ECO2103 Principles of Microeconomics
Tutorial 5
Question One
a) You are studying with a friend and your friend says "A budget line shows the various combinations of two goods that can be purchased with the buyer's income at current prices." Is your friend's assessment correct or not?
b) How is a budget line similar to a production possibilities frontier? How do they differ?
c) Why budget line has a negative slope? What does the slope of the budget line equal?
d) What is an indifference curve?
e) Why do consumers prefer higher indifference curves (farther to the right) to lower indifference curves?
f) In an indifference curve/budget line framework, how does a consumer decide which of all possible combinations of goods to purchase?
g)
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The price of a movie is $15.
i) Along budget line BL1, what is the price of a dinner? ii) What combination of dinners and movies will George select along budget line BL1? iii) Budget line BL2 represents a change in the price of dinners from that along BL1. What is the new price of dinners along this budget line? iv) What combination of dinners and movies will George select along budget line BL2?
v) Use the information in this problem to give two points on George's demand curve for dinners.
b) Olivia's income is $216 a year and she spends all of it on music CDs and movies on DVDs. The price of a music CD is $18 and the price of a DVD is $18.
i) Draw a graph of Olivia's budget line (with CDs on the horizontal axis). What is the slope of Olivia's budget line?
ii) What quantities of CDs and DVDs does Olivia buy? Explain your solution. iii) What is Olivia's marginal rate of substitution at the point at which she consumes? Explain.
c) Record companies, faced with the growing competitions from digital music download services, lower the price of a music CD from $18.00 to $13.50. The price of a DVD is $18. Olivia's income is $216 a year and she spends all of it on music CDs and movies on DVDs.
i) Draw a graph of Olivia's budget line (with CDs on the horizontal axis). What is the slope of Olivia's budget line?
The figure above illustrates Olivia's preferences. ii) Given the price of a CD, the price of
Q6: How much production fixed expenses should be allocated to 1 kg of "complete meal"? Give a specific number and your logic to support the
|2.1 Explain the purpose of agreeing the format in which a budget will be presented |Question 1 Page 2 |
|0 |$ 60 |$ 0 |$ 60 |$ 0 |$ 0 |$ 0 |$ 0 |
c. Explain how the location of each curve graphed in question 7b would be altered if (1) total fixed cost had been $100
5. How would you identify timescales, priorities and financial resources when preparing a budget? [2.3]
Question 35 Suppose a basket of goods and services has been selected to calculate the consumer price index (CPI) and 2002 has been chosen as the base year. In 2002, the basket’s cost was $76.00; in 2004, the basket’s cost was $79.50; and in 2006, the basket’s cost was $85.00. The value of
a) In the first set of calculations, the staff used a discount rate of 20%, a five-year time horizon, and ignored taxes and terminal value. What is the relative attractiveness of these three alternatives?
3. Refer back to the prior question about the Berghoff and consider the information presented there. Assume that you are told that the entire difference in price is related to higher cost during the dinner period. In a sentence, how might you explain the higher cost?
Solely taking a look at the graph, to accommodate future demand for growth I would recommend ocean transportation to move our products from the new facility in China. As we expect demand to grow by 10 percent annually over the next five years, it will be most beneficial to utilize ocean transportation as projected total costs for air becomes higher than ocean above the trade off point of 1,904,761.9 POUNDS. For example, total projected costs were calculated to be at $587,156 for air versus $630,080 for ocean at the end of 5 years. Extrapolate the graph even further into the future, with the expectation of even more growth,
13. Sunglass Hut purchases a pair of Tiffany sunglasses from a wholesaler for $180 and sells it for $300. If the wholesaler increases its price by 20%, to the nearest dollar, what should Sunglass Hut charge in order to maintain the same percent margin?
Case II is a continuation of Case I. In this case you will convert the line-item budget developed in Case I into a functional budget. Then you will employ further information to create a flexible budget. Refer to the Case I Solution for data.
Is there a way to estimate the cost of services and product to customers such that Stuart’s Branded Foods can be competitive in their market? Use the illustrations of the two customers to demonstrate your approach. What would be the selling price per kit or per cup for each customer?
b. Use your answer to part A to determine the total annual indirect cost assigned to:
3) Explain the so-called ‘Divided Line’. What do the different levels mean? How does this apply to
v. What are the limitations, if any, to the estimates of the profitability of the two customers? (Hint: Consider what improvements could be made to the accounting system to obtain more accurate costs)