principle of economics

Draw the budget constraint showing the trade-off between Restaurant Butterfly meals and Passion Coffee.. Income and Substitution Effects when price of meals at Passion Coffee go up:a Wha

GROUP ASSIGNMENT

Instructor: Nguyen Thanh Tung

GROUP:

Ton Nguyen Yen Linh

Huynh Kien Phi

To Thi Mai Loan

Nguyen Dang Thien Kim Nguyen Ha Uyen

Course:

Principle of Economics

Problem A 2

1 Answer: 3

Problem B 6

2 Answer: 7

Problem C 9

3. Answer: 9

Table of

Conten

ECO111 - Group Assignment Number of pages: 10 SUMMER 2022

Problem A: (3 marks)

Sunny is an FPT university student She has two options for meals: eating at the restaurant Butterfly for $12 per meal or eating at Passion Coffee for $3 per meal Her weekly budget for meals is $120

1 Draw the budget constraint showing the trade-off between Restaurant Butterfly meals and Passion Coffee If she spends equal amounts on both goods, draw an indifference curve showing the optimum choice Label the

optimum as point A

2 Other things equal, suppose Passion Coffee Cup increases its meals by $1 to 4$

per meal Using your diagram from part (a), show the consequences of this

change in price Assume that Sunny now spends only 30 percent of her income

on Restaurant Butterfly meals Label the new optimum as point B

Students name - ID

Huynh Kien Phi SS171001 –

To Thi Mai Loan SS170761 – Ton Nguyen Yen Linh – SS170858 Nguyen Ha Uyen SS170795 – Nguyen Dang Thien Kim - SS170770

3 What happened to the quantity of Passion consumed because of this price

change? What does this result say about the income and substitution effects?

Explain your arguments with suitable graphs

Answer:

1

Assume the price of each meal in restaurant Butterfly as ; the price of each meal PB

in Passion Coffee as P Then we have: PC

PB = 12

PPC = 3

I = 120

To draw the budget constraint showing the trade-off, it should be divided into 2 cases first:

All consumptions in restaurant Butterfly:

I/ P = 120/3 = 40 (meals) (1) B

All consumption in Passion Coffee:

I/ P = 120/12 = 10 (meals) (2) PC

From (1) and (2), then we have the following graph indicates the budget

constraint (blue) with labels of axes: Quantity of Butterfly (Y) and Quantity of Passion Coffe (X)

0

5

10

15

20

25

30

35

40

45

Quantity of

Butterfly

Quantity of Passion Coffee

FIGURE

Budget Constraint

We have equation: I = P * Q + P * QB B PC PC (3)

According to the given topic if the girl spends equal amounts on both goods means the quantity of Butterfly and the quantity of Passion Coffee are the same

=> QB = QPC (4)

From (3) and (4) => I = P * Q + P * Q B PC

Q = I / (P + P ) B PC

Q = 120/(12+3) = 8 Then, we have the optimum of the optimal quantities is 8 in which Sunny can consume the above condition The following graph represents the indifferent curve for goods:

2

Other things equal, suppose Passion Coffee Cup increases its meals by $1 to 4$ per meal Then:

PB = 12

PPC = 3 => P =4 ; P = 5 ; P = 6 : PPC1 PC2 PC3 PC4=7

I = 120

Q = Q = Q = 8 B PC

0

2

4

6

8

10

12

0 5 10 15 20 25 30 35 40 45

Quantity of

Butterfly

Quantity of Passion Coffee

A

FIGURE

Indifferent Curve

Assume that Sunny now spends only 30 percent of her income on Restaurant Butterfly meals:

PB*QB1=I*30%

12* Q =120*30% B1

Q =36/12=3 B1

I = P * Q + PB1 B1 PC1 * QPC1

120 = 12*3+4* QPC1

QPC1 = 21

Similarly, to PPC2, PPC3, and P , we have: PC4

QPC2=16.8 QPC3=14 QPC4=12

Because the price of eating in restaurant Butterfly does not change, so the graph would be represented as:

As can be seen in the graph when the price of Passion Coffee increases The more increase in it, the more left tendency of the curves

