1011 PS1 Q S15 - Econ 1011 - Problem Set #1 - Questions - Spring 2015 PDF

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Econ 1011 - Problem Set #1 - Questions - Spring 2015...

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YOUR NAME:_______________________________ YOUR TAs NAME:_______________________ YOUR DISCUSSION #___________ THE GEORGE WASHINGTON UNIVERSITY Department of Economics Economics 1011 Section 10

Prof. Steve Suranovic Spring 2015 Problem Set #1 Due in Class Wednesday January 28

Part A. Write the term that is described by each of the following statements in the blank space.

Questions 1. Macroeconomics studies these types of economic variables. 2. This branch of economics studies the behavior of individual firms and households 3. This type of economic analysis seeks to explain how things work in the economy

Answers aggregate

microeconomics

Positive economics

4. This type of economic analysis seeks to explain what types of policies should be applied. 5. Adam Smith used these three professions in his story to describe the motivation of production of the essential goods we all desire. 6. What does Adam Smith say in the Wealth of Nations motivates production activity.

Butcher, baker, brewer

7. Economists assume consumers act to maximize this. (a synonym for happiness)

utility

8. Economists assume firms attempt to maximize this.

profit

9. Typically, economic analysis focuses on consumer satisfaction that arises in what way?

Normative economics

Self-interest

Consumption of goods and services

10. Explain the division of labor for a restaurant meal by identifying three distinct tasks completed by a separate person.

Table preparation, greeting and seating, taking of order

11. term used to describe the amount of output that can be produced with one unit of labor input.

Labor productivity

12. Term used to describe the process of breaking up production activities into separate distinct tasks

Division of labor

13. economic term used to describe the fact that listening to a favorite song once or twice makes you happy but listening to it the 30th time in a day makes you go crazy. 14. Assuming diminishing marginal utility, if the first unit consumed gives a person 20 utils and the second unit gives an additional 15 utils, how much more may the third unit give? 15. Assuming constant marginal utility, if the first unit consumed gives a person 5 utils, how much more will the third unit give? 16. this economic data is the primary signal that influences economic decisions

Diminishing marginal utility

There will be 5 less, making it 10 utils

It will be the same (5 utils)

prices

17. An alternative name attributed to Adam Smith for Hayek’s “spontaneous economic order.”

Market mechanism

18. term used in economics to describe the fact that resources are limited

scarcity

19. Name three assumptions in the map model shown in class.

20. In map model, suppose a person uses it to find a place to get coffee on the way out of town. Is this an assumption or an implication of the map model? 21. In the map model, the lines represent actual roads in the town. Is this an assumption or an implication of the model? 22. In the map model, the town is depicted as two-dimensional. Is this assumption more likely to be consequential to the result or inconsequential? 23. In the map model, suppose one of the streets with an arrow is misnamed. Is this assumption more likely to be consequential to the result or inconsequential? 24. The map model uses small squares with shop names next to them represent actual buildings. Is this assumption included more because it reflects reality or more because it simplifies the model? 25. The map model assumes that small circles next to some intersections represent stop signs. Is this assumption included more because it reflects reality or more because it simplifies the model? 26. This kind of reasoning draws conclusions from a set of given assumptions. 27. In the pure exchange model, both trader’s preferences exhibit diminishing marginal utility. Is this an assumption or an implication of the model?

Lines are roads To the right is north Arrows are the direction to travel

implication

assumptions

inconsequential

consequential

More because it simplifies

More because it reflects reality

Priori or deductive

Assumption

28. In the pure exchange model, traders are assumed to have perfect information. Is this assumption more likely to be consequential or inconsequential to the result that trade makes both traders better off? 29. This kind of reasoning begins with empirical observations and infers what must have happened to cause it.

Consequential

inductive

30. The terms of trade if Jasper trades 10 pounds of potatoes for 2 jars of honey.

Either 5 lbs/jar or 1/5 jar/lb

31. If four bushels of apples can be traded for three bushels of oranges, how many bushels of oranges can be purchased with one bushel of apples?

¾ bushels of oranges

32. If the price of ice cream is $5.00 per quart and the price of cheesecake is $3.00 per slice, what is the terms of trade between cheesecake and ice cream?

5/3 slices/qt or 3/5 qts/slice

33. If Smith earns $100,000 in surplus value when he sells oranges at the market and if the total surplus value created by trade is split 25-75 between seller and buyer in each transaction, then how much surplus value do consumers who buy oranges from Smith receive in the market?

$300,000

34. Self-interest, or greed, can generate negative outcomes if an individual engages in one of these unethical behaviors.

