ECON 1011 Problem Set 1 PDF

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THE GEORGE WASHINGTON UNIVERSITY Department of Economics Economics 1011 Section 14

Prof. Steve Suranovic Fall 2019 Problem Set #1 Due in Discussion Class Thursday Sept 12 by 4pm on Bb

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 variables (GDP, inflation unemployment, etc.) 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 and 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/greed

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 in the restaurant.

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

Taking an order (waiter), cooking the food (chef), cleaning the table (bus boy)

Labor productivity

12. 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.

Diminishing marginal utility

13. 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?

Less than 15 utils

14. Assuming constant marginal utility, if the first unit consumed gives a person 5 utils, how much more will the third unit give?

5 utils

15. this economic data is the primary signal that influences economic decisions

prices

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

The Invisible Hand

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

Scarcity

18. In the hand-drawn map model in Lecture 3, 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?

Implication

19. In the hand-drawn map model in Lecture 3, the lines represent actual roads in the town. Is this an assumption or an implication of the model?

assumption

20. In the hand-drawn map model in Lecture 3, the town is depicted as twodimensional. Is this assumption more likely to be consequential to the result or inconsequential?

Inconsequential

21. In the hand-drawn map model in Lecture 3, suppose one of the streets with an arrow is misnamed. Is this assumption more likely to be consequential to the result or inconsequential?

Consequential

22. The hand-drawn map model in Lecture 3 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?

More because it reflects reality

23. The hand-drawn map model in Lecture 3 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?

More because it simplifies the model

24. This kind of reasoning draws conclusions from a set of given assumptions.

Deductive reasoning

25. In the pure exchange model, both trader’s preferences exhibit diminishing marginal utility. Is this an assumption or an implication of the model?

Assumption

26. 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?

Consequential

27. This kind of reasoning begins with empirical observations and infers what must have happened to cause it.

Inductive

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

5 pounds of potatoes per jar of honey

29. 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 bushel of oranges

30. 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?

3 quarts of ice cream per 5 slices of cheesecake

31. 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

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

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

Deception

Theft

34. Name two private mechanisms used to protect against violations of private property.

Use of safes, locking doors

35. Name two government mechanisms used to protect against market deceptions.

Labeling laws, advertising laws

36. term used to describe information only known to some people but not to others.

Privileged

37. stock trading to your advantage using information before it becomes publicly available is called this.

Insider trading

38. term used to describe a stock trading practice of jumping ahead of another trader to make a trade before them to one’s advantage.

High-frequency trading

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

0 11

m

s ile

40

mil es

Baltimore MD

Washington DC

a. What is the shortest driving time (in minutes) to Philadelphia? -150 minutes 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? -229 minutes

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? -229 minutes d. Which added assumption is consequential to (i.e., affects) the chosen route? -The assumption that dashed lines represent current road repair activity that slows traffic. e. Which added assumption is inconsequential to the chosen route? -The assumption that the dotted line is a road closure. 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. No, the routes do not change by adding the more realistic assumptions

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? Yes, the time it would take to drive from city center to city center changes depending whether or not the simplified model of using dots as cities is used.

2. Answer the following questions by referring to Figure 3.2 in Lecture 4. Suppose each bracketed combination refers to (# oranges, # apples) a. Which combination of apples and oranges is equivalent to (3, 8) for Smith? 5 oranges and 5 apples b. Explain why Smith gets higher utility with (6, 5) than with (2, 6). Smith has a higher utility per orange than utility per apple, so he has a higher utility with more oranges. Plus, a bigger bundle result in more utility in general. 3. Answer the following questions by referring to Figure 3.6 in Lecture 4. Suppose each bracketed combination refers to (# oranges, # apples) a. How many oranges and apples do Smith and Jones have at point C? Smith  (3,3) Jones  (7,7) b. How many oranges and apples do Smith and Jones have at point G? Smith  (3,7) Jones  (7,3) c. How many oranges and apples do Smith and Jones have at point K? Smith  (9,9) Jones  (1,1) d. How many oranges and apples do Smith and Jones have at point A? Smith  (0,0) Jones  (10,10) 4. Answer the following questions by referring to Figure 3.6 in Lecture 4. a. What would the terms of trade be if Smith and Jones trade from the endowment point E to the point J? 3 a/o b. What would the terms of trade be if Smith and Jones trade from the endowment point E to the point B? 1/3 a/o c. What would the terms of trade be if Smith and Jones trade from the endowment point J to the point G? 1/5 a/o

5. Answer the following questions by referring to Figure 3.7 in Lecture 4. 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. Because there is no possibility to make both traders better off, meaning that any other trades would give Smith less utility, but give Jones more. b. Briefly explain why the trade 3 oranges for 7 apples is not the utility maximizing solution for the traders. It is not the utility maximizing solution for the traders because Smith has a high amount of surplus value. Smith has much ore utility than Jones, but there can be a trade where they both have the same amount of utility.

