Economics Questions Thread

[chrisjb]

Thanks for the help on the other question. I had assumed too much stuff.

[Hutchoo]

This is copied out of Economics Down Under, chapter 1; short answer 9.
How does a tax influence the allocation of resources?

[Water]

I'm not sure, if this would be an Examable or SACable answer, but


Think about this way,

If you have a 20% tax on alcohol, opposed to 5% tax on cigarettes, and the cost to produce both of them are the same. You would therefore, choose cigarettes rather than alcohol because you can produce more output from the same input therefore creating more revenue. This would almost mean, your effectively allocating your resources because your maximizing your PPF curve to the edge.


Therefore meaning, if your tax is greater, this reduces your ability to produce more output from the same input, thus reducing allocative efficiency.

[schmalex]

A tax increases the price to buyers, and increases costs to sellers. The easiest way to show it in a SAC or exam is as a cost of production. Move the supply curve inward and you'll see the effect of taxes.

[Hutchoo]

Thanks a heap for that, Water and schmalex.

What is a good example of a free rider problem?
Many come to mind but I can't think of anything that is short and sharp.
I would choose a longer answer; but going into all that detail isn't really worth 1 mark.

Thanks.

[sam.utute]

Thanks a heap for that, Water and schmalex.

What is a good example of a free rider problem?
Many come to mind but I can't think of anything that is short and sharp.
I would choose a longer answer; but going into all that detail isn't really worth 1 mark.

Thanks.

One of the easier ones is street lighting. Obviously, if no one provided street lighting and you paid the $3000 or so to get it installed, there is no way you could exclude your neighbours from benefiting. They would benefit despite the fact they did not pay for the privilege. Another example could be national defense (army, navy, air force).

[schmalex]

To add to that, if the government asked for money for people to build streetlights, then people would just think "well, we all want streetlights, so other people will surely pay for it, so there's no point in me paying for it if someone else will do it".

The uni textbook uses the example of a fireworks show. If a town wanted fireworks for New Years, they could ask people for $5 each so that the town could have a fireworks show, but the people who don't pay will still see the fireworks, so some people might hope that other people and they don't have to.

[Hutchoo]

Love you guys <3
Love VN.
You make these questions so simple and pro.
Much love
I'll have more questions soon.

[chrisjb]

Here to demonstrate my ignorance again...

This MC question is from economics down under p30:

Faced with a rise in prices, the supply of fresh nectarines may be inelastic in the short term because:
A) Time needed to grow extra trees
B) The fruit has a limited storage Life
C) The resources of fruit growers are immobile
D) All of the above

The answer is obviously D, but I only got that because it's clear from the other options. What I don't understand is why a change in price can trigger a change in suply elasticity. Why doesn't the gradient of both curves stay the same, but just have the lines change their positions to create a new equilibrium?

[sam.utute]

Here to demonstrate my ignorance again...

This MC question is from economics down under p30:

Faced with a rise in prices, the supply of fresh nectarines may be inelastic in the short term because:
A) Time needed to grow extra trees
B) The fruit has a limited storage Life
C) The resources of fruit growers are immobile
D) All of the above

The answer is obviously D, but I only got that because it's clear from the other options. What I don't understand is why a change in price can trigger a change in suply elasticity. Why doesn't the gradient of both curves stay the same, but just have the lines change their positions to create a new equilibrium?

The question is not implying that the supply elasticity of the nectarines has changed. It is merely asking "Why is it inelastic?"

[chrisjb]

Here's another one...

Assume that Coke and Pepsi are very close soft drink substitutes, then an increse in the price of Coke would most likely tend to cause:
A) an increase in the demand for Pepsi
B) a contraction in the demand for Coke
C) no effect on the demand for Pepsi
D) Both A and B are correct

I answered D but apparantly the answer is A... I can't work it out.

[Hodgeyhodgey]

Maybe because they're close substitutes, an increase in the price of coke means people will choose pepsi as it is the cheaper alternative?

[chrisjb]

Maybe because they're close substitutes, an increase in the price of coke means people will choose pepsi as it is the cheaper alternative?

yeah... but that would make A and B correct (a fall in demand for Coke and a rise in demand for pepsi)... Perhaps just a typo.

[Hodgeyhodgey]

True that..someone confirm? It should be D, right?

[schmalex]

It's a tricky question, but generally "a contraction in demand for coke" means that the actual deman curve for coke has shifted inwards, but what has actually happened is that the quantity of coke bottles demanded has shifted ALONG the demand curve to a lower quantity. So the demand for coke at any given price is the same, but the QUANTITY of coke bottle demanded is reduced. Tricky question.