Product efficiency and allocative efficiency.


Question One

  1. Dr. Arata Kocki is talking about both Product Efficiency and Allocative Efficiency.
  2. Production efficiency is achieved if goods and services are produced at the lowest possible cost. This result is achieved at all the points on the PPF (Production Possibilities Frontier). "But eliminating the last 10 percent is a tremendous task and very expensive". The production possibilites frontier is the most useful tool that would show the most efficient ways in which the governments can produce multiple goods with the resources they have. The production possibilities frontier illustrates the scarcity and limitations of how much of which good can be produced. The governments would use this tool as a way to determine at which point along the curve they would choose for production, this would decide how many units of mosquito nets and how many units of medicine would be produced with the limited resources they have. Using the PPF model would involve the decision of tradeoff. At any point in time, the output cannot exceed the input. If the producers decide to produce more of one good they must sacrifice the other good in order to do so. For example if the government wants to produce more mosquito nets they would have to decrease the production of medicine and allocate those resources to mosquito net manufacturing. The amount sacrificed is called the opportunity cost.

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    Allocative efficiency is the point on the Production Possibilities Frontier. At the best point on the PPF we cannot produce more of one good without giving up another that benefits us in another way. According to Dr. Arata Kochi, with enough money, current tools like nets, medicines and DDT could drive down Malaria cases 90 percent. The PPF tool also helps depict the marginal cost and benefits. The marginal cost is the opportunity cost of producing one more of a unit. This may be why the last 10 percent would be a "tremendous task and very expensive".

    Question Two

  3. At some point during the decrease in the price of music, consumers will be willing to purchase music instead of illegally downloading music free. As the price for music decreases, it is predicted that legitimate music providers would gain a larger market share. Some consumers may begin to download music when they feel that the price of music is set at a point where purchasing music would not be a noticable burden on themselves financially. This would impact people with low incomes the most, mainly teenagers. If a track is priced at 99 cents and they would like to buy a whole album which averages out at about 15 tracks per album, the album would be priced at 15 dollars which would not compete with free downloads from other websites. However if the price of a track was 25 cents and they wish to purchase the whole album, the album would only be priced at 4 dollars. This low price could attract many illegal downloaders. Another benefit that would attract illegal downloaders to purchase music after the price decrease would be for the fact that they are inheriting tracks legally and not risking themselves to be fined by the law if they were ever to be caught. In the past, the media has spread the news of downloaders being caught, facing heavy fines. Purchasing music legally by paying a small price would relieve them of that stress.
  4. In the music market, CD's are generally priced higher than digital downloads because of the production costs and other added costs by retailers. Currently, new release album CD's are priced at an average of 25 dollars. A price reduction on digital music downloads will most likely decrease the demand of music CD's. The main reason for the decrease in the demand for CD's is the price difference. Consumers would rather spend 4 dollars than 25 dollars on the same audio material that an artist has produced. Another factor would be the ease of purchasing. An album can be purchased and downloaded instantly over the internet and especially on fast dedicated servers like itunes, whereas music CD's take time and effort out of a day to purchase it.
  5. Decrease in price of music downloads would definately impact the consumer and producer surplus on the Avril Lavigne CD market. If music downloads are cheaper, consumers will want to pay less and download instead of buying the CD. This will overall decrease the consumer and producer surplus.
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Question Three

  1. The price of HD DVD players on ebay would decrease. The price would decrease because the HD DVD technology has become obsolete and useless to consumers because no upcoming movie titles would be released in the HD DVD format since the pullout of distributing companies.
  2. The price of Blu Ray players would remain constant. Even though the main competing format has pulled out they would still like the prices to remain competitve with other brands releasing blu ray players.
  3. The end of HD DVD would introduce an era of increased demand and supply of Blu Ray movies. The end of HD DVD would leave Blu ray as the only way to enjoy movies in high definition. This would increase the demand of blu ray movies which would also increase the supply. For example during the HD format battle between HD DVD and Blu Ray, Warner Brothers were associated with both releasing titles in both formats. Now that HD DVD is out, consumers who were backing up HD DVD would have no other option but to start purchasing Blu Ray titles if they want to continue enjoying movies in high definition.
  4. The market price for blu ray movies would remain constant as a means to hook consumers. Many movie titles were originally exclusive to Blu Ray and were priced the same as movies associated with both formats for examples titles produced by Warner Brothers. That shows that movies that can be purchased in another format and movies that couldnt were both priced the same for example Warner Brothers' "300" and an exclusive partner with Blu ray, Sony Pictures' "James Bond Casino Royale" both priced their titles the same upon release.
  1. If the price of Blu Ray players decreases from $400 to $350 a player the demand for these played would increase from 30 million to 35 million players per year, increasing revenue by 250 million dollars.
  2. If the price of Blu Ray players decreases from $350 to $300 a player, the demand for these players would increase from 35 million to 40 million players per year, decreasing revenue by 250 million.

Question Four

  1. P2xQ2= 180x110= 19800 19800 - (90x180) = 3600
  2. Without tax, the price of alcopops is $100 per carton. With the tax in place the demand curve shifts to the left dropping the price received by sellers to $90 and rising the price paid by buyers to $110. The tax raises the price paid by buyers by less than the tax lowers the price received by sellers, so buyers and sellers share the burden of the tax.
  3. Based on the equilibrium price and quantity consumed before and after the tax, it clear shows that the demand for 'alcopops' is elastic. By using the formula to calculate price elasticity of demand, the formula of "% changed in Quantity demanded/ % change in Price" was used. The equation was calculated resulting to -10/10 = -1 .
  4. It is expected that the tax on 'alcopops' could impact beer and spirits on the market. When taxes are imposed on certain products, consumers are less likely to buy it and switch to a cheaper alternative that would meet their requirements. These products are the substitutes. This is a similar case, consumers will look for a cheaper substitute good if a tax is imposed on 'alcopops' which may lead to a general increase in purchases of other alcoholic drinks like beer and spirits. However if prices of a good rises, people could choose not to purchase anything because they cannot afford it.