Econ tutorial questions answers thanos PDF

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MACQUARIE BUSINESS S CHOOL Department of Economics

ECON1020 – PRINCIPLES OF ECONOMICS 1 ANSWER GUIDE FOR TUTORIAL 3 WEEK 3 (BEGINNING 8/03/2021)

Q1 THANOS: THE SUPER-VILLAIN ECONOMIST Watch this video until the 4m 30s mark and discuss the following questions: 1. What fundamental economic problem worries Thanos? 2. How do Thanos’ views relate to the Malthusian model from the week 2 lecture? 3. Was Malthus right to be worried about population growth? What about Thanos? ANSWER 1. Thanos states (at the 2m 09s mark) “It's a simple calculus. This universe is finite, its resources finite. If life is left unchecked, life will cease to exist.” His worry as an economist is the fair allocation of scarce resources: Too many mouths to feed lead to not enough resources to go around. A fundamental economic problem. 2. Thanos held the view that even though life could look fine, peaceful, and prosperous now, eventually we will hit a limit and catastrophe would ensue. Thomas Malthus (the economist behind the Malthusian model) is very similar to Thanos in a lot of ways. Malthus' point was, in the end, the population will bump up against the resource limit. And every time you make some technological progress in production or the material standard of living, people will just have more babies and they will eat up all the extra resources (due to the law of diminishing average product of labour). So you'll always end up at a subsistence level equilibrium. No matter what progress you make, population growth will always consume that progress. Diminishing average product of labour: As more labor is applied to a fixed amount of land (or capital), the average product of labour falls. This means that every extra worker is producing less and less than previous workers. Once at subsistence level, this means that extra works produce below subsistence levels. 3. Malthus was wrong. He did not consider the possibility that improvements in technology could happen at a faster rate than population growth, offsetting the diminishing average product of labour. This ‘permanent technological revolution’ means that the Malthusian model is no longer a reasonable description of the world. Average living standards increased rapidly and permanently after the capitalist revolution. Thanos' more catastrophic view of the problem, that we may hit the limit of natural resources available to us, may be more of an issue. If we keep consuming more natural resources, more energy and so on (running down our natural capital), we could still get

MACQUARIE BUSINESS S CHOOL Department of Economics

ourselves into trouble. That that is unsustainable, no finite universe can contain exponential growth forever. However, do not despair just yet. This week’s discussion forum question offers up one possible solution to this problem!

Q2

THE IMPORTANCE OF RELATIVE PRICES

The following figure shows the real wages of craftsmen (skilled workers) in London (1264– 2001), and the population of Britain.

How does a change in the relative price of production inputs explain the fact that the Industrial Revolution started in Britain (not anywhere else) 200 years ago (not before or later)? ANSWER The textbook explains why the Industrial Revolution started in Britain first, based on a firm’s cost-minimising behaviour (using a model where the firm chooses the costminimising technology given the input prices). An increase in the relative wage (to the non-labour input price) incentivises firms to innovate and adopt technologies that hire less labour and more non-labour inputs. Around 200 years ago, the relative wage in Britain was higher compared to other regions (See the figure below), which implies that firms were more incentivised to look for less labourintensive technologies. The technical aspect of this model is explored in Q3.

MACQUARIE BUSINESS S CHOOL Department of Economics

Q3 ISOCOST LINES AND TECHNOLOGICAL CHANGE Suppose the wage (w) is $10 and the price of coal (p) is $20 and a representative firm in the textile industry has two types of technologies available with a goal to produce one unit of cloth:

Technology A Technology B

Labour (L) 4 units 1 unit

Coal (R) 2 units 6 units

1. Calculate the production costs required for the two types of technology. Which technology would a firm choose? 2. Write down the equation of the isocost line that includes each technology. Make R the subject of the equation. 3. Draw the two isocosts on a diagram. Indicate Technologies A and B and the relative input price. 4. Suppose the wage increases to $15 per unit and the price of coal (p) decreases to $5 per unit. Which technology would a firm choose now? Draw the new isocosts on the same diagram and indicate the relative input price. 5. How much is the innovation rent? ANSWER 1. The production cost for each technology is calculated as: • • • •

c = wL + pR c = wL + pR = 10L + 20R – general cost function. Cost for Tech. A: 4×10 + 2×20 = 80 Cost for Tech B: 1×10 + 6×20 = 130

MACQUARIE BUSINESS S CHOOL Department of Economics

•

The firm will choose the lower-cost technology A.

