Reference no: EM13696040

Tourists Head for the Exits

Problem 1:

The number of Australians holidaying overseas has doubled, leaving domestic operators reeling. While domestic tourism has been on the slide for a decade, overseas travel by Australians has more than doubled. The latest government figures indicate almost a third of the population is taking an annual trip abroad.

a. Describe the degree of substitutability between holidays in Australia and holidays overseas and draw an indifference curve that illustrates your description.

b. Draw a budget line for holiday travel and identify the best possible allocation between domestic and international holidays.

c. Show on your graph how the best affordable point changes when the price of overseas holidays falls.

Problem 2:

In standard economics we tend to emphasize goods and services as a source of utility. Thus for a society, Gross National Income (GNI) per capita - essentially the income per person of residents - would be a measure of happiness or the quality of life. What are some of the problems of using this to measure quality of life?

Problem 3

We can divide an individual's life into two hypothetical periods - ‘young' and ‘old'. Suppose that the individual earns income only when young and saves some of that to consume when old. If the interest rate on savings falls, can you tell what happens to consumptions when young? Can you tell what happens to consumption when old? Explain with the use of a diagram.

Problem 4:

Imagine that a wealthy relative dies and leaves you an inheritance in a trust fund that will provide you with $20 000 per year for the rest of your life. Draw a diagram to illustrate this shift in your budget constraint between leisure and consumption. After considering the ideas of income and substitution effects, decide whether this inheritance will cause you to work more or less.

Problem 5:

To run a hairdressing business, you need to hire labour and capital. Suppose labour costs $20 per hour and capital (rent for the premises
and equipment) costs $30 per hour.

a. Suppose the minimum cost way to produce 4 haircuts per hour is to use 3 units of labour and 2 units of capital. Draw the isocost line that minimizes the cost of producing the 4 haircuts. (Put labour on the horizontal axis).

b. What is the slope of the isocost line?

c. Suppose the price of labour increases to $30 per hour. Illustrate on the diagram and explain in words how production process of producing 4 haircuts per hour will change.