Principles of microeconomics HW1 PDF

Preview

Summary

Homework assignment and great study guide for principles of microeconomics. ...

Description

ECON 2113

Homework 1

Ch. 1—Ten Principles of Economics 1) Economics is the study of how humans make choices under conditions of scarcity / the study of how society manages its scarce resources. How society manages its scarce resources. 2) The term efficiency refers to the size of the economic pie, and the term equality refers to how the pie is divided. Scenario 1-1 You have the afternoon free. You have a choice between going to the movies with a friend or studying economics for three hours. If you go to the movies, you will spend $8.00 on a ticket and $4.50 on popcorn. If you choose to study economics for three hours, you will raise your exam grade by 10 points. 3) Refer to Scenario 1-1. a) What is your opportunity cost of going to the movies? Not being able to study for 3 hours, less knowledge on the material and therefore less prepared for the test. As well as the actual cost of going to the movies, which is $12.50. $12.50 ($8.00 + $4.50) and 10 points on your exam grade. b) What is your opportunity cost of studying economics? Spending time with you friend, having a good time going to the movies and relaxing. The enjoyment you would have received from going to the movies with your friend. 4) Debbie quits her job, which pays $30,000 a year, to finish her college degree. Her annual college expenses are $10,000 for tuition, $2,000 for books, and $700 for food. What is her opportunity cost of attending college for the year? She will have to pay $12,700 for the year of college and she will not be able to earn the $30,000 she would have if she would have kept working. But instead, she will have completed a college degree, which should give her more and better opportunities in the work force after graduation. $42,000 = ($30,000 + $10,000 + $2,000). The cost of food is not an opportunity cost because Debbie would need to eat regardless of whether she worked or went to college. 5) Zack quits his job at a consulting firm, which pays $40,000 a year, to enroll in a two-year graduate program. His annual school expenses are $30,000 for tuition, $2,000 for books, and $600 for food. What is his opportunity cost of attending the two-year graduate program? He will not get the $80,000 he would if he would have decided to work and he will spend a total of $65,200 for the two years in college. So $65,200 in expenses and $80,000 loss in wages. But, like Debbie, he will now be more qualified and should be better off with the two-year graduate’s degree. $144,000 = ($40,000 + $30,000 + $2,000) x 2 years. 6) Give an example of a trade-off faced by society.

ECON 2113

Homework 1

Society faces a trade-off between efficiency and equity. Because to achieve greater equality, society could redistribute income from the wealthy to the poor. But that reduces people’s incentive to work and produce, which will eventually shrink the size of the economic “pie” (efficiency = when society gets the most from its scarce resources). Efficiency and equality; a clean environment and a high level of income; guns and butter (national defense and consumer goods). Scenario 1-3 It costs a company $35,000 to produce 700 graphing calculators. The company’s cost will be $35,070 if it produces an additional graphing calculator. The company is currently producing 700 graphing calculators.

7) Refer to Scenario 1-3. a) What is the company’s average cost? $50. $50 = $35,000/700 calculators. b) What is the company’s marginal cost? $70, the cost of making an extra calculator. $70. The cost of producing the additional calculator. c) A customer is willing to pay $60 for the 701th calculator. Should the company produce and sell it? Explain. Yes, because the average cost for 1 calculator when you produce 701 calculators for the total cost of $35,070 is = $35,070/701= $50.03. So, if they pay are willing to pay $60, they are still paying more than what the value of the calculator. No, because the marginal cost ($70) is less than the marginal benefit ($60). d) What is the minimum price the company will charge for the 701th calculator? $50.03, because that is the cost of each calculator if you produce 701 for $35,070. $70. 8) Rational people make decisions “at the margin” by comparing marginal costs and marginal benefits. 9) What are the two possible causes of market failure? Causes of market failure are externalities and market power. Externality and market power. Externalities: when the production or consumption of a good affects bystanders (pollution). When consumption or production of a good causes a benefit/harm to a third party. Market power: a single buyer or seller has substantial influence on market price (monopoly).

ECON 2113

Homework 1

10) Explain the concept of externality and give an example. Externality is when the product or consumption of a good affects bystanders. (positive  beneficial or negative  harmful) Positive  If you walk to work, you benefit the environment by not driving and polluting. Negative  smoking for example impacts people around with secondhand smoke, it impacts people’s health even though they are not directly smoking themselves.

11) What does the “invisible hand” refer to? It refers to the unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically. Adam Smith suggested that if people were allowed to trade freely, traders present in the market would compete with each other, leading markets towards the positive output with the help of an “invisible hand”. 12) What do prices reflect in a market economy? The reflect the goods value and cost to the society. 13) In the short run, an increase in the money supply is likely to lead to risen inflation and lower unemployment.

Ch. 2—Thinking Like an Economist 1) Identify each of the following topics as being part of microeconomics or macroeconomics. Use MI for microeconomics and MA for macroeconomics. a) the impact of a change in consumer income on the purchase of luxury automobiles MI b) the effect of a change in the price of Coke on the purchase of Pepsi MI c) the impact of a war in the Middle East on the rate of inflation in the United States MA d) factors influencing the rate of economic growth MA e) factors influencing the demand for tractors MI f)

the impact of tax policy on national saving MA

g) the effect of pollution taxes on the U.S. copper industry MA h) the degree of competition in the cable television industry MI i)

the effect of a balanced-budget amendment on economic stability MA

j)

the impact of deregulation on the savings and loan industry MI

2) Which of the following statements are positive and which are normative? Use P for positive and N for normative. a) The minimum wage creates unemployment among young and unskilled workers. P

