Resource Allocation, Public Goods, Elasticity Of Demand, And Cost Analysis

Question 1

External benefits and external costs have an effect on the allocation of resources. As the external cost is a negative externality, thus it is not considered within the account of production factors (Nas, 2016). Thus, it enhance the production with a higher market price of the good or said service leading to over allocation of the available resources. On the other hand, external benefit can be considered as the positive externality that enhance the performance of the other factors (Pillai et al., 2017). Thus, it comes under the cost constraint of the budget allowing the production to fall with the fall under lower price rate leading to under allocation of the resources (Lu et al., 2016).

Figure 1: Resource allocation under externality

Source: (Created by Author)

As per the figure 1, it can be seen that at P0 price, market clearing output will be Q0 as the Marginal Private Cost (MPC) curve intersect with the Marginal Social Cost (MSC) curve at the point where equilibrium level of output and price will be Q0 and P0 respectively (Kneese et al., 2015). Now, under the negative externality, price will be higher, allowing the MSC to shift rightward to the MSC1. market equilibrium will take place, where MSC cuts the MPC curve and as per the same, new equilibrium will occur at price P1 and output Q1 allowing the over allocation of the resource. Contrary to this, if there is positive externality, then it will lead the MSC curve to shift to MSC2 (Chavas, 2015). At the point where MSC intersect with MPC, will cause the equilibrium output at Q2 and price at P2. Thus, under the positive externality, there will be under allocation of the resources allowing the output to fall.

A public good is a good that one can consume in spite of reducing the availability of the same for other individuals making it a non-rival and non-excludable good. As per the Kauder (2015), if the Marginal Cost of a good equates with the Marginal benefit, then that good can be considered as the public good.

As the engineering and material research laboratory is privately owned, it cannot be utilised by all the person except the authorised personnel. Thus, the laboratory will be a private good.

Quarantine service is a public good because it is responsible and first line of defence from the government towards plant, human and animal quarantine border controls.

Question 2

It is a private good because it is excludable in nature and in case of addition of every car on the toll road will allow the space for additional cars to fall making it exhaustible too that defines the same as the private good (Boardman et al., 2017).

Course will certainly be private good because with the payment of the fee, students will be allowed to enter the class that makes it a rival good and with rise in the number of each student, there will be fall in additional absorption of student too (Frischmann & Hogendorn, 2015).

It would certainly be private good because it cannot be shared and rival in nature. Moreover, one cannot use the same contact lenses that one individual is using making it excludable too (Azzimonti et al., 2016).

Price Elasticity Coefficient:

Percentage change in the quantity demanded / Percentage change in price

As it can be seen that price change from 3 AUD/kg to 5 AUD/lg. then the change in the price is = [(5-3)/5]*100

= 40%

Change in quantity demanded, due to the change in price is 50 kg per day and the demand fall from 250 kg per day to 200 kg per day.

Therefore, percentage change in quantity demanded is = [(250-200)/250]*100

    = 20%

Therefore Price Elasticity of Demand = 20% / 40% = .5

Therefore, the demand of apple is inelastic nature

Figure 2: Total revenue under elasticity

Source: (Created by Author)

As per the law of demand there is a negative relationship between the quantity demanded and the price level; as the price increases, quantity demanded falls (Friedman, 2017). As per the above diagram, it can be said that if the price elasticity is greater than one, there will be rise in the revenue as the revenue generated through the decrease in price will outweigh the revenue lost from the fall in the price (Jawad et al., 2018). On the other hand, if the price elasticity of demand is considered for in elastic zone, where the change in demand showcase relatively less impact due to the change in the price, revenue will fall. At the elastic zone, effect of quantity outweigh the price effect (Olmstead et al., 2015). If the price is decreased, the revenue gained from the additional units sold will outweigh the revenue lost from the fall in the price of the same.

• If the price increase in the elastic zone, there will be fall in the revenue.
• If the price is increased in the elastic zone, then revenue will rise.
• If the price is increased in the unit elastic zone, then revenue will remain same as before

FIRM A
Quantity	0	1	2	3	4	5	6
Total revenue ($)	0	10	20	30	40	50	60
Average revenue ($)	0	10	10	10	10	10	10
Marginal revenue ($)	0	10	10	10	10	10	10
Total cost ($)	30	42	50	60	76	100	140
Marginal cost ($)	30	12	8	10	16	24	40
Average cost ($)	30	42	25	20	19	20	23.33333
FIRM B
Quantity	0	1	2	3	4	5	6
Total revenue ($)	100	134	154	177	216	266	366
Average revenue ($)	0	134	77	59	54	53.2	61
Marginal revenue ($)	0	34	20	23	39	50	100
Total cost ($)	140	130	120	110	100	90	80
Marginal cost ($)	0	-10	-10	-10	-10	-10	-10
Average cost ($)	30	130	60	36.66667	25	18	13.33333

Table 1: Cost of firm A & B

Question 3

Source: (Created by Author)

Firm A: Where MR=MC, at 3 unit of output.

