ECON 649 Economic Analysis

One of the incentives that led to the introduction of the moving assembly line and other technological innovations in the production of cars in the United States was the increase in the wages of skilled workers required to produce cars using older production methods.

1. Show on a diagram the two different technologies used to produce one Model-T car, i.e. the technology before (Technology A) and after the innovations by Henry Ford (Technology B). On the horizontal axis put the number of workers employed in the production process. 

1. Are either of the two technologies (A or B) dominant Explain.

1. Use isocost lines to illustrate the costs of Technology A and B before the change in relative prices. Illustrate the impact on the isocost lines arising from the changes in relative prices caused by the increase in the wages of skilled workers. 

2. Discuss the impact on the incentives for firms arising from this change in relative prices. Incorporate the concept of economic rent into your discussion.
3. Henry Ford said that he wanted to make cars at a price that meant any middle-class American could afford to buy them. He achieved his goal with the price of Model-Ts declining from around $800 to less than $300 between 1908 and 1923. The lower price increased annual sales of the Model-T from around 10,000 to more’s than 2 million cars across the period.
4. Illustrate diagrammatically the impact of the Ford company’s profit maximising choice of price and quantity arising from the innovations in the manufacturing process.

1. Explain any assumptions you may have made in drawing this diagram/s.

3. Continue to assume the firm faces a similar cost curves to the firm that manufactured Beautiful Cars (Unit 7 of the textbook). At the end of World War 2, car companies were able to sell to the highest bidder because the demand for cars was greater than U.S car manufacturers could supply. In the United States in 1958, the problems for consumers caused by this bidding war led to the introduction of a law that mandated that car yards place a price on the car.

1. Discuss the impact of the bidding war between consumers, on prices that car yards were able to charge customers. Outline the impact on the size and distribution of the gains of trade between the customers and the firm. Illustrate on the appropriate diagram.

1. Discuss the impact of the law that forced car yards to place a price on the car. This discussion should include the impact on prices and the size and distribution of the gains of trade between the customers and the firm. Illustrate on the diagram. 

1. Discuss the impact of the internet on the size and distribution of the gains from trade between the sellers of cars and its customers. Illustrate on the appropriate diagram.

1. Which of the situations in the car market outlined in a) b) and c) are Pareto efficient Explain.

4. In the previous question, we assumed that car firms had a particular set of cost curves. However, the cost curves for car manufacturers using mass production techniques could be different.

1. Draw a set of alternative cost curves (total cost, average cost and marginal cost) for car manufacturers that use mass production techniques. 

1. Explain the reasons behind your representation of the cost curves.

Read Section 3.1 “Labour and Production” in the textbook.  You have been asked to conduct a research study at your university, just like the one at Florida State University.  In addition to study environment, outline two factors that you think should ideally be held constant in a model of the relationship between study (leisure) hours and final grade? (30 words maximum)

1. What could bring about a technological is improvement in your production function (the relationship between study hours and your marks) and those of your fellow students? Outline two of these potential changes that could improve the relationship between hours spent studying and the marks gained. 

1. Analyse what might happen to your optimal choice of free time and final grade, and the choices that your peers might make. 
2. Illustrate on a diagram (feasibility frontier and indifference curves) the impact on YOURchoice arising from the technological improvement associated with your studies. 

“The high-income economies will continue to experience a major transformation: the declining role of work in the course of our lifetimes. We go to work at a later age, stop working at an earlier age of our longer lives, and spend fewer hours at work during our working years. Robert Fogel, an economic historian, estimated the total working time, including travel to and from work and housework, in the past. He made projections for the year 2040, defining what he called discretionary time as 24 hours a day minus the amount we all need for biological maintenance (sleeping, eating and personal/home hygiene). Fogel calculated leisure time as discretionary time minus working time.” (Unit 3, Section 3.9)

1995. Outline the reasons for the increase in (lifetime) discretionary hours in high income countries between 1880-1995. 
1996. Illustrate the impact of technological innovation on discretionary hours, and the choice between leisure and annual earnings in 1880, 1995 and the predicted changes for 2040. 
1997. Outline the reasons for the outcomes in 1880, 1995 and 2040 that you have illustrated on your diagram. What would you include in a university lecturer’s employment contract, if you want to influence the effort put into teaching.

1. What can’t or would be difficult to include in the contract.

Rip Curl is an Australian company that began operations in 1969.  It was originally involved in the manufacture of surfboards but it expanded the scope of its business so that is now one of the biggest companies involved in the design, manufacture, and sale of surf and snow wear.  

Ripcurl in the 1970s manufactured all its products in Australia. In 2017 there is only one Ripcurl factory left in Australia.  Joe is employed in this factory, which makes clothing for Ripcurl.  He earns $25/hour and works 40 hours each week.  The job is repetitive and boring.  He values the hourly disutility of work at $5.  If he were to lose his job he would qualify for unemployment benefits and receive $535.60 every 2 weeks.  There is no time limit on the receipt of unemployment benefits in Australia.  Joe is 47 years old and the average length of unemployment in Australia for those aged 45 to 54 years is 63 weeks.

