True or False Questions With Explanation Why The Answer Is So

Question

1.

Suppose that bushfires in North-West Victoria destroys many of the citrus farms. As a result, the

price of oranges rises from $0.40 to $0.80, the price of a tangelo rises from $1.20 to $2.00, and the

price of limes rises from $0.50 to $0.90. Suppose the citrus market basket is composed of 100

oranges, 50 tangelos and 200 limes. Therefore, there has been an 80% increase in citrus price

index and the average citrus consumer's cost of living has also increased by this amount.

2.

A housing estate has 100 residents who are concerned about security. The accompanying table gives the total cost of hiring a 24-hour security service as well as each individual resident’s total benefit.

(a) Explain using precise economic language, why the security service is a public good for residents of the estate.

(b) If the residents act together, how many security guards will they hire? (use marginal analysis to justify your answer and show all working).

Quantity of security guards Total Cost Total individual benefit to each

resident

0 $0 $0

1 150 10

2 300 16

3 450 18

4 600 19

Answer 1

For (1) the basket's prices before and after the price changes could be calculated to be $200 and $360 respectively, for an 80% increase but the average citrus consumer's cost of living hasn't necessarily increased by this much. (FALSE) (see the unnecessary calculations below) Honestly, I initially missed the additional claim they sneakily placed in at the end, unfortunately not until after I had done all the arithmetic.

Old basket = 100 * $0.40+50 * $1.20+200 * $0.50 = $40 + $60 + $100 = $200

New basket = 100 * $0.80+50 * $2.00+200 * $0.90 = $80 + $100 + $180 = $360

% change = (new - old) / old * 100% = (360-200)/200 * 100% = 160/200 * 100% = 80%