2. An isocost shows all combinations of L and R that cost the same amount. •

•

•

The isocost that includes Tech. A: o 10L + 20R = 80 o That is, R = (80/20) – (10/20)L o R = 4 – 0.5L The isocost that includes Tech. B: o 10L + 20R = 130 o That is, R = (130/20) – (10/20)L o R = 6.5 – 0.5L What is the relative input price (relative price of labour)? o The slope of the isocosts indicate the relative input price: 0.5

3. See the blue lines in the diagram below. How to graph the lines? Make R and L equal to 0 (separately), and solve for the other to get two points, and draw lines joining the dots.

4. With the new input prices, • • •

Cost for Tech. A: 4×15 + 2×5 = 70 Cost for Tech B: 1×15 + 6×5 = 45 The firm will choose the lower-cost technology B.

The new isocosts are: •

•

The isocost that includes Tech. A: o 15L + 5R = 70 o That is, R = (70/5) – (15/5)L o R = 14 – 3L The isocost that includes Tech. B: o 15L + 5R = 45

MACQUARIE BUSINESS S CHOOL Department of Economics

o o •

That is, R = (45/5) – (15/5)L R = 9 – 3L

What is the relative input price (relative price of labour)? o The slope of the isocosts indicate the relative input price: 3. o The opportunity cost, i.e. relative price, of employing labour has increased, making employing labour a higher tradeoff.

See the red lines in the diagram above. 5. Recall the definition of economic rent: the benefit received above the next best alternative: •

•

• •

Innovation rent is a form of economic rent associated with the extra profit gained from innovating. The innovation rent is the profit received from choosing to innovate in comparison to the profit from using the existing technology. The innovation rent, in this case, is $25, the amount of cost saved by choosing Technology B over A given the new input prices (assuming there is no change in the firm’s revenue). The firm that stuck to the old technology A will not be able to compete with those with the new technology B under. This process of firms with the old technology being swept by those with the new technology is called ‘creative destruction’ (a term coined by Joseph Schumpeter). This is the catalyst that sparked the Industrial Revolution.

MACQUARIE BUSINESS S CHOOL Department of Economics

DISCUSSION FORUM QUESTION Since the Industrial Revolution in the 18th century, technological progress and innovation have played an integral role in economic growth and increasing living standards. One of the most important innovations of recent times is the advent of renewable energy technologies. Read the first two sections of this article and refer to the figure below that shows the 10-year change in the price of electricity from newly built power plants by energy source (see the article for a higher-resolution image). What is the reason for the dramatic change in the price of electricity from new renewable power plants, and what implications does this have for the future of living standards around the world?

TEACHING GUIDE This discussion is an opportunity for students to realise that technological change and creative destruction is an on-going process that we continue to observe today (not just during the Industrial Revolution). Changing renewable electricity prices for new power plants are driven by the learning curves that renewable energy technologies follow, rather than changes in input prices. Because renewable energy inputs are comparatively low, the cost of the technology itself is

MACQUARIE BUSINESS S CHOOL Department of Economics

what makes up most of the output cost. Learning curves describe how the cost of a new technology changes as it gets produced more and we learn how to improve the production process. Established technologies, such as coal-fired power stations, do not have a learning curve and their prices are predominantly determined by input prices and operational costs, which are hard to reduce. For this reason, we should see the price difference between renewable and fossil fuel energy sources increase in the future. The implications for living standards are numerous. Falling energy prices instantly increase real incomes, as energy is an input into every production process. Cleaner energy means we emit fewer emissions, helping to achieve progress on climate change and avoiding more severe climate crises in the future. Cleaner energy also improves current health, by reducing air pollution and the various associated diseases and health problems. Learning curves are becoming increasingly important in modern industrial organisation, as new technologies, such as AI or machine learning, and solar energy, take advantage of zero or low cost resources as inputs, i.e. data or solar energy....