5 and the cross

elasticity of demand between economy class quantity and high speed rail price is 1.2, other

things equal, explain the impact on the economy class revenue if income of consumers increase

by 5% and high speed rail price decreases by 8%. Analyse each incident separately. (5 marks)

(b) The following table shows the total cost incurred by a perfectly competitive firm in the short run.

Output

0

1

2

3

4

5

6

7

8

9

10

Total Cost

10

16

20

22

23

26

36

48

61

81

106

(i)

Describe the relationship between total cost and average cost. Calculate the average fixed

cost at 4 units of output, the average variable cost at 5 units of output, the average total cost

at 6 units and the marginal cost at the 7th units of output. (8 marks)

(ii)

Assume that the firm is able to sell any amount of its output at the price of $10 per unit.

Explain how to determine the optimal quantity and calculate the total profit or loss at that

quantity. (6 marks)

Question 3

In a fishing village famous for its cuttlefish, there are many firms producing dried cuttlefish. The

cuttlefish are identical and each firm has only a small market share with no control over the price. Hence

the dried cuttlefish market can be considered as perfectly competitive.

(a) Initially all the producers are earning a normal profit. Discuss this situation with a suitable dried

cuttlefish market and a representative firm diagrams. (5 marks)

(b) There is a well-reputed medical report suggesting that eating dried cuttlefish may cause cancer.

Explain the effect of this report on the dried cuttlefish market and a representative firm in the

short run equilibrium. Support your answers with suitable market and firm diagrams. (10 marks)

(c) What happen to the dried cuttlefish market and the firms in the long run? Explain with suitable

dried cuttlefish market and a representative firm diagrams. (10 marks)

Question 4

Consider a single pricing monopolist with a demand equation P = 60 - 2Q. It encounters a constant

marginal cost of $20 which is also equals to the average total cost.

(a) Identify the optimal price and quantity for the monopolist. Illustrate your answers with a suitable

diagram. (7 marks)

(b) Identify the profit and the consumer surplus of the monopolist at the optimal output. (6 marks)

(c) Compare to a perfectly competitive market. If this market were to be a perfectly competitive

one, what is the equilibrium price and quantity? Illustrate your answer with a suitable diagram.

(7 marks)

(d) Compare to a perfectly competitive market, calculate the deadweight loss of the monopoly. (5

marks)