Tutorial work - Question & answers, week 2 - 6, 10 - 15 PDF

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Week 2 Chapter 1 RQ 1.1p17, RQ 2.1p18, RQ 2.2p18, Review Question Briefly discuss each of the following economic ideas: people are rational; people respond to incentives; optimal decisions are made at the margin.

1.1. (i)

Economists assume that people make decisions and behave rationally. This assumption allows for economic models and the analysis of decisions. For example, for two identical products, economists assume that if there were a cheaper one, an individual would purchase this. 

“Decision makers explicitly or implicitly weigh the benefits and costs of each action and then choose an action only if the benefits are expected to outweigh the costs” (ii)

Economists assume that economic incentives drive people. Similar to the rational assumption, economists make the assumption that for example, an individual would choose a high paying job over a low paying job, in that the economic incentives are far greater. 

(iii)

Finally, economists assume that optimal decisions are made at the margin. That is, MC = MB. For example, economists are assuming that people will only purchase an extra unit of a product if it has an additional benefit to them. 

“Decisions are not all or nothing” Review Question 2.1.

Explain how the concept of opportunity cost arises from the central economic problem of scarce resources and unlimited wants.

As resources are limited but wants are unlimited, society must make choices as to which wants they would like to satisfy with the limited resources available to them. Opportunity cost is defined as the next best alternative forgone. This definition takes into consideration what an individual misses out on by choosing to satisfy a want. For example, I have $5 where my highest priority is to buy $5 worth of food, and my next priority is to buy $5 worth of drink. The opportunity cost of purchasing food is purchasing drink, in that it is the next best alternative forgone.    Review Question 2.2.

What are the three economic questions that every society must answer? Briefly discuss the differences in how centrally planned, market and mixed economies answer these questions. 1. What to produce?  What goods and services will be produced? 2. How much to produce?  How will these goods and services be produced? 3. For whom to distribute production?  Who will receive these goods and services?

A centrally planned economy is an economy where the government decides the answers to these questions. In a market economy, the forces of demand and supply determine the answers to the questions. A mixed economy is primarily a market economy but the government intervenes and ultimately helps to allocate resources and help in deciding the answers to these three economic questions.  Chapter 2 Review Question

RQ 1.2p50, PA 1.9p51, RQ 2.1p52, PA 2.3 p52

1.2.

What is a production possibility frontier? How can we show economic efficiency on a production possibility frontier? How can we show inefficiency? What causes a production possibility frontier to shift outward?

A production possibility frontier is a diagram/graph that demonstrates opportunity cost. The diagram graphs one good/service on the x-axis and a second good/service on the y-axis, ultimately showing the different output combinations possible with a limited number or resources.  Economic efficiency can be shown by any point lying on the PPF.  Economic inefficiency can be shown by any point lying inside the PPF, highlighting the fact that all resources are not employed.  Technological change allows for increased production from the same amount of resources, allowing the PPF to shift outwards.  If more resources become available, then PPF will also shift outwards. Problems and Applications *1.9.

You have exams in economics and statistics coming up and five hours available for studying. The table shows the trade-offs you face in allocating the time you will spend in studying each subject. HOURS SPENT STUDYING

CHOICE

ECONOMICS

EXAM SCORE

STATISTICS

ECONOMICS STATISTICS

A

5

0

95

70

B

4

1

93

78

C

3

2

90

84

D

2

3

86

88

E

1

4

81

90

F

0

5

75

91

a.

Use the data in the table to draw a production possibility frontier graph. Label your vertical axis ‘Score on economics exam’ and label your horizontal axis ‘Score on statistics exam’. Make sure you label the values where your production possibility frontier intersects the vertical and horizontal axes.

b.

Label the points representing choice C and choice D. If you are at choice C, what is your opportunity cost of increasing your statistics score?

c.

Under what circumstances would A be a sensible choice?

A would be a sensible choice if the individual required a higher grade in their final to get the grade they were aiming for. This simply depends on the preferences of the individual.

Review Questions 2.1.

What is absolute advantage? What is comparative advantage? Is it possible for a country to have a comparative advantage in producing a good without also having an absolute advantage? Briefly explain.

Absolute advantage occurs when an entity is able to produce both products with a lower opportunity cost than another. Absolute advantage is the ability to produce more of a good or service than competitors using the same amount of resources. Comparative advantage is when an entity can produce only one product with a lower opportunity cost than another. A country CAN have a comparative advantage in one good even if they do not have an absolute advantage. For example, if Australia could produce 12 apples for every 3 oranges and New Zealand could produce 6 oranges for every 2 apples: 𝐴𝑢𝑠𝑡𝑟𝑎𝑙𝑖𝑎′ 𝑠 𝑂𝐶𝐴 =

