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Homework answers / question archive / 1) According to economists, the biggest “cost” of unemployment is a
1)
According to economists, the biggest “cost” of unemployment is
a. increased “welfare” expenditures. c. the value of foregone output.
b. lost tax revenue. d. none of these.
2)Problems 1. Redraw the following diagram, label the marginal revenue curve, the profit-maximizing price, the profit-maximizing quantity, the profit, and the deadweight loss. Price Demand Marginal Cost Average cast Quantity 2. Where will profits be higher: When demand for a patented drug is highly inelastic or when demand for a patented drug is highly elastic? Draw a graphical solution for BOTH to prove your answer (note: you need to have costs, prices etc...included in your answer-since you cannot explain anything in words) 3. Draw the shape of the total revenue curve for a monopoly. 4. Let's imagine that the firm with cost curves illustrated below is a large cable TV provider. Price Old demand AC MC MR Quantity REDRAW the graph for this form and answer the following questions: 1. Assuming that the form is free to maximize profit, find and label the profit-maximizing price, quantity, and the firm's profit. 2. Now assume that the firm is regulated and that the regulator sets the price so that the firm earns a normal (zero) profit. What price does the regulator set and what quantity does the firm sell? (Label this price and quantity on the diagram.)
1)
The correct answer is option C. Value of foregone output.
Explanation:
Option C is the most apt answer because biggest reason in terms of cost associated with unemployment is the value of forgegone output. All the other options are the effects of unemployment i.e. increased welfare expenditure and lost tax revenue.
Due to fall in the output, the unemployment increases due to which expenditure to increase welfare of unemployed people and cutting down tax revenues are the steps to be taken by the government. But, the foremost reason due to which unemployment cost much to the government amd thus, economy is fall in the value of output. Falling output increases unemployment and thus, tax revenues fall and welfare expenses rises. Thus, Option C i.e. value of the foregone output which could have lead to lower unemployment is the root cost associated with unemployment.
2)
SOLUTION:
We can solve this problem by assuming some hypothetical demand and supply related equations, to prove our results.
Let us assume that we have the following set of Equations,
The Total Cost curve is indicated by
, where
The cost term with Q is the Variable Costs, and the term without Q is the Fixed Cost.
Thus, we have,
- - - - - - - -- (1)
- - - - - -- - (2)
Also, we have the following Highly Elastic and Highly Inelastic Demand curves, as written below.
Highly Elastic Demand Curve can be written as,
- - - -- - - -(3), which is the Demand curve
- -- - - - - - -(4)
Highly Inelastic Demand Curve can be written as,
- - - - - - - - - (5), which is the Demand curve
- -- - - - - - -(6)
Now, we can plot the following equations, marked (1) to (6). We can then calculate the values of AC, P, and Q, and make inferences for the Profit of the 2 cases.
Consider the diagram below,
The image has been drawn on MS Paint. Image Not to Scale. Also, the values for the curves were obtained by assumption from a Hit and Trial method, and thus gives values in such small decimal quantities. However, other equations can also be assumed.
For ELASTIC DEMAND CURVE
Solving, MC = MR for the Elastic Curves, we have
1.5 Q = - 2Q + 10
Q = 2.85
Putting Q = 2.85 into the P, and AC curves (equations), we have, P = 7.15, and AC = 2.48 (all shown in the diagram).
Thus, we can calculate the Profit, by calculating the Area of the yellow shaded region.
Thus, we have Profit during Elastic Demand curve = (7.15 - 2.48 ) * 2.85 = 13.30
Similarly, For INELASTIC DEMAND CURVE
Solving, MC = MR for the Inelastic Curves, we have
1.5 Q = - 16Q + 10
Q = 0.57
Putting Q = 0.57 into the P, and AC curves (equations), we have, P = 5.44, and AC = 2.18 (all shown in the diagram).
Thus, we can calculate the Profit, by calculating the Area of the Blue shaded region.
Thus, we have Profit during Inelastic Demand curve = (5.44 - 2.18 ) * 0.57 = 1.85
Profit for Elastic Demand curve > Profit for Inelastic Demand curve, as
13.30 > 1.85
Thus, we see that for a constant and fixed Supply curve (indicated by MC, AC, and TC curves), Profit is more when we have an elastic demand curve as compared to Inelastic Demand curve.
