BUIL1149 PROPERTY ECONOMICS
PROBLEM SHEET # 1 (MICRO MODULE)
(SOLUTIONS TO ASTERISKED PROBLEMS)
Q3*
Consider the following equation:
where:
Ythe annual quantity of Baltic Pine (measured in units of 1 million metres) brought to market by millers
Xthe price per metre of Baltic Pine
Required:
(a)Is the relationship between X and Y a direct or inverse one?
The relationship is a direct or positive one. In other words, price X and quantity supplied Y move in the same direction. That is, as the price of Baltic Pine increases (decreases) the supplied quantity of Baltic Pine increases (decreases) all other variables held constant.
(b)Indicate which variable (X or Y) is the dependent variable and which is the independent variable.
The dependent variable is quantity supplied Y and the independent or explanatory variable is price X.
(c)Plot the relationship between the amount of Baltic Pine brought to the market and the price per metre of this timber over the price range $5 to $30 per metre rising in $5 increments.
(d)Identify the economic law that might account for the direction in which the graphed curve is sloping.
The upward sloping curve is attributable to the Law of Supply which states that “all other variables held constant, the quantity of supplied timber will increase (decrease) if price increases (decreases)[1].
(e)Use the graph as well as the algebraic equation to determine the quantity of timber brought to market at a price $14 per metre.
(f)Use the graph as well as the algebraic equation to determine the price per metre that will eventuate in 5 million metres of timber to be brought to market.
To solve this problem 3(f) algebraically one may proceeds as follows:
(g)What variables other than X do you think might alter the position of the graphed curve and for that matter the relationship between Y and X in the algebraic equation.
-The price of resources used in milling (e.g. electricity, labour etc.)
-Technology
-Price of substitutes (both timber and non-timber) for Baltic Pine
-Government Subsidies/Taxes
-etc.
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[1]Underpinning the propensity for the short-run supply curve to slope upwards is what is known as theLaw of Increasing Costs This Law asserts that the extra cost of producing one additional unit of output (when at least one of the inputs used in production is fixed) will get larger and larger the higher the level of supplied output. In turn, this implies that the minimum asking price required to call forth the profitable supply of one additional unit of output must get successively larger and larger at higher and higher output levels. And this of course will make the supply curve slope upwards. The Law of Increasing Costs - discussed more fully in Micro Topic 3 - is also responsible for the concavity of theProduction Possibility Curve (discussed in the introductory lecture).