6. Answer the following questions based on the Edgeworth Box diagram below. Suppose the diagram describes two farmers Ryan and Murphy. Ryan’s origin is located at the lower left and Murphy’s at the upper right. Ryan is initially endowed with 5 bananas and 100 peaches and Murphy is endowed with 45 bananas and 50 peaches. Suppose the solid line is one of Ryan’s indifference curves while the dotted line is one of Murphy’s indifference curves. Peaches (#) A 140

50

80

40

60

20

0

Murphy 0

10

40

B 30

20

D

C E

20

30

10

40

F G

0

Ryan

0

20

40

Bananas (#)

Bananas (#)

100

120

60

80

100

50 120

140

Peaches (#)

A. What assumption about preferences assures that the indifference curves are curved as shown? B. What assumption about preferences assures that point E is preferred to point C by Murphy? C. Which point on the graph corresponds to Ryan and Murphy’s endowment? D. Among the mutually advantageous trade outcomes that are labeled, which one would Ryan prefer the most? E. Which point or points provide Ryan with greater utility than at point E? F. What happens if Ryan and Murphy trade to either point B, C or E? G. What is the terms of trade (in bananas per peach) if Ryan and Murphy reach the consumption point C after trading?

Diminishing marginal utility Larger bundle=higher utility G B B, C Utility increases for both traders 2/5 bananas/peach

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

10

Peanuts (Bags)

A. Which labeled point represents the endowment? B. Which labeled point or points give Chris a higher utility than D?

H F, G

C. Which among all the labeled points gives Chris the highest utility?

G

D. Which labeled point or points are mutually beneficial after trade?

N/A

E. Which labeled point, or points, is (are) certainly Pareto Optimal? F. What is a possible terms of trade, in bottles per bag, if Chris and Dana trade mutually voluntarily? G. Which labeled point, or points, would require theft or deception rather than voluntary exchange to obtain?

D, E, F

2/3 bottles per bag

A, B, C, G, I

8. 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 Sam and Jon. Sam is initially endowed with 12 sticks of butter and Jon is endowed with 16 loaves of bread. Suppose the solid lines are Sam’s indifference curves while the dotted lines are Jon’s indifference curves. Bread (loaves) 12

14

12

10

8

6

4

Jon OJ

2 B

A

2

10 C 8

4

6

D 6

F G

4

8

H

2

Butter (sticks)

Butter (sticks)

E

10 I

Sam

OS

2

4

6

8

10

12

14

16

Bread (loaves)

A. In the Edgeworth box diagram, at what labeled point is Sam and Jon’s endowment , B, Which labeled point, or points, would be mutually beneficial for Sam and Jon after trade. C. In the Edgeworth box diagram, calculate the three terms of trade if Sam and Jon traded to points E, F and G, respectively. D. Of the three terms of trade listed in part C, which would Sam most prefer? E. Of the three terms of trade listed in part C, which would Jon most prefer? F. Suppose Sam and Jon truck their products to the market; barter, or negotiate with each other; and then exchange, or trade. What fair, or balanced, exchange is most likely to result? G. How much bread and butter will Sam have after the trade made in part F? H. How much bread and butter will Jon have after the trade made in part F?

A C, D, E, F, G, H E: 8/5 loaves/stick F: 7/6 loaves/stick G: 6/7 loaves/stick E G

Trade to point F (7 loaves for 6 sticks)

7 loaves of bread and 6 sticks of butter 9 loaves of bread and 6 sticks of butter

9. What standard assumption in the pure exchange model must be relaxed to make deception a possibility? -The standard assumption of perfect information must be relaxed to make deception a possibility.

10. 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? -If a seller expects to never sell to the same buyer more than once, there is an increased risk of deception, as there is no threat of backlash or hurting the relationship. However, if a seller expects to sell to a buyer multiple times, there is a smaller chance of deception as the seller would want to have a good relationship with the buyer to continue to gain in sales/utility.

11. The respect for property rights is equivalent to what popular moral principle that insists that people NOT do something? Not do what? Explain. -The respect for property rights is equivalent to the moral principle that insists that people do not steal or damage the rightful property of others....