law of demand
Five questions. WRITEABRIEF NOTE OF EXPLANATION IN; ANSWER TO EACH PART OF EACH QUESTION
INSTRUCTIONS
Below are five questions. WRITEABRIEF NOTE OF EXPLANATION IN
ANSWER TO EACH PART OF EACH QUESTION. The marks awarded will depend on the quality ofthe reasoning
exhibited and the abilityto expressthe argument in a concise manner. Where appropriate draw diagramsto
illustrate your answer (these can be hand drawn).
Question 1 (10 Marks)
(a) If we do not have scarce resources,wiII we have a law of demand? Will we observe the
price rationing of goods? Will the objective of efficiency in the use of resources have any meaning? Explain.
(b) Explain howthe price mechanism acts as an allocative device in solving the three
fundamental problems confronting any society? What are some ofthe defects of a market system?
Question 2 (10 Marks)
(a) An elderly
couple own a holiday home which theyvisit intermittently during the year but in total for no more than ten weeks ofthe year. Forthe
remainder of the time the house remains vacant. Afriend jokingly remarks about their extravagant Iifestoyle but the couple argue that
after paying rates, insurance electricity, gas etc., it only coststhem $3,000 per year or $30 for accommodation
for each week they spend on v acation. Assess the validity of the couples reasoning.
(b) Use the concept of opportunity cost to demonstrate that it might be worthwhile forfirmsto contract out specific
activities even when they are more cost effective in money termsthan external contractors in providing the same activities or
functions. Relate your discussion to the theory of comparative advantage.
Question
3 (10 Marks)
Define a price floor and a price ceiling and give an example of each type of price
restriction. Explain how price ceilings and price floors cause quantity rationing. What problems arise
from such intervention in the market? Illustrate your answer by considering the case of a government
passing a regulation so that farmers receive a price higherthan the market price for their crops.
Question 4 (10 Marks)
(a) Assume that both rich and poor face linear
demand functions. Explain whether a wealthy individuaI’s demand function for a good is or is not more elastic than the
demand function of a less wealthy consumer.
(b) Assume that the demand for illegal drugs is inelastic and that
users get the funds to pay forthese drugs by stealing. Suppose that the government increases penalties on suppliers of illegal
drugsthereby reducing supply. What will happen to the amount of crime committed by users of illegal drugs? What will happen
to spending on drugs?
Question 5 (10 Marks)
3)
Explain how knowledge of factor prices and factor productivity is fundamental to obtaining the cost conditions for a
irm.
b) Explain the difference between marginal cost and average cost. Why can
marginal cost be computed from eithertotal variable cost orfrom total cost? Why does short-run marginal cost initiallyfall
and then rise? Likewise why does average variable cost fall and then rise?
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