theory of comparative advantage
1 The theory of comparative
advantage is generally used to demonstrate the benefits of international trade
Could the argument also be used to show that it might be worthwhile for firms
to contract out specific activities even when they are equally or more cost
effective in money terms than external contractors in providing the same
activities or functions?
2 Some people, believing that
the consumption of alcohol is both ‘individually and socially undesirable’,
claim that governments should put taxes on liquor so that people will consume
less alcohol and spend more money on other goods Indicate how an understanding
of demand and of price elasticity of demand is useful in analyzing this
argument
3 Why do economists believe
short-run marginal cost curves have positive slopes?
Why does this belief lead to the
notion that short-run supply curves have positive slopes?
4 (a) If the government imposes
a lump-sun tax of $10,000 per year – that is, a tax that is fixed for one year
– how will this tax affect the shape of the firm’s short-run average total cost
and marginal cost curves? Assess the view that a profit maximizing monopolist
should respond to this tax imposition by increasing price
(b) Evaluate the following
statement:
“A monopolist produced 1
million units last year If a $10 per unit tax is imposed, the profits of the
monopolist will decrease by $10 million“
5 Critically evaluate each of
the following statements as advice on how to maximize profits or minimize
losses:
(a) “The reason why we
charge a lower price at higher output levels is because we are able to spread
our fixed costs over a larger production run“
(b) “Regardless of the
economic environment, every firm will maximize profits by operating at the
minimum point of its average total cost curve“
(c) “Monopolists always try
to maximize the difference between price and average costs“
6 Airlines practice price
discrimination by charging leisure travelers and business travellers different
prices
(a) What conditions are required
for successful third-degree price discrimination? Why do airlines adopt this
pricing policy?
(b) In airline pricing what group
of customers tends to pay the higher price – business travelers or leisure
travelers? Why? Explain
(c) Why do airlines impose
restrictions like advance purchase requirements, weekend stay requirements and
time-of day restrictions in the provision of discount fares? Explain
(d) Why are some heavily
discounted airfares only available for sale on the Internet?
(e) What factors, other than
price discrimination, might be responsible for the charging of different
airfares to a given destination?