0

2

4

6

8

10

12

0 5 10 15 20 25 30 35 40 45

Quantity of

Butterfly

Quantity of Passion Coffee

FIGURE

Indifferent Curve

A

3 As a result of the price change, consumption of meals at Passion Coffee increased by $1 to $4 Income and Substitution Effects when price of meals at Passion Coffee go up:

Meals at

Passion Coffee This resulted in rising consumption and outweighed

the substitution effect

Consumption should have decreased

Problem B: (3 marks) Suppose that each firm in a competitive industry has

the following costs: Total cost: TC = 100 + q2

Marginal cost: MC = q, where q is an individual firm’s quantity produced

The market demand curve for this product is Q = 720 - 2P, where P is the D

price and Q is the total quantity of the good Currently, there are 10 firms in the market

a) What is each firm’s fixed cost? What is its variable cost? Give the equation

for average total cost

b) Graph average-total-cost curve and the marginal-cost curve for q from 50 to

70 At what quantity is average-total-cost curve at its minimum? Calculate

marginal cost and average total cost at that quantity

0

2

4

6

8

10

12

0 5 10 15 20 25 30 35 40 45

Quantity of

Butterfly

Quantity of Passion Coffee

A

B

FIGURE

The income and substitution effect

Answer:

a) In the definition, total cost is the market value of all the inputs that a firm uses in production, which is calculate by equation:

TC = FC + VC According to question:

TC = 100 + q2 Here, q 2 is the total variable cost (VC) as it is dependent on the individual firm’s quantity produced (q) So, fixed cost (FC) = 100 and variable cost (VC) = q 2

The average-total-cost (ATC) which is calculated by equation:

Average total cost = Total cost/Quantity

ATC = TC/Q = (100 + q )/q = 2 100

� 㕞 + �㕞

b)

Here, the various measures of cost have been shown in the table below:

Output Total

Cost Fixed Cost Variable Cost

Average Total Cost

Marginal Cost

61 3821 100 3721 62.63934 61

In the long run, firms will enter or exit the market until profit is driven to zero

As a result, its minimum occur when it intercept to the MC or (ATC)’ = 0 The ATC have a U-shaped The MC is Derivative of Total Cost which is calculated:

�㕀�㔶 = ∆�㕄∆�㕇�㔶= (�㕇�㔶)′= (100 + �㕞2)′= 2�㕞

0

10

20

30

40

50

60

70

80

50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 Cost

Quantity of Output

FIGURE

The Average Total Cost and Marginal Cost Curves

MC ATC

Hence, the quantity of average-total-cost at its minimum is:

�㕀�㔶 = �㔴�㕇�㔶 ⇔ 2�㕞 =� 㕞 ⟺ �㕞 = ±10 100 + �㕞2

q is a positive number due to q is an individual firm’s quantity produced

Therefore, the quantity of marginal cost and average total cost is 20 at q = 10

Problem C: (4 marks) How can a government make everyone better-off by

providing fireworks display Is there any cases the government will not provide that kind of goods? Can private sector participate in this initiative? If yes, what

is their role? Explain your arguments in 500 words

Answer:

A public good is a commodity or service that is provided without profit to all members of a society, either by the government or a private individual or organization A fireworks display is an example of the public good The government provides fireworks displays for citizens because it brings many values

The first value is traditional cultural values Since ancient times, fireworks on New Year's Eve have meant warding off evil spirits and bringing good luck The government often provides fireworks displays on memorable occasions such as Lunar New Year, National Day, etc

The second value is that fireworks attract a variety of tourists, especially in big cities Fireworks places often gather a lot of people and attract many tourists This will boost the tourism and service industries in the country That is also the reason that the government often invests in beautiful fireworks in big cities, and less in smaller cities

However, the government will not provide that kind of goods if it brings less benefit than it costs or causes negative effects For example, in 2021, because of the

Covid-19 pandemic, the government did not provide these goods because fireworks places often gather a lot of people, and this will greatly affect the spread of disease Another

case is in rural areas with very few people, the government will also not provide these goods because it brings less benefit than its cost

The private sector cannot participate in this initiative because fireworks are very dangerous Therefore, it needs to be controlled seriously by the government If yes, they are responsible for ensuring that the fireworks will take place at a safe location, and not cause fire or explosion, or any harm to surrounding residents

End of Group Assignment