In 2016, Ripcurl was heavily criticised for outsourcing some of its clothing production to a factory in North Korea, located near the border with China.  The criticism centred on the pay and work conditions of people in the factory.  This included being forced to work 7 days per week (without additional compensation), averaging more than 70 hours per week.  In fact, workers are paid very little in cash.  Most of their wages in this factory are received as food coupons that can only be used at government run stores to purchase rice and corn. Workers who do not obey orders can be imprisoned in labour camps where there is no pay and the conditions are much worse.

1. Discuss the size of the economic rent received by the North Korean workers in the Ripcurl factory.  Your answer must include a reference to the relationship between the hourly wage, the disutility of effort and their reservation wage. 

Ripcurl claims it did not know about the factory in North Korean, stating that one of its Chinese suppliers had outsourced the work to the factory without their permission.   Workers in factories in North Korea can produce 30% more clothes each day than Chinese workers.

We know little about the wages of factory workers in North Korea except for those at the Kaesong industrial zone just across the border from South Korea.  The wages in these factories are higher than elsewhere in North Korea as they were negotiated as part of a deal between the North and South Korean governments. The wages for North Korean workers in the industrial zone ranges from a minimum of around $75 a month to an average of around $160.  This compares with an average factory wages of $450-$750 a month in China.

1. On the same diagram draw the best response curve for the workers in North Korea industrial zone and China (with the daily wage on the horizontal axis, and daily effort on the vertical axis).  (Hint: Think about the possible differences in the slope of the best response function). 

1. On a new diagram illustrate the cost minimizing/profit maximizing choice for owners of factory’s in North Korea and China. 
2. Based on the above analysis is there involuntary unemployment in North Korea and China. 

Most studies find that younger people are more sensitive than older people to increases in the price of cigarettes.  The average price elasticity of cigarettes for teenagers is –1.43, –0.76 for young adults, and –0.32 for adults.  Another factor influencing elasticity is income with studies in high-income countries finding greater price sensitivity of tobacco among those on lower incomes.  

1. Provide two reasons for the differences in price elasticity of demand for the different age groups. 

1. Explain the greater price sensitivity of demand for tobacco amongst lower income groups.

1. Assume the demand for cigarettes amongst low income groups is price inelastic (even if it is more elastic than higher income groups).  Discuss the impact on the budgets of these consumers arising from the annual increases in taxes on tobacco.

1. Use the supply and demand diagram.  Illustrate the impact of levying a tax on cigarettes on the welfare of consumers and suppliers.

1. Discuss the impact on welfare from the levying of taxes on cigarettes shown in the previous diagram.  Refer to the impact on the consumer & producer surplus.

Half of the people who smoke cigarettes will die early from a smoking-related disease. In Australia, that works out to about 15,000 deaths per year.  In Australia smokers spent over 750,000 days in hospital each year — leading to hospital costs of about $670 million.

1. Is a broader definition of welfare (one that includes more than the consumer & producer’s surplus) more useful in analysing the welfare impact of taxing cigarettes.

In Australia, the proportion of smokers using roll-your-own tobacco has increased in recent years.  Now around 24% of smokers in Australia smoke rollies rather than factory (tailor) made cigarettes.  This is because the effective tax levied on tailor made cigarettes has been higher than the tax on each roll-your-own cigarette.

Unfortunately, rollies are more harmful than tailor-made cigarettes. Rollies have about 38 times more additives than factory-made cigarettes. These additives include chemicals that are associated with cancer and other smoking related diseases.  Another factor in the health risk of rollies is that they are usually thinner, causing people to suck harder, which increases the amount of tar you inhale.  Studies have shown that the increased risk of cancer from smoking rollies is two to three times higher than the risks from smoking tailor-made cigarettes. 

1. Use the supply and demand diagram.  Illustrate the impact of the differential taxation on the market for rollies. 

1. Discuss again the impact on welfare from the taxation of tobacco products.  (Hint: Address the impact from the switch to rollies).  

1. Governments in high-income countries introduced advertising bans on tobacco products in the 1990s.   Discuss the potential impacts on the slopeof the demand curve from the ban. Discuss the potential impact of the ban on tobacco advertising on the price setting power of tobacco companies.

1. Illustrate diagrammatically the potential impact on the profit maximising choice of tobacco companies arising from the ban on advertising. (Ignore the impact on the costs of the company from the ban on advertising). 

Pareto efficient refers to productive efficiency that concerns with optimal manufacturing of product. Internet benefits the customers in inquiring about the cars and purchase according to their needs and this leads to socially optimal allocation (Rios et al.2013). It may adversely influence the producers, as internet utilization is limited to them. Hence, in this situation the car market becomes Pareto efficient as it makes consumers better off byu making producers worse off.