𝐿𝑜𝑠𝑠 𝑖𝑛 𝑂 3 1 = = 𝐿𝑜𝑠𝑠 𝑖𝑛 𝐴 12 4

𝐴𝑢𝑠𝑡𝑟𝑎𝑙𝑖𝑎′ 𝑠 𝑂𝐶𝑂 = 4 𝐿𝑜𝑠𝑠 𝑖𝑛 𝑂 6 = =3 𝐿𝑜𝑠𝑠 𝑖𝑛 𝐴 2 1 𝑁𝑒𝑤 𝑍𝑒𝑎𝑙𝑎𝑛𝑑′ 𝑠 𝑂𝐶𝑂 = 3 Has Australia has a comparative advantage in the production of apples as their opportunity cost is lower. New Zealand has a comparative advantage in the production of oranges as their opportunity cost of producing oranges is lower than Australia’s. Neither country has an absolute advantage however both countries have a comparative advantage. 𝑁𝑒𝑤 𝑍𝑒𝑎𝑙𝑎𝑛𝑑′ 𝑠 𝑂𝐶 𝐴 =

Therefore, it is possible for a country to have a comparative advantage in producing a good without also having an absolute advantage.   

Problems and Applications *

2.3. [Related to Don’t let this happen to you] Using the same amount of resources, Australia and New Zealand can both produce apples and oranges as shown in the following table, measured in thousands of tonnes.

AUSTRALIA

NEW ZEALAND

APPLES

ORANGES

APPLES

12

0

6

0

3

3

3

3

0

4

0

6

a.

ORANGES

Who has a comparative advantage in producing apples? Who has a comparative advantage in producing oranges? Explain your reasoning.

1 4 = 12 3 12 =3 𝐴𝑢𝑠𝑡𝑟𝑎𝑙𝑖𝑎′ 𝑠 𝑂𝐶𝑂 = 4 6 𝑁𝑒𝑤 𝑍𝑒𝑎𝑙𝑎𝑛𝑑′ 𝑠 𝑂𝐶 𝐴 = = 1 6 6 𝑁𝑒𝑤 𝑍𝑒𝑎𝑙𝑎𝑛𝑑′ 𝑠 𝑂𝐶𝑂 = = 1 6 𝐴𝑢𝑠𝑡𝑟𝑎𝑙𝑖𝑎′ 𝑠 𝑂𝐶𝐴 =

As Australia has a lower opportunity cost in the production of apples, they have a comparative advantage in its production. By the same token, as New Zealand has a lower opportunity cost in the production of oranges, they have a comparative advantage in its production.  b.

Does either country have an absolute advantage in producing both goods? Explain.

Neither country has an absolute advantage in producing both goods. Using the same amount of resources, Australia can produce more apples than New Zealand, and New Zealand can produce more oranges that Australia. Only if one country could produce more of both goods would there be an absolute advantage.  c.

Suppose that both countries are currently producing 3000 tonnes of apples and 3000 tonnes of oranges. Show that both can be better off if they specialise in producing one good and then engage in trade.

If both countries produce 3 oranges and 3 apples each, then their total is equal to that much – 3 apples and 3 oranges. However, if Australia produced only apples, then they would produce 12 apples. If New Zealand only produced oranges, they would produce 6 oranges. With trade, both countries would end up with 6 apples each and 3 oranges each. This is due to the different comparative advantages the countries have.  

Week 3 Ch. 3

RQ 1.4p80, PA 1.8p80, RQ 2.3p82, PA 4.4p83

1.4.

What is the law of demand? Use the substitution effect and income effect to explain why an increase in the price of a product causes a decrease in the quantity demanded.

The law of demand states that, ceteris paribus, as the quantity demanded of a good or service increases, the price of that good or service will decrease. The substitution effect explains how an increase in the price of a product increases the attractiveness of available substitutes, and hence the quantity demanded of the initial good will decrease.  The income effect explains how an increase in price of a product, decreases an individual’s real income, and hence the individual is likely to decrease the quantity demanded to keep real income the same. 

1.8.

State whether each of the following events will result in a movement along the demand curve for McDonald’s Big Mac burgers or whether it will cause the curve to shift. If the demand curve shifts, indicate whether it will shift to the left or to the right and draw a graph to illustrate the shift. a.

The price of Hungry Jack’s Whopper burgers declines.

Shift demand curve to the left  b.

McDonald’s distributes vouchers for $1.00 off on a purchase of a Big Mac.

Movement along demand curve  c.

A shortage of potatoes causes the price of fries to increase.

Shift demand curve to the left – increase in price of complementary good  d.

KFC raises the price of a bucket of fried chicken.

Shift demand curve to the right – assuming they are substitutes  e.

The Australian economy enters a period of rapid growth in incomes.

Shift demand curve to the right If inferior good, then demand curve to the left. However, if normal good, then shift to the right.

2.3.

What is the law of supply? What are the main variables that will cause a supply curve to shift? Give an example of each.

The law of supply states, ceteris paribus, that as the price of a good or service increases, the quantity supplied of that good also increases. The main variables that cause the supply curve to shift are: 1. The price of inputs 2. Technological Change 3. Changes in the price of substitutes 4. Changes in expected future prices

5. Changes in the number of