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PRINCIPLES OF ECONOMICS Samples of answer

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					PRINCIPLES OF ECONOMICS
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QUESTION 1 a) From figure 1, the view that support the prices (per ounce) of the precious metal change drastically can be seen when the price of gold rose from USD100 in January 2002 to USD125 at the end of the year. Then, the price of the platinum was also rose up from USD100 in January to USD124 in December of that year. Meanwhile, the prices of palladium have dropped drastically from USD100 in January to USD50 in December 2002. The prices also can bee seen dropping almost 50% from the initial price in January 2002.

b)

One reason for the increase demand for gold in 2002 is because of the increase in investment as economic condition becomes uncertain. If the economic condition becomes uncertain or worsened, the price of gold will go down as the interest rates fell. The market will see a surge in demand for gold as prices become low.

c)

The platinum prices had risen in 2003 because of the high price of its substitute, the palladium. In December 2000, the price of palladium is at USD1100, compared to USD250 in January 2003. So when the high price for palladium in the end of 2000, consumer tend to switch to platinum. As a result, in January 2003, the platinum price increased as the quantity decreased. At the same time, the demand for platinum has risen.
D Price Per-unit D1 Increase in demands

D1 Change in non-price determinants D Quantity of platinum per ounce

From the diagram above, we can see the increase in the price of its substitute good (palladium) has caused the demand curve shifts rightward from D to D1. The shift is not caused by a change in price; instead it’s due to the changed in the price of related goods

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d)

The price elasticity of supply is closely following the price elasticity of demand concept. Price elasticity of supply is the ratio of the percentage change in the quantity supplied of a percentage change in its price. It measures the responsiveness of the quantity supplied to a change in price. Based on the data, the nature of the price elasticity of precious metals is the unit elastic. This is because the supplies of precious metal can be easily increased from stocks when the price is increase. However it is difficult to expand supply in a short run.

e)

The palladium price and platinum price may have been linked correspondently to the non price determinants of the demand. Palladium is related good of platinum. Palladium is substitute goods that compete with platinum for consumer purchases. As results, there is a direct relationship between a price change for both platinum and demands for palladium.

For instance, we assume that the prices of platinum and palladium and other precious metal remain unchanged. If we can go relax on the cateris paribus (holds all prices of the other goods, constantly) assumption and the price of palladium rises. Many palladium buyers will tend to switch to palladium and the demands curve for platinum will shifts rightward (shows an increase in demand). Therefore both platinum and palladium are actually one type of related goods that is categorized under substitute goods.

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QUESTION 2

Table 2 Workers (1) Output (2) Marginal product (∆2/∆1) 0 1 2 3 4 5 6 7 0 20 50 90 120 140 150 155 Total cost Average total cost TC/Q 200 0 15 8 5.6 5 5 5.3 5.8 Marginal cost ∆TC/∆ in Q

]→ ]→ ]→ ]→ ]→ ]→ ]→

20 30 40 30 20 10 5

100+200=300 200+200=400 300+200=500 400+200=600 500+200=700 600+200=800 700+200=900

5 3.3 2.5 3.3 5 10 20

a) Answer:

See figure in table 1.Pattern of marginal product can be described as going up increasingly stable from worker no 0 to no 3 and starting to decrease at worker no 4 and going down to worker no 7

b)

Answer: See figure in table 1 for the answer

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c)

Based on the answers in (b) above analyzes the relationship of the following: i) ii) Marginal product and marginal cost; and Average total cost and marginal cost. (a) Marginal Product (b) Marginal Cost
Marginal cost

:
Marginal product

Maximum
40 35 30 25 20 15 10

20

15

10

Minimum
5 1 2 3 4 5 6 7 5 20 40 60 80 100 140 160

Part (a) Quantity of Labor

Part (b) Quantity of Output

Part (a) represents the marginal product of worker (MP) curve. At first each additional worker hired adds more to the output compare to the previous worker. The MP curve will rise until the maximum is reached at the third hire worker. At fourth worker, the law of diminishing returns sets in and each of additional workers hired adds less output than the previous one.

Part (B) shows the marginal cost (MC) curve is a U-shaped curve which inversely related to the MP curve. Assuming the wage rate remains constant, as the MP rises, the MP curve falls. When the MP curve reaches the maximum at third worker, the MC curve is at the minimum. As diminishing returns set in and the MP curve falls, the MC curve rises.

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ii)

Average Total Cost (ATC)
ATC

15

ATC
10

5 20 40 60 80 100 120 140 160

MC curve will intersects both the AVC curve and ATC curve at their minimum points. It is a relationship called the marginal average rule. When marginal cost is below average cost, the average cost falls. When marginal cost is above average cost, average cost rises. When the marginal cost equals, average cost is at it minimum point.

REFERENCES Case, K.E and Fair, R. C (2000), Principles of Economics, (6th ed), Prentice Hall New Jersey

Gregory, M. N. (2001), Principles of Economics (2nd ed.), Harcourt College Publisher McEachern, Williams A., (2000), Economics; A contemporary Introduction, (5th ed.), South-Western College Publishing.

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