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Questions and Answers of Economics

"A firm's bonds have maturity of 10 years with a $1000 face value, an 8% semi-annual coupon, " are callable in 5 years, at $1,050, and currently sells at a price of $1,100. What is the yield to call
I. On March 1 20x2, Pyne Furniture Co. issued $700,000 of 10% bonds to yield 8%. Interest is payable semiannually on February 28 and August 31. The bonds mature in 10 years. Pyne is a calendar-year
Imagine that you won millions of pounds on the National Lottery. Would your ‘economic problem’ be solved?
Assume that in a household one parent currently works full time and the other stays at home to look after the family. How would you set about identifying and calculating the opportunity costs of the
When you made the decision to study economics, was it a ‘rational’ decision (albeit based on the limited information you had available at the time)? What additional information would you like to
In what way does specialization reduce the problem of scarcity?
Would redistributing incomes from the rich to the poor reduce the overall problem of scarcity?
Assume that oil begins to run out and that extraction becomes more expensive. Trace through the effects of this on the market for oil and the market for other fuels.
Give two examples of positive statements about the economy, and two examples of normative ones. Now give two examples that are seemingly positive, but which have normative implications or undertones.
For what reasons might the price of foreign holidays rise? In each case, identify whether these are reasons affecting demand, supply, or both.
If both demand and supply change, and if we know which direction they have shifted but not how much, why is it that we will be able to predict the direction in which either price or quantity will
If you were the owner of a clothes shop, how would you set about deciding what prices to charge for each garment at the end-of-season sale?
Is there any truth in the saying that the price of a good is a reflection of its quality?
Assume that oil begins to run out and that extraction becomes more expensive. Trace through the effects of this on the market for oil and the market for other fuels. Discuss.
Why are both the price elasticity of demand and the price elasticity of supply likely to be greater in the long run?
Which of the following will have positive signs and which will have negative ones: (a) Price elasticity of demand; (b) Income elasticity of demand (normal good); (c) Income elasticity of demand
What are the advantages and disadvantages of speculation from the point of view of (a) The consumer; (b) Firms?
Think of two things that are provided free of charge. In each case, identify whether and in what form a shortage might occur. In what ways are/could these shortages be dealt with? Are they the best
If the government increases the tax on a liter of petrol by 5p, what will determine the amount by which the price of petrol will go up as a result of this tax increase?
Illustrate on four separate diagrams (as in Figure) the effect of different elasticity’s of demand and supply on the incidence of a subsidy.
Why are agricultural prices subject to greater fluctuations than those of manufactured products?
Compare the relative benefits of subsidies and high minimum prices (as under the CAP) to(a) The consumer; (b) The farmer.
The EU is more than self-sufficient in a number of commodities. Does this mean that the objectives of the CAP have been achieved? What has been the cost of achieving this success? What do you think
Do rising world food prices make the CAP unnecessary?
Is it reasonable to assume that people seek to equate the marginal utility/price ratios of the goods that they purchase, if (a) They have never heard of ‘utility’, let alone ‘marginal
Consider situations where you might consider swapping items with someone. Why are such situations relatively rare? Can you think of circumstances in which this might be more common?
Explain why the price of a good is no reflection of the total value that consumers put on it.
A country’s central bank (e.g. the Bank of England or the US Federal Reserve Bank) has a key role in ensuring the stability of the banking system. In many countries the central bank is prepared to
Distinguish between a normal good, an inferior good and a Giffen good. Use indifference curves to illustrate your answer.
Choose two industries that you believe are very different. Identify factors used in those industries that in the short run are (a) fixed; (b) variable.
Taking the same industries, identify as many economies of scale as you can.
‘Both short-run and long-run average cost curves may be -shaped, but the explanations for their respective shapes are quite different.’ Explain this statement.
Why do marginal cost curves intersect both the average variable cost curve and the average cost curve at their lowest point?
Why might it make sense for a firm which cannot sell its output at a profit to continue in production for the time being? For how long should the firm continue to produce at a loss?
If the industry under perfect competition faces a downward-sloping demand curve, why does an individual firm face a horizontal demand curve?
If supernormal profits are competed away under perfect competition, why will firms have an incentive to become more efficient?
Is it a valid criticism of perfect competition to argue that it is incompatible with economies of scale?
Why is the profit-maximising price under monopoly greater than marginal cost? In what way can this be seen as inefficient?
Think of three examples of monopolies (local or national) and consider how contestable their markets are.
In what ways is a monopolistically competitive firm likely to be less efficient than one under perfect competition?
Are there any shops in your area that stay open later than others? If so, does this affect the prices they charge? Why do you think this is?
Give three examples of oligopolistic industries. In what ways do the firms in each of these industries compete? Why do they choose to compete in the way that they do?
Why, under oligopoly, might a particular industry be collusive at one time and yet highly price competitive at another?
What is meant by the prisoners’ dilemma game when applied to the behaviour of oligopolists? What will determine the outcome of the game?
Think of two examples of price discrimination. In what ways do the consumers gain or lose? What information would you need to be certain in your answer?
Would it be possible for firms to calculate their maximum-profit output if they did not use marginal cost and marginal revenue concepts?
What is meant by the principal–agent problem? Give two examples of this problem that you havecome across in your own experience.
