Answering Managerial Economics Questions: Forex Markets Revisited, Real Estate Policies (Coursework Sample)

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Managerial Economics Questions
Forex Markets Revisited:
 The demand and supply of dollars with relative to the Japanese Yen is as shown in the figure below. From the figure it can be seen that for exchange rate of Yen for a dollar is fixed at 120.64 Japanese Yens.
Yen / dollar ($) Supply
 120.64
 Demand
1 Quantity of Dollar ($)
An increase in supply of Yen will lead to a decrease in the demand for the dollar and this makes the dollar to appreciate in value, and less of the US goods will be bought in the market as compared to the Japanese goods, which have become cheaper. If the US government wishes to keep the exchange rate fixed, it has to increase the supply of dollar. Such a policy will lead to depreciation in the value of the dollar, which will increase the inflation rate in the United Sates.
Real Estate Policies:
In competitive market for real estate in which demand has a standard downward-sloping shape and supply is perfectly inelastic (vertical), what consumers fear most is when the price ceiling (P Max) is fixed below the initial equilibrium price. This is because such a move will create shortages in the market for real estate as shown in the figure below.

 Price Supply

 Pe
 Pmax
Shortage Demand

Qs Qe Qd
From the figure, it can seen that at the equilibrium price Pe, the quantity demanded and the quantity supplied of real estate is the same. When the government decides to fix the price ceiling (P max) below the equilibrium price, the quantity demanded increases from Qe to Qd, while the quantity supplied decreases form Qe to Qs. This creates shortages in the market as the quantity demanded is far above the quantity supplied. This situation is disliked by the consumers since there is no one point when the quantity of the real estate supplied will be adequate to match the demand of the consumers.
Drug Legalisation and Taxation:
An increase in demand increases the consumer surplus while decrease in supply will lead to a decrease in the producer surplus. A decrease in the producer surplus will be offset by the increase in the consumer surplus and this will make the total market surplus to remain the same as shown in the figure below.
 S2
 Price S1
 P2
 B Final Market Surplus
P1 Initial Market surplus
A D1 D2

Quantity
A decrease in supply will lead to an increase in consumer surplus while producer surplus will be reduced. However, when the government imposes taxes which are equal to the sum of change in demand and supply, the consumer surplus and the producer surplus will set back to their original level due to the dead weight loss created by the government. This causes the government surplus and the social surplus to remain the same. This can be illustrated as shown in the figure below.
Price S2
 S1
X + Y P2
 P1 Dead weight loss
D

Quantity
Import impact:
The figure below shows the effect of allowing the importation of a product at a relatively lower price than that charged in the a competitive market with a standard domestic demand curve and a standard, but highly elastic, domestic supply curve in which the domestic suppliers have been sent out of the market.
 Sd
 Price SW
 P* Initial domestic surplus
 PW Final social surplus


Q* Qw Quantity
From the figure, Sd is the initial domestic supply curve while SW is the supply curve when goods are allowed to be imported at PW. The supply curve shifted to the right as there is increase in the supply due to importation of more goods. The initial social surplus is represented by the dark shaded region as shown in the figure above. When goods are allowed to be imported at PW, the quantity demanded increases from Q* to Qw, and this causes both the producer surplus and the consumer surplus to increase leading to an increase in the social surplus.
Elastic Demand and Externalities
In a competitive market with a standard supply curve and a perfectly elastic (perfectly flat) demand curve, an introduction of a standard per –unit tax will increase the price of the product while the supply will remain the same. Increase in price shifts the demand curve vertically from D1 to D2 with units equal to the cost of the negative externality ($ X) as shown in the figure below. A shift in the demand curve upwards increases the producer surplus which implies an increase in social surplus, since social surplus is the summation of the producer surplus and the consumer surplus. AP1B is the original producer surplus, while AP2C is the new producer surplus after the externality has led to a per unit tax of $ X.
 Supply
Price P2 C D2
 $ X New Producer Surplus
 P1 B D1
Original Producer surplus