PRINCIPLES OF ECONOMICS- Assignment 1 PDF

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PRINCIPLES OF ECONOMICS Assignment I 1. The company that you manage has invested $5 million in developing a new product, but the devel develo opment is not quite finished finished.. At a recent mee meeting, ting, your salespeople report that the introduction of compe competing ting products has reduced the expected sales of your new product to $4 milli million. on. If it would cost $3 mill million ion to finish development and make the product, should you go ahead and do so? What is the most that you should pay to complete development? 1. Yes. the company should go ahead and do so. First the sunk cost should not be considered in decision making. Second the output( $4 million) is larger than input( $3 million). 2. $3 million 2. In 2010, President Barack Obama and Congress enacted a healthcare reform bill in th the e U.S. Two goals of the bill were to provide m ore Americans with health insurance (via subsidies for lower-income households financed by taxes on higher-income households) and to reduce the cost of healthcare (via various reforms in how healthcare is provided). a. Ho How w do t hese goals relate to equality and efficiency? First, this system is related to equality because it makes distribution of income. Second, this system is related to efficiency because many people can enjoy more health benefit while spending less money. b. How might healthcare reform increase productivity in the U.S.? People can use labor and money for other productive things instead they use labor and money for health. c. Ho How w m ight healthcare reform decrease productivity in the U.S.? High income earners who pay a lot of health taxes lose a their’s wil. 3. Pat and Kris are roommates. They spend most of their time studying (o (off course), but they leave some time for their favorite ac activities: tivities: making pizza and brewing root beer. P at takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew a gallon of root beer and 4 hours to make a pizza. a. What is each roommate’s opportunity cost of making a pizza? Who has the absolute advantage in making pizza? Who has the comparative advantage in making pizza? 1. Pat’s opportunity cost of making a pizza is 1/2 beer Kris’s opportunity cost of making a pizza is 2/3 beer. 2. Pat has both absolute and comparative advantage in making a pizza. b. If pat and Kris trade foods wi with th each other, who will trade away pizza in exchange for root beer? Pat will trade away pizza. c. Th The e price of pizza can be expressed in terms of gallons of root beer. What is t he highest price at which pizza can be t raded that would make both roommates better off? What is the lowest price? Explain. Pat wants at least half a beer for his pizza and Kris will not want t o give more than 2/3 beer for a pizza. The highest price and lowest price that sa satisfy tisfy both are 2/3 beer and 1/2 beer respectively. 4. The following table describes the production possibilities of two cities in

the country of Baseballia:

a. Without trade, what is the price of white socks (in terms of red socks) in Boston? What is the price in Chicago? Boston’s 1 white socks=2 red socks Chicago’s 1 white socks=2 red socks b. Which city has an absolute advantage in the production of each color sock? Which city has a comparative advantage in the production of eac each h co color lor sock? Boston has an absolute advantage in both color socks. Comparative advantage does not exist. c. Will these cities trade socks with one an another? other? Explain. Comparative advantage does not exist so the trade is not needed. d. Suppose workers become even more productive in Boston such that a worker in Boston can now produce 6 pairs of red socks per hour and 3 pairs of white socks. How does this information affect your answers ab above? ove? Explain. It cannot affect affect this outcome. Even if Boston’s worker become more productive, the price of white socks can’t be changed. 5. Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price and quantity of minivans. a. P eople decide to have more children. Demand for minivans increase.

b. A strike by steelworkers raises steel prices. Supply for minivans decrease.

c. Engineers develop new automated machinery for t he production of minivans. Supply for minivans increase.

d. The price of sports utility vehicles rises. Demand for minivans increase.

e. A stock-market crash lowers people’s wealth. Demand for minivans decrease.

6. Suppose that the price of basketball tickets at your college is determined by market forces. Currently, the demand and supply schedules are as follows:

a. Draw the demand and supply curves. What is unusual about this supply curve? Why might this be true? 1. Originally, demand decreases as demand increases, but demand remains constant. 2. There are limited seats on the basketball court.

b. What are the equilibrium price and quantity of tickets? $8 and 8000 tickets c. Your college plans to increase total enrollment next y ear by 5,000 st students. udents. The additional students will have t he following demand schedule:

Now add the old demand schedule and t he demand schedule for t he new students t o calculate the new demand sch schedule edule for the entire college. What will be th the e new equilibrium price and quantity? $8 and 8000 tickets.

7. Suppose that business travelers an and d vacationers have the following demand for airline tickets from New York to Boston:

a. As the price of t ickets rises from $200 to $250, what is the price elasticity of demand for (i) business travelers and (ii) vacationers? (Use the midpoint method in your calculations) 1. (2000-1900/1950)/(250-200/225) -> 9/39 ->0.23.....(inelastic demand) 2. (800-600/700)/(250-200/225) -> 9/7 -> 1.28....(elastic demand) b. Why might vacationers ha have ve a different elasticity from business travelers? Because vacationers choose their decision easily than business travelers . As a result their choice in quantity of demand is bigger than Business travelers. 8. Pharmaceutical drugs have an in inelastic elastic demand, and computers have an elastic demand. Suppose that technological advance doubles the supply of both products (that is, the quantity supplied at each price is twice what it was). a. What happens to the equilibrium price and quantity in each market? The equilibrium price falls and the equilibrium quantity increases in both markets.

b. Which product experiences a larger change in price? Pharmaceutical drugs experience the larger decline in the equilibrium price although the equilibrium quantity only increases a bit. This is because it’s a market with inelastic demand. c. Which product experiences a large largerr change in quantity? In the market of computers there is a big increase of the equilibrium quantity due to a small decrease of prices of these goods, which have elastic demand. d. What happens to total consumer spending on each product? Total consumer spending on pharmaceutical drugs will decline because the demand is inelastic and the percentage increase in the quantity is lower than the percentage decrease in price. Total consumer spending on computers will increase because this market has elastic demand and the percentage increase in quantity is bigger than the percentage decrease in price. -The end-...