Microeconomics assigment PDF

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assiment for student microeconomics...

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Notice:  You are encouraged to work in a team of 8 people or less. Team-work skills are among important skills that you should acquire. Make sure the full names and student numbers of all the group members appear on the first page of the single copy that you submit for the team.  Answer all the questions and show all your work.  Make sure you staple together all the pages you hand-in .  The assignment is due during the first 10 minutes of the class. 1. In an economy there are only two consumer goods: Gizmos and Widgets . Only labour is required to produce both goods, and the economy’s labour force is fixed at 120 workers. The table below indicates the daily outputs of Gizmos and Widgets that can be produced with various quantities of labour. Number of Workers Daily Gizmos Production Number of Workers Daily Widgets Production 0 0 0 0 30 15 30 150 50 30 50 300 70 40 70 400 90 45 90 450 120 47.5 120 475 a. Draw the Production Possibility Boundary (PPB) for this economy using a gird with Widgets on the vertical access, assuming full employment in this economy. (Note: read the table carefully as the sorting is different from what you have seen before.) b. What is the opportunity cost of producing the first 15 Gizmos? What is the opportunity cost of producing the next 15 Gizmos (i.e., from 15 to 30)? What happens to the opportunity cost of Gizmos as their productions is continuously increased? c. Suppose that actual production levels for a given period were 15 Gizmos and 150 Widgets. What can you infer from this information? d. Continuing from part (c), what is the opportunity cost of moving from the production combination of “15 Gizmos and 150 Widgets” to “15 Gizmos and 450 Widgets”? [Hint: think twice, the answer might not be as straight forward as it may seem at first!] e. Suppose a central planner in this economy were to call for an output combination of 25 Gizmos and 450 Widgets. Is this plan attainable? Explain. f. A new technology is developed in Gizmos production, so that each worker can now produce double the daily amount indicated in the schedule. What happens to the PPB? Draw the new boundary on the grid. Can the planner’s output combination in (e) be met now?

. An economy’s production possibilities boundary is given by the mathematical expression 45 = A + 5B , where A is the quantity of good A and B is the quantity of good B . a. If all resources in the economy where allocated to producing good A , what is the maximum level of production for this good? What is the maximum level of production for good B ? b. Draw the PBB on a grid putting A on the vertical axis. c. Suppose that the production of B is increased from 3 to 5 units and that the economy is producing at a point on the production possibility boundary. What is the associated opportunity cost per unit of good B ? What is the opportunity cost per unit of good B if the production of this good were increased from 5 to 7? d. In what way is this PBB different from that in the previous exercise? e. In what way does the combination of 30 units of good A and 7 units of good B represent the problem of scarcity? 3. The following table presents a decade’s data on three components of a typical household’s total expenses: education, housing, and food. Year Education Housing Food 1994 $13,740 $17,100 $16,600 1995 $15,180 $19,100 $17,600 1996 $16,380 $20,500 $20,000 1997 $17,700 $21,920 $22,500 1998 $18,940 $23,520 $24,000 1999 $20,260 $24,620 $25,200 2000 $22,280 $24,620 $26,000 2001 $24,510 $25,820 $26,600 2002 $29,300 $26,720 $26,700 2003 $32,230 $26,720 $27,600 a. Using year 1994 as the base year, construct individual indices for each of the three expense items. b. Which of these three items increased the most in percentage terms for the period 1994 – 1995 and by how much? How about over the entire decade (1994 – 2003)? c. What was the percentage increase in Housing expenses between 1997 and 1998?

Economics Name Institution

Economics a. Draw the Production Possibility Boundary (PPB) for this economy using a gird with Widgets on the vertical access, assuming full employment in this economy. (Note: read the table carefully as the sorting is different from what you have seen before.)