‘A firm will always prefer to make more profit rather than less.’ Do you agree with this statement? Is it compatible with alternatives to the profit-maximizingtheory of the firm?
A firm under monopoly or oligopoly that aims to maximize sales revenue will tend to produce more than a firm that aims to maximize profits. Does this conclusion also apply under (a) perfect
What are the potential costs and benefits of mergers to(a) Shareholders;(b) Managers;(c) Customers?
Why is it difficult to test the assumption that firms seek to maximizelong-run profits?
Do behavioral theories of the firm allow us to make any predictions about firms’ prices and output?
Is mark-up pricing likely to benefit consumers?
Why does the marginal revenue product differ between workers in different jobs?
For what reasons is the average gross weekly pay ofwomen only 76.4 per cent of that of men in the UK?
Given the analysis of bilateral monopoly, if the passingof minimum wage legislation forces employers to payhigher wage rates to low-paid employees will thisnecessarily cause a reduction in employment?
What factors could cause a rise in the market rate ofinterest?
How is the market price of land related to itsproductivity?
Can taxes be used to relieve poverty?
In what ways might the views of different politicians on what constitutes a ‘good’ tax system conflict?
Distinguish between proportional, progressive and regressive taxation. Could a progressive tax have a constant marginal rate?
Consider the cases for and against a poll tax.
Under what circumstances would a rise in income tax act as (a) a disincentive and (b) an incentive to effort?
What is meant by the poverty trap? What design of benefit system would offer the best solution to the problem of the poverty trap?
How would you go about deciding whether person A or person B gets more personal benefit from each of the following?(a) An electric fire; (b) A clothing allowance of £x; (c) Free higher education;
Why might it be argued that a redistribution of consumption, while not involving a Pareto improvement, could still be desirable?
Why might it be better to ban certain activities that cause environmental damage rather than to tax them?
Distinguish between publicly provided goods, public goods and merit goods.
Consider the advantages and disadvantages of extending property rights so that everyone would have the right to prevent people imposing any costs on them whatsoever (or charging them to do so).
Should all investment be subject to a social cost–benefit appraisal?
Make out a case for (a) Increasing and(b) Decreasing the role of the government in the allocation of resources.
Assume that there are several chemical firms in an industry, each one producing different levels of an effluent, whose damage to the environment depends on the location of the firm. Compare the
Make out a case from a deep green perspective for rejecting the ‘social efficiency’ approach to the environment.
Why might efforts to address the issue of global warming be hampered by a lack of understanding of probability amongst the general public?
The USA is the world’s largest emitter of CO2, and China is the second largest. What issues arise from this in the formulation of a global policy to reduce CO2 emissions?
Make out a case for adopting a policy of individual tradable carbon permits, allocated to all citizens within a country. Could such a policy be extended globally?
Compare the relative merits of increased road fuel taxes, electronic road pricing and tolls as means of reducing urban traffic congestion. Why is the price inelasticity of demand for private car
Why is the price inelasticity of demand for private car transport a problem when formulating a policy for the reduction of traffic congestion? What could be done to change the price elasticity of
How would you set about measuring the external costs of road transport?
From 1 April 2008, the UK government introduced free off-peak bus travel for the over-60s in England and Wales. What is the likely impact of this policy on car usage? Is there a case for extending
Should governments or regulators always attempt to eliminate the supernormal profits of monopolists/oligopolists?
Compare the relative merits of banning certain types of market structure with banning certain types of market behavior.
If two or more firms are charging similar prices, does this imply that collusion is taking place? What evidence would you need to determine the existence of collusion?
There exists a view that the UK is too small an economy to benefit from competition in many industries, with firms failing to reach minimum efficient scale. What does this imply for competition
Should regulators of utilities that have been privatised into several separate companies allow?(a) Horizontal mergers (within the industry); (b) Vertical mergers; (c) Mergers with firms in other
Summaries the relative benefits to consumers of (a) Privatizing a nationalized industry, (b) Keeping it in the public sector but introducing competition.
If an industry regulator adopts an RPI – X formula for price regulation, is it desirable that the value of X should be adjusted as soon as cost conditions change?
Examine the case for public ownership of an industry where a natural monopoly exists.
Price-cap regulation was abandoned in the gas and electricity industries because the regulator (Of gem) felt that there was sufficient competition. Consider whether this was a wise decision.
Explain how equilibrium would be restored in the circular flow of income if there were a fall in investment.
Explain the circumstances under which an increase inpensions and child benefit would(a) Increase national income; (b) Leave national income unaffected; (c) Decrease national income.
For what reasons might GDP be a poor indicator of (i) The level of development of a country; (ii) Its rate of economic development?
Will the rate of actual growth have any effect on the rate of potential growth?
For what possible reasons may one country experiences a persistently faster rate of economic growth than another?
Why will investment affect both actual (short-term) growth and the long-term growth in potential output? What will be the implications if these two effects differ in magnitude?
At what phase of the business cycle is the average duration of unemployment likely to be the highest? Explain.
Explain whether it would be desirable to have zero unemployment.
Consider the most appropriate policy for tackling each of the different types of unemployment.
Do any groups of people gain from inflation?
If everyone’s incomes rose in line with inflation, would it matter if inflation were 100 per cent or even 1000 per cent per annum?

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