经济学导论_Outcome1_Exam-答案

经济学导论_Outcome1_Exam- Assessment task instructions 答卷时在各个图里将均衡点对应的坐标用虚线对应到对应的坐标轴上 Read the following passage and answer the questions which follow. SteamScot is a privately run rail company, which provides steam train journeys in Scotland. At present they operate three specific rail journeys in various parts of Scotland. These journeys are aimed at the tourist market and operate throughout the summer months. Around 70% of passengers are domestic tourists with the other 30% overseas visitors. The company has been fairly profitable over the last decade, and with the help of various grants available, they are considering an expansion of its operations. However, it is also aware that within the next five years a major overhaul of its capital stock as well as major repairs will have to be undertaken. It is this dilemma that the board of the company faces. It is estimated that in the coming year it will have ?2.5 million to spend. This money could be used to open a new line between Inverness and Fort William, or to begin the repair and replacement plan on its current routes. A recent report has highlighted that following recent terrorist threats, visitors from the USA are expected to fall within the next three years, but that European visitors are likely to increase as the Euro rises in value. It is also expected that Visit Scotland (the tourist organisation) will mount a major advertising campaign in England to encourage more visitors from that country. The board of directors of SteamScot is also considering a change in their pricing, but is unsure if this is a wise move. At present the average price of a journey is ?4 and 60,000 tourists use the services. A report commissioned by the board on price, supply and demand is shown on the following table. Price of tickets Quantity demanded Quantity supplied ?6 20,000 100,000 ?5 40,000 80,000 ?4 60,000 60,000 ?3 80,000 40,000 ?2 100,000 20,000 ?1 120,000 0 1 SteamScot face a ‘basic economic problem’! What is this ‘problem’ and what is the opportunity cost of the replace and repair programme? The problem of SteamScot is: Although to open a new line between Inverness and Fort William and to begin the repair and replacement plan on its current routes are both needed for the development of company, yet the money that SteamScot will spend in the coming year is within limits due to limited resources. Therefore, SteamScot cannot apply the two plans simultaneously and has to make a choice between opening a new line between Inverness and Fort William and beginning the repair and replacement plan on its current routes. Opportunity cost is the largest value of the things given up in order to get something else. For SteamScot, the opportunity cost of the replace and repair programme is the revenue brought by the new line between Inverness and Fort William. 2 From the table in the previous passage, construct a demand and supply schedule on a diagram and identify the equilibrium price and quantity. Answer: According to the report commissioned by the board on price, supply and demand, the diagram of the demand and supply schedule is depicted as follows: ?4 and the equilibrium It can be learned from the diagram that the equilibrium price is quantity is 6,000. 3 (a) Calculate, using total revenue, the price elasticity of demand when: (i) price rises from ?4 to ?5 Answer: calculated by midpoint elasticity formula of the price elasticity of demand. The formula is:, where, is the price elasticity of demand, , are the initial price and the price after changes respectively, and , are the corresponding demand of initial price and the price after changes respectively. According to the price, supply and demand provided by the report is: when the price is ?4, the demand is 60,000; when the price is ?5, the demand is 40,000. (ii) price falls from ?4 to ?3 According to price, supply and demand provided by the report, when the price is ?3, the demand is 80,000; when price falls from ?4 to ?3, the price elasticity of demand is: (b) If you were a member of the SteamScot board, what would you recommend the company does in both situations? Give reasons for your advice. Answer: when the price elasticity of demand is larger than 1, lower the price will help increase the company’s revenue; when the price elasticity is equal to 1, prices changes have no influence on the company’s revenue; and when the price elasticity is less than 1, lower the price will reduce company’s revenue. When price rises from ?4 to ?5, the price elasticity of demand is 1.8 which is larger than 1. The range of demand decreasing is larger than the range of price rising, so the revenue of SteamScot is reduced from 240,000 to 20,000. In this case, SteamScot should lower the price by cutting costs, or create more opportunities to increase the demand while maintaining the price of ?5. For instance, SteamScot could increase customer demand by improving service quality. When price declines from ?4 to ?3, the price elasticity of demand is 1. SteamScot’s revenue will experience no change, but remain at 240,000. In this case, SteamScot can keep stable revenue with no other efforts but sustain the product quality and the service quality. 4 How would the advertising campaign by Visit Scotland affect demand for SteamScot journeys? Show the effect on a diagram. The advertising campaign by Visit Scotland would increase the amount of tourists, as well as increase the demand for SteamScot journeys. As shown below: 5 Apart from an increase in price, what other determinant would encourage SteamScot to increase its supply of rail journeys? Apart from price, other determinants which can encourage SteamScot to increase its supply of rail journeys are: governments lower the taxes for companies or to provide subsidies for companies, and technological progress cuts the production cost of SteamScot. 6 If the Chancellor of the Exchequer was to reduce income tax, would this affect demand for SteamScot’s products? Explain your answer with reference to income elasticity of demand. Answer: SteamScot’s products are journeys and journeys are luxuries for people. The income elasticity of demand is larger than 1, that is, when the income increases by 1%, the demand will increase by more than 1%. If the Chancellor of the Exchequer was to reduce income tax, people’s disposable income would increase, and the demand for journey would increase as well. Therefore, measures to reduce the income tax will increase demand for SteamScot’s products. 7 Using a diagram show what would happen to the equilibrium if the Scottish Executive gave SteamScot a subsidy. Explain any changes and how the market would return to equilibrium. Answer: If the Scottish Executive gave SteamScot a subsidy, it is equivalent to lower SteamScot’s cost. Compared with no subsidy, the price with subsidy would be lower than the price without subsidy of the same quantity. Therefore, SteamScot supply curve will move down, as shown below: E1 The chart above shows that the equilibrium point moves from E1 to E2. Related to the original equilibrium, if the Scottish Executive gave SteamScot a subsidy, equilibrium price would decrease and the equilibrium quantity would rise. The process of adjustment of market from E1 to E2: after government provides subsidy to SteamScot, SteamScot’s cost is lowered; the products quantity provided by SteamScot would increase and the market supply would increase. Under the original price of P1, the amount of journey that market is willing to supply is larger than the amount of journey that consumers are willing to accept. For Q1, the cost of increasing one unit of product is less than the price that consumers are willing to accept. Therefore, the company is willing lower prices to increase product supply. As prices continue to decrease and market demand continues to increase, the company will adjust to the price and quantity of E2 where the market is balanced.