Firm B: Where AR=MR, at 5 unit of output.

Firm A: Profit has been enhancing moderately

Firm B: Profit has been enhancing at higher rate

Cost of solder will be variable cost.

In a jewellery store, soldering is required, however, depending upon the number of orders, requirement of the same can be change and the cost bear by the organisation will also change (Obeid et al. 2017).

The basic minimum wage come under the fixed cost

Basic minimum wage will be fixed for a month and as it has been mentioned that it can only be changed with the prior notice of once month; thus, it will be considered as the fixed cost.

Valentine’s Day advertising campaign will be variable cost to the firm

Amount of cost by the firm for the advertising campaign is not fixed and it will take place for the limited time. Thus, it will be variable cost to the firm (Du et al., 2014).

Over time pay will be fixed cost

Depending upon the amount of operation by the individual worker, their over pay will be calculated. Thus, the amount of the same is not fixed and there may be months, where amount of overpay is nil. Thus, it can be considered as the variable cost.

Electricity cost of running machines for one month will be fixed cost.

Irrespective of the magnitude of the operation, there will be minimum cost of electricity for the firm. Thus, it will be considered as the fixed cost.

Interest on a mortgage for the factory is fixed cost of the firm.

Though it has been mentioned that, over the course of the month, amount of interest on mortgage for the factory will rise, however, irrespective of the magnitude of the operation of the firm it will be there (Liu & Tyagi, 2017). Thus, interest on a mortgage for the factory will be fixed cost.

Depreciation of the machines will be within the fixed cost

Irrespective of the operation of the firm, there will be depreciation in the machines with the growth of age. Thus, it will come under the fixed cost.

Business rates will come under the fixed cost

Irrespective of the amount of business local government taxes are fixed, thus it will come under the fixed cost (Veblen, 2017).

Cost of electricity for running the machines and drills paid frequently will be accounted as the variable cost to the company.

Question 4

As the fixed and variable cost is being considered for the one month, thus the amount of the running machines and drills paid quarterly will be accounted as the variable cost (Kropf & Saure, 2014). Moreover, the cost will not be there in case of the non-operation of the firm.

Wear and tear on machines will be considered as the fixed cost.

Amount of wear and tear can fluctuate over the time and within a month there is possibility that no cost is borne by the firm for the wear and tear. Thus, it will be the variable cost.

It is known that,

Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC)

TC = $4000 + $13000

TC = $17000

Therefore, TC of the firm for producing 100 units of jewellery is $17000.

Average Fixed Cost = Total Fixed Cost / quantity = $4000/100 = $40

Average Variable Cost = Total Fixed Cost/ quantity = $13000/100 = $130

Average Total Cost = Total Cost/ quantity = $17000/100 = $170

Relation between the MC and AC defines the operating performance of the firm. If the AC equates with MC, then it can be said that the firm is operating at the zero profit level.

Figure 3: Relation between the AC and MC

Source: (Created by Author)

As it can be seen from the given information, MC and AC is equating with each other, thus the firm is earning zero profit and the price is 46.71 for the each unit of product sold by the firm and the output level produced by the firm is corresponding to the given price level (Zeuthen, 2018).

As per the framework of the supply and demand, it is known that, there is a negative relation between the price and the quantity demanded (Friedman, 2017). Thus, with rise in the price, there will be fall in the quantity demanded and vis-à-vis.

If the price of the margarine rise from equilibrium price P0 to P1, then quantity demanded will fall from Q0 to Q1 and there will be demand gap by Q2Q1 amount.

If the demand of yogurt rises from Q0 to Q1, it will lead the price of the same to rise from P0 to P1.  

If the price of the bread rise rom say P0 to P1, then it will lead to fall in the demand from equilibrium position of Q0 to Q2 resulting in a demand gap by Q2Q1 amount.

Resource Allocation under External Costs and Benefits

With the rise in demand of the bread, there will be rise in the price from P0 to P1.

An expected rise in butter will allow the consumer to consider the future scope of price rise from P0 to P1. This will allow the consumers to shift from Q0 demand to Q2 eventually and utilise the substitute product of the butter.

As the tax on the butter production is imposed, it will reduce the supply of the same allowing the supply curve to shift from S0 to S1 (Blundell et al., 2016). It will further enhance the price of the final product in the market, allowing the quantity demanded to fall from Q0 to Q1.

With the new technology, there will be rise in output from Q0 to Q1, allowing the price to fall from P0 to P1 (Li et al., 2018). However, in order to incur the expense of the new technology, producers will charge P2 price for Q1 amount of price.

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