475 WIDGETS450 PPB 400

300

150

30

50

70

90

120

EMPLOYMENT

a. What is the opportunity cost of producing the first 15 Gizmos? What is the opportunity cost of producing the next 15 Gizmos (i.e., from 15 to 30)? What happens to the opportunity cost of Gizmos as their productions is continuously increased? The opportunity cost of producing 15Gizmos will forego 150 widgets to be produced The opportunity cost to produce 15 more widgets will be 300-150=150 widgets in the production sector As the production increases the opportunity cost of Gizmos reduces. b. Suppose that actual production levels for a given period were 15 Gizmos and 150 Widgets. What can you infer from this information? It would mean the reduction of the number of workers because the produced outputs can’t manage to sustain more workers in the working sector. The company will be making less profit which can mean that the manager will only reduce number of workers to be able to make profit

c. Continuing from part (c), what is the opportunity cost of moving from the production combination of “15 Gizmos and 150 Widgets” to “15 Gizmos and 450 Widgets”? [Hint: think twice, the answer might not be as straight forward as it may seem at first!] The opportunity cost of gizmos would remain constant meaning no reduction or increase in the opportunity cost while the widget production increases meaning more workers are added in the company to help in the production. This will definitely mean an increase to foregone gizmos labourers and increase the widget workers. Hence those people working in gizmos production firm will lose job and those in widget firm will find more job d. Suppose a central planner in this economy were to call for an output combination of 25 Gizmos and 450 Widgets. Is this plan attainable? Explain. No this is unattainable due to lack of coinciding resources that will help to hit that target. Unless there will be an adjustment in the number of workers to put more effort in the widget production so as the target can be attained. Then it can only mean that addition of more workers will only bring loss to the firms since when the number of workers have reached maximum, and there is addition of more employees without adding more resource input like capital. It will mean that the added workers will not create any impact as far as the produced output is concerned. e. A new technology is developed in Gizmos production, so that each worker can now produce double the daily amount indicated in the schedule. What happens to the PPB? Draw the new boundary on the grid. Can the planner’s output combination in (e) be met now?

Gizmos

95

90

80 PPB 60

30

30

50

70

90 Workers

120

The combination can be obtained since the profit have also directly doubled due to increase in production of gizmos which means that the workers will now manage to combine the 25gizmos and 450 widgets. 2. An economy’s production possibilities boundary is given by the mathematical expression 45 = A + 5B, where A is the quantity of good A and B is the quantity of good B. a. If all resources in the economy where allocated to producing good A, what is the maximum level of production for this good? What is the maximum level of production for good B? A+5B=45 Maximum level to produce A

A= 45-5B

Maximum level to produce B

B= (45-A)/5 9-A/5

b. Draw the PBB on a grid putting A on the vertical axis.

A

50 40

Production possibility boundary

30 20 10

60

70

75

80

90

B

c. Suppose that the production of B is increased from 3 to 5 units and that the economy is producing at a point on the production possibility boundary. What is the associated opportunity cost per unit of good B? What is the opportunity cost per unit of good B if the production of this good were increased from 5 to 7? The opportunity cost will be doubled 5-3=2 The amount of good B foregone to increase A =2 7-5=2

The amount of good A foregone to increase opportunity cost of B is 2

d. In what way is this PBB different from that in the previous exercise? This PPB is decreasing with increase in the alternative good while in the previous exercise the PPB was directly proportional for the goods in consideration.

f.

In what way does the combination of 30 units of good A and 7 units of good B represent the problem of scarcity?

The combination of the two good A being 30units and B 7 units means that the consumer have only decided to forego some quantity of the items and give preference for more of A. this is due to the scarcity of the money he or she have and can’t afford to buy all he want with the scarce money he has. a. Using year 1994 as the base year, construct individual indices for each of the three expense items. =

13740+17100+16600 =47,440

YEAR 1994

EDUCATION $ 13,740

HOUSING $ 17,100

FOOD $16,600

b. Which of these three items increased the most in percentage terms for the period 1994 – 1995 and by how much? How about over the entire decade (1994 – 2003)? YEAR 1994 1995

