1
ECO1011 - Basic Microeconomics
2008 Fall
Problem Set 4
Due Date: Nov 27, 2008 (Thursday) before 1pm
Instruction: Go to the library homepage. Select
“
Database (subject)
”
, and then
“
CUHK
Examination Papers
”
. Search for the following questions from the past exams.
1.
ECO1011A/B - 2007-2008 1st term Part A Question 4.
ANSWER:
There are a few: 1) the perfectly competitive market model may not be a good model for
every markets. Some markets are better modeled by others. 2) it analyzes the effects of
policy on one particular market while the effects of a policy may extend to some other
markets that will not be shown in the diagram of the market we focus. 3) it considers
social surplus change at one point in time, but does not address any dynamic effects of
policy on the market.
2.
ECO1011A/B - 2007-2008 1st term Part A Question 5.
ANSWER:
This statement is not true. As shown in the textbook page 338, the proportions of tax
burden on buyers and sellers depend both on the elasticities of demand and supply.
Student can show a graph similar to Figure 9.18 to prove this point. If a student does not
show anything and just state that the statement is wrong, he does not get any point.
3.
ECO1011C/D - 2007-2008 2nd term Part A Question 4.
ANSWER:
a) The economic cost of a piece of capital equipment over a period of time is equal to the
opportunity cost of using the equipment over the period of time.
What is the opportunity cost? Consider if you own the piece of capital equipment for a
year. You are forgoing a chance to invest the amount of money you first put into purchase
to some other productive investment. Suppose you can generate r% in the best alternative
investment over the year. Then $5,000 x r% is what you have lost. After a year of usage
(or idle), suppose no one else would buy the equipment from you. Then your economic
cost over the year is ($5,000 - $0) + $5,000 x r%. Suppose, instead, after a year, you will
be able to sell it at $1,000. Then your economic cost over the year is ($5,000
–
PV($1,000))
+ $5,000 x r%, where PV($1,000) is the present value of $1,000 a year from now.
b) This is an incomplete question. Suppose you can sell your machine anytime within May
at $7,000, then the economic cost of the machine in May is $7,000 x r
1
%, where r
1
% is the
return you would be able to generate for that $7,000 within May. Effectively, you forgone
the chance of selling the machine right at the beginning of May and invest the proceeds to
obtain the return.
Suppose instead, you can only sell the machine in May 1
st
at $7,000. By the end of May,
the machine is worth $6,000 only. Then the economic cost is $7,000 x r
1
% + ($7,000
–
PV($6,000)), where PV($6,000) is the present value of $6,000 one month from now.