Dishonesty

35. Lack of respect for property rights could enable a greedy Smith or Jones to engage in this non-market activity

Theft

Part B. Complete the following questions on a separate sheet and attach with a STAPLE. 1. Consider the map in the Figure below. Suppose you wish to travel from Washington DC to Philadelphia in the shortest amount of time, and that you can drive 1 mile per minute on all of the routes shown. Harrisburg PA 106 m iles

Philadelphia PA

123 miles

s 95 mile

11

0m

s ile

40

mil es

Baltimore MD

Washington DC a. What is the shortest driving time (in minutes) to Philadelphia?

b. Suppose the dashed lines represent current road repair activity that slows traffic to an average of 2 minutes per mile. With this added assumption, what is the shortest driving time (in minutes) to Philadelphia?

c. Suppose the assumption in b is still true and the dotted line represents a road closure that prevents cars from passing. With this added assumption, what is the shortest driving time (in minutes) to Philadelphia?

d. Which added assumption is consequential to (i.e., affects) the chosen route?

e. Which added assumption is inconsequential to the chosen route?

One simplification in the model above is that each city is represented by a dot. The distances between cities are the distances from the city borders. However, suppose in a more realistic version of the model we assume the time it takes to drive from the border of the city to the city center is given in the following table. (These times are added to the between city distance/times above). Suppose to drive thru a city requires driving into the center and also back out to the border (i.e. it takes twice the time) City Washington DC Baltimore, MD Harrisburg, PA Philadelphia, PA

Time (Border to Center) 20 mins 15 mins 5 mins 35 mins

f. Is the simplification of using a dot for the city consequential in terms of which route is shortest in parts (a) and (b) above? In other words, by adding the more realistic assumptions, do the routes in parts (a) and (b) above change? Assume no construction is occurring within the cities in any cases.

g. Is the simplification of using dots for cities consequential in terms of the time it would take to drive from city center to city center in parts (a) and (b) above?

2. Answer the following questions by referring to Figure 2.2 in Section 2.2 of the textbook. Suppose each bracketed combination refers to (# oranges, # apples) a. Which combination of apples and oranges is equivalent to (3, 8) for Smith?

b. Explain why Smith gets higher utility with (6, 5) than with (2, 6).

c. If consumption exhibits diminishing marginal utility, it is possible for (4, 5) to give Smith the same amount of utility as (6,3)?

3. Answer the following questions by referring to Figure 2.6 in Section 2.3 of the textbook. Suppose each bracketed combination refers to (# oranges, # apples) a. How many oranges and apples do Smith and Jones have at point C?

b. How many oranges and apples do Smith and Jones have at point G?

c. How many oranges and apples do Smith and Jones have at point K?

d. How many oranges and apples do Smith and Jones have at point A?

4. Answer the following questions by referring to Figure 2.6 in Section 2.3 of the textbook. a. What would the terms of trade be if Smith and Jones trade from the endowment point E to the point J?

b. What would the terms of trade be if Smith and Jones trade from the endowment point E to the point B?

c. What would the terms of trade be if Smith and Jones trade from the endowment point J to the point G?

5. Answer the following questions by referring to Figure 2.7 in Section 2.6 of the textbook. Assume the initial endowment is (10, 0) for Smith. Suppose each bracketed combination refers to (# oranges, # apples) a. Which trade pattern is most likely to be best for Smith: 3 oranges for 5 apples, 5 oranges for 3 apples, 7 oranges for 5 apples, or 9 oranges for 6 apples?

b. Which trade pattern is most likely to be best for Jones: 3 oranges for 5 apples, 4 oranges for 6 apples, 6 oranges for 3 apples, or 8 oranges for 8 apples?

6. Answer the following questions by referring to Figure 2.7 in Section 2.6 of the textbook. Assume the initial endowment is (10, 0) for Smith. Suppose each bracketed combination refers to (# oranges, # apples) a. Briefly explain why the trade 3 oranges for 7 apples achieves a pareto optimum.

b. Briefly explain why the trade 3 oranges for 7 apples is not the utility maximizing solution for the traders.

7. Answer the following questions based on the Edgeworth Box diagram below using the labeled points A – I as needed. Suppose the diagram describes two individuals Chris and Dana. Dana is initially endowed with 11 bags of peanuts and 1 bottle of beer and Chris is endowed with 4 bags of peanuts and 9 bottles of beers. Suppose the solid lines are Dana’s indifference curves while the dotted lines are Chris’ indifference curves. 14

10

10

12

8

6

2

4

0

A B

8

2

D

C

6

4

4

6

E F

2

8

0

I

H

G

0

Dana

Chris 0

Beer (bottles)

Beer (bottles)

Peanuts (Bags)

2

4

6

8

10

12

14

Peanuts (Bags)

A. (1) Which labeled point represents the endowment? B. (1) Which labeled point or points give Chris a higher utility than D? C. (1) Which among all the labeled points gives Chris the highest utility? D. (1) Which labeled point or points are mutually beneficial after trade? E. (1) Which labeled point, or points, is (are) certainly Pareto Optimal? F. (1) What is a possible terms of trade, in bottles per bag, if Chris and Dana trade mutually voluntarily? G. (1) Which labeled point, or points, would require theft or deception rather than voluntary exchange to obtain?

10

8. What standard assumption in the pure exchange model must be relaxed to make deception a possibility.

9. Explain how the frequency of trades between a seller and a buyer can affect one’s ability to use deception to raise one’s utility. In other words, how would the potential for deception change if one expects never to again sell to your current customer, compared to a situation in which you expect to sell to the same customer again and again?...