EDUCATION 13,740 15,180 EDUCATION=15180-13,740=1440 HOUSING=19,100-17100=2000 FOOD =17,600-16,600=1000 HOUSING BY 2000

EDUCATION= 32,230-13,740=18,490 HOUSING= 26,720-17100=9620

HOUSING 17,100 19,100

FOOD 16,600 17,600

FOOD

=27,600-16600=11,000

EDUCATION BY 18,490 c. What was the percentage increase in Housing expenses between 1997 and 1998? 1997=23520 1998=24,650 1130/23520 0.0480×100 4.8% Suppose that an economist hypothesizes that the annual quantity demanded of a specific computer brand (QD) is determined by the price of the computer (P) and the average income of consumers (Y) according to QD = Y – 3P. a. Which of these variables are endogenous and which are exogenous if we were interested in constructing a theory that explains the determination of quantity demanded with emphasis on the effect of price? Y and p endogenous since they depend on QD QD exogenous since they are independent variables b. What does the negative sign before the tem 3P imply about the relationship between QD and P? What does the implicit positive sign before the term Y tell you about the relationship between income and quantity demanded? QD is inversely proportional with P The positive sign means the more income one have the higher the rate of demand hence directly related c. Suppose for the moment that average income is given and equals $6,000. Rewrite the demand relationship by inserting this value into the given expression above. QD=$6,000 -3P d. Assuming that average income equals $6,000, calculate the values of QD when P = 0, P = $500, P = $1,000, and P = $2,000. When p=o QD= 6,000-3*O 6,000 When P=500 QD= 6,000-3*500

6,000-4500 1500 When p=1000 QD=6,000-3*1000 6,000-3,000 3,000 When P=2000 QD=6,000-3*2000=0 e. Put the relationship between P and QD (assuming Y = $6,000) on the grid, putting P on the vertical axis. Indicate the intercept values (X-intercept and Y-intercept) on each axis.

P

6000 5000 4000 3000 2000 1000 1000

f.

2000

3000

4000

5000

QD

Assuming Y = $6,000, calculate the change in the quantity demanded when the price increases from $1,000 to 2,000. Do the same for a price increase from $500 to $1,000 and from $500 to $2,000. Call the change in the quantity demanded ∆𝑄 𝑄 and the change in the price ∆𝑄 . (∆ means “change in.”)

=2000-1000 1000 =1000-500 500

=2000-500 1500

g. Calculate the slope of the relationship graphed in previous part.

6000-3000=3000

h. Now suppose that evidence indicates that the average income of consumers has changed to $9,000. Plot the new relationship between P and QD and determine the slope and intercepts. How does this change affect the graph compared to the previous one? Calculate the quantity demanded for the list of prices given in part (d) and compare these with those in part (d). Do you see a general pattern? Fill the blank in the following sentence: “All else equal, at any given price, higher income results in _an increase_____in_____ quantity demanded.” [Notice: this is how we analyse the effect of changes in exogenous variables.] QD

EQUILIBRIUM 6000

9000

Income

5. Consider two equations describing the relationship between three variables X, Y1, and Y2: X =, a + b Y1, (1) X = c – d Y2, (2) where a, b, c, and d, are positive, known constants (numbers). The objective is to find values of X, Y1, and Y2 for which both equations are satisfied and as well Y1 = Y2. a. How many unknown variables are there? Clearly identify them. How many equations are there? Clearly identify them. Note that there should be as many equations as unknown variables.≥ When this is the case, a unique solution exists. (Try to convince yourself that having only (1) and (2) makes it impossible to solve for the unknown variables, by equating X from (1) to X from (2) and trying to solve for Y1 and Y2.) 4 unknown variables which includes a, b, c, and d X=a+ b Y1 X=c- d Y2 a =1 b= 2 c=3 d=4 a≥ 0, b≥0, c≥0, d≥0 1=1+2Y1 Y1=1/2

X=c-dY2 2=3-4y2 Y2=2

c. Replace both sides of the third equation (which one is it?) using expressions (1) and (2) to solve for X.

X=1+2×1/2 =1+1 2 d. After solving for X, find the values of Y1 and Y2 and verify whether the third equation is satisfied.

2=1+2y1 1=2y1 Y1=1/2

2=3-4y2 -1=-4y2 Y2=1/4

e. Now, rename Y1 as QS representing quantity supplied, replace a with 200, replace b with 2, rename Y2 as QD representing quantity supplied, replace c with 400, replace d with 3, and rename X as P representing price. This gives you a system of supply and demand for a good. Rewrite expressions (1) and (2) using this information. How many unknown variables and how many equations do you have? 3unknown variables which are QS, QD and P

f.

