Question ECO405 Week 10 Scenario Script: Economic Problems and Issues

02 Jun Question ECO405 Week 10 Scenario Script: Economic Problems and Issues

Question
ECO405 Week 10 Scenario Script: Economic Problems and Issues

Week 10 Scenario: Government-funded Programs & Social Responsibility

Slide #

Slide Title

Slide Narration

Scene 1

Boss: Great news! I’ve learned of a government grant to expand our operation in a low-income area. These grants are designed for any business that is willing to open up in areas that have high unemployment rates and low income. The idea is that they will increase employment through providing opportunities to the local population.

Scene 2

Employee: The grant money from the government will …

Scene 2.a

Response A

Employee:Increase our cost structure, shifting our supply curve to the left.

Boss: Incorrect. The grant in effect means the government is paying a part of our production costs, so the amount we have to pay to produce a quantity of goods has decreased.

Scene 2.b

Response B

Employee:Decrease our cost structure, shifting our supply curve to the right.

Boss: Correct. The free money from the government means we can provide more quantity for the same price, or charge a lower price for the same quantity.

Scene 2.c

Response C

Employee:Does not change our cost structure, which in result will not change the supply curve.

Boss: Incorrect. Our sources of revenue do change the quantity and price of goods that we can provide, which does shift our supply curve.

Scene 3

Boss:This grant seems to be a benefit to both our company and the local community, but the story does not end here.

The government gets its money from taxing the population and businesses. To be able to give grants, they need to somehow find the money. The results could be counter-effective on small and large scales depending on how they obtain the funding.

Scene 4

Employee: I see your point. An increase in taxes would …

Scene4.a

Response A

Employee:Increase the disposable income for our community.

Boss: Incorrect: taxes take away from income and this means less income will be realized.

Scene 4.b

Response B

Employee:Decrease the disposable income for our community.

Boss: Correct: After the government deducts taxes, we get disposable income. An increase in taxes will reduce the disposable income.

Scene 5

Boss: How does that affect the demand for our products and services?

Scene 6

Employee: An increase in income taxes will …

Scene 6.a

Response A

Employee: Shift our demand curve to the left, causing less quantity demanded.

Boss: Correct. An increase in income taxes will decrease disposable income, which will result in consumers demanding less quantity.

Scene 6.b

Response B

Employee: Shift our demand curve to the right, causing more quantity demanded.

Boss: Incorrect. An increase in income taxes decreases disposable income, which will result in consumers demanding less quantity.

Scene 6.c

Response C

Employee: Income taxes don’t affect the demand for products and services.

Boss:Incorrect. I would expect by now that you would understand that a change in cost affects demand.

Scene 7

SHOW GRAPH

Boss: This is our business’s supply and demand chart. The supply curve S and the demand curve D show the pre-grant situation.

Scene 8

QUESTION 1

Boss: Show me how the grant, and the tax increase to fund it, will change the supply and demand curves.

Scene 8.a

Response A

Employee: S & D [$.75 & 130k]

Boss: Incorrect. These curves show the situation before the grant and the tax hike to fund it.

Scene 8.b

Response B

Employee:S & D1 [$.55 & 130k]

Boss: Incorrect. This shows the decrease in demand due to the tax hike, but does not show our increased ability to supply due to the government grant.

Scene 8.c

Response C

Employee:S1 & D [$.85 & 125k]

Boss: Incorrect. The government grant will lower our costs, which will decrease prices for a given quantity. The S1 curve shows an increase in costs.

Also, the increase in taxes to supply the grant will decrease demand due to consumers’ lower disposable income.

Scene 8.d

Response D

Employee: S1 & D1 [$.75 & 120k]

Boss: Incorrect. This does show the decrease in demand due to the tax increase, but shows an increase in our supply costs. The government grant money given to us will decrease our costs.

Scene 8.e

Response E

Employee:S2 & D [$.65 & 150k]

Boss: Incorrect. This does show our decreased costs from the government grant, but does not show the consumer’s decreased demand from the tax increase.

Scene 8.f

Response F

Employee:S2 & D1 [$.55 & 130k]

Boss: Correct. These curves show our decrease in cost due to the free government grant money, and also show the decreased consumer demand due to the tax increase to fund the grant.

Scene 9

QUESTION 2

Boss: How does the price and quantity equilibrium for the tax-hike grant situation compare with the pre-grant equilibrium?

Scene 9.a

Response A

Employee: Price higher, quantity higher