ECON 2113

Homework 1

b) The minimum wage ought to be abolished. N c) If the price of a product in a market decreases, then, other things equal, quantity demanded will increase. P d) A little bit of inflation is worse for society than a little bit of unemployment. N e) There is a tradeoff between inflation and unemployment in the short run. P f)

If consumer income increases, then, other things equal, the demand for automobiles will increase.P

g) The U.S. income distribution is not fair. N h) U.S. workers deserve more liberal unemployment benefits. N i)

If interest rates increase, then investment will decrease. P

j)

If welfare benefits were reduced, then the country would be better off. N

ECON 2113

Homework 1

3) Use the following graph to answer the following questions. a) How would point J be represented as an ordered pair? (20,24) b) What type of curve is this? It is a demand curve. c) Does this curve show a positive or negative correlation between price and quantity? Negative correlation, because as price rises the demand drops and opposite. d) Compute the slope of D1 between points J and

L.

slope=(y2-y2)/(x2-x1)=(24-16)/(20-

40)=8/-20=-2/5. e) What is the slope of D1 between points L and N? Why would you not have to calculate this answer? =-2/5. You don’t have to calculate the answer again because the points are on the same line, which means they have the same slope. f)

What is it called if we move from D1 to D2? A shift in demand.

g) How do you know that the slope of D2 is the same as the slope of D1? Because the lines are parallel, there is always the same distance between D1 and D2, so the slope does not change.

ECON 2113

Homework 1

Figure 2-1

4) Refer to Figure 2-1. a) What are the coordinates of point C? (60,3) b) What is the x-coordinate of point R? x=20 c) How are price and quantity related in this graph? As prices rise, quantity drops or as prices drop, quantity rises. d) What is the slope of the line with points A, B, and C? slope = (7-5)/ (20-40) =2/-20=-1/10. e) Is a move from point A to point B considered a shift of the curve or a movement along the curve? It is considered a movement along the curve. f)

Is a move from point A to point R considered a shift of the curve or a movement along the curve? It is considered a shift of the curve.

g) Given that price is measured on the vertical axis, quantity is measured on the horizontal axis, and that the curves are downward-sloping, what type of curves are depicted here? A demand curve.

5) The three main factors of production, or categories of inputs, used by firms to produce goods and services are land, labor, capital and entrepreneurship. 6) What you must give up to get something else is called the opportunity cost.

ECON 2113

Homework 1

Figure 2-2

Consider the production possibilities curve for a country that can produce sweaters, apples (in bushels), or a combination of the two.

7) Refer to Figure 2-2. a) The bowed outward shape of the production possibilities curve indicates that opportunity cost of apples in terms of sweaters is as we increase the amount of apples, the opportunity cost of sweaters increases more and more. In other words, the more you increase the production of apples, the higher the opportunity cost of the sweaters, you are giving up production of more sweaters for producing more apples. b) Which point(s) on the graph is(are) efficient production possibilities? Q, R, U and V. c) Which point(s) on the graph show unemployment of resources? T and W. d) Which point(s) on the graph is(are) unattainable given current resources and technology? S and X. e) What is the opportunity cost of moving from point T to point R? +30 sweaters. You are now using all of your resources and labor hours and can now make an additional 30 sweaters. The opportunity cost would be the labor hours and resources you were not using at point T. f)

What is the opportunity cost of moving from point R to point Q? The opportunity cost would be the 80 apples you will no longer produce, but instead you will be able to produce 40 more

ECON 2113

Homework 1

sweaters. You will no longer be producing any apples at all, but instead you will use all of the resources and labor hours to produce sweaters.

Figure 2-3

8) Refer to Figure 2-3. a) Consider the production possibilities frontier for an economy that produces only sofas and cars. As the economy moves from point A to point D, is the opportunity cost of cars increasing, constant, or decreasing? The opportunity cost of cars is constant, because the slope remains the same along the line. b) Consider the production possibilities frontier for an economy that produces only sofas and cars. The opportunity cost of one sofa is 1 sofa=600cars/900= 0,67 car. c) Consider the production possibilities frontier for an economy that produces only sofas and cars. The opportunity cost of one car is 1 car=900sofas/600= 1,5 sofa.

ECON 2113

Homework 1

Table 2-1

Mobile Phones 0 200 500 900 1400 2000

Pizzas 10,000 8,000 6,000 4,000 2,000 0

9) Refer to Table 2-1. a) Consider the production possibilities table for an economy that produces only mobile phones and pizzas. What is the opportunity cost of increasing production of mobile phones from 200 to 500? The opportunity cost is 2,000 pizzas that will no longer be produced. b) Consider the production possibilities table for an economy that produces only mobile phones and pizzas. What is the opportunity cost of increasing production of pizzas from 4,000 to 6,000? The opportunity cost is 400 mobile phones, that will no longer be produced. c) Consider the production possibilities table for an economy that produces only mobile phones and pizzas. Describe the shape of the production possibilities frontier. It is an inward bowed shaped, an inverted PPF, which means that it has a decreasing opportunity cost.

10) Answer the following. a) Economists at which administrative department help formulate spending plans and regulatory policies? Office of Management and Budget. b) Economists at which administrative department help design tax policy? Department of Treasury. Treasury = the funds or revenue of a government, corporation or institution. c) Economists at which administrative department analyze data on workers and those looking for work to help formulate labor-market policies? Department of Labor. d) Economists at which administrative department help enforce the nation’s antitrust laws? Department of Justice.

ECON 2113

Homework 1

e) The institution that sets the nation’s monetary policy is called the Federal Reserve. Monetary = relating to money or currency....