To find the equilibrium and solve for equilibrium values of QD, QS, and P, what other condition do we need? [Hint: Think about our discussion in class and the fill the blank here to find out what other condition you might need: “If quantity demanded is more than quantity supplied, the price will _increase_______. If quantity demanded is less than quantity supplied, then price will __decrease_______. So, price will not change only if quantity demanded _is equal to________ quantity supplied. This is how we define equilibrium: a condition under which variables in the model remain stable and do not change. We call this additional equation market-clearing condition.”] i ,The condition will be QD=QS The price will be at equilibrium

g. Given the system of supply and demand and the market-clearing condition, solve for equilibrium values of QD, QS, and P. QS=QD QS= 2*400 =800 QD=800

P=200

h. Show the supply and demand curves on a grid putting price on the vertical axis and clearly identify the equilibrium price and quantity.

QD

QS

PRICE P1

Q1 QUANTITY

i.

What is the quantity supplied and demanded at P = 290? Excess supply or excess demand, which one exists at this price and what is the size of it? How is expected to affect the price? How is the induced change in price expected to affect quantities demanded and supplied?

QD 200=800 290=? (290*800)/200 116O i., what is the quantity supplied and demanded at P = 220? Excess supply or excess demand, which one exists at this price and what is the size of it? What are the expected impacts on the variables of the model? QS

200=800 220=? (220*800)/200 176OO/200 880 j.

Based on the concepts of excess supply and excess demand and how they put upward or downward pressures on price argue why any price other than the one you identified in (f) cannot establish equilibrium. When the supply is excess, it means that there is a lot of products in the market which will make the price of the goods to fall. The producers will not be able to stand the less price since they will be making loss hence adjust the supply to the equilibrium. When there is excess demand the price of the products will be high and yet the producers can’t be able to produce that much. For the producers to satisfy their wants the demand is supposed to be reduced by adjusting the price to the equilibrium level.

6. Explain the following concepts in detail (must be in English, complemented with any formulas or diagrams or anything extra that you might necessary to complete your description): a. Nominal and Real National Income – refers to as income earned by the citizens like the cash at hand and the assets which are also income in the economy b. Actual and Potential total output- the real output in the production sector which help to evaluate if the firm have made a loss or a profit c. Hypothesis –the analyses of outcome whether null or alternative in a given situation

d. Normative and positive statements-normative refers to as negative statements and positive statement refers to as those expressing optimism in future e. Unemployment rate it is the number of people who are willing and looking for a job but can’t secure one f. Frictional, Structural, and Cyclical unemployment- frictional is when workers people are looking for a job but can’t secure due to population increase, structural is the type of unemployment where people can’t secure jobs due to distances and cyclic is a type of unemployment where people don’t have job due to poor conditions offered in the job and decide to resign g. CPI –it is the consumer price index h. Percentage change in a variable –refers to as the rate of change in variables expressed in percentage form. i. Change in a variable – it is the amount of changes that occur for various variables i.e. the discrepancy. The amount of increase or decrease j. Slope –this is the change in the x-axis and y-axis of various variables k. Opportunity cost- it is the alternative foregone in which a consumer forego a certain good so as to consume another good due to the scarcity of resources depending on priority l. Productivity- it is the process in which people engage in production sector and the rate at which they can produce products to give a certain output m. Market economy -the place where exchange take place in the market between the buyers and the sellers in the economy. n. Correlation vs. causation –the relationship of given item and observance of the outcomes

o. Macroeconomics –the study of major things like how the government reduces inflation rates through fiscal policy and how the employment is created p. Business cycle –the movement and rotation where at times business make money during boom and loss during depression according to all stages q. Recessionary gap and inflationary gap –the gap during recession and the gap during inflation created by government to reduce interest rates on consumers respectively r. Labour force- This the total number of workers in a given organisation . Exchange rate, depreciation and appreciation exchange rate is the rate at which foreign currency is exchanged with domestic currency; depreciation refers to as the loss of value of assets, and appreciation means the increase in value of certain goods. t. Inflation and price level –refers to as the loss of value of money while price level is the minimum cost of something u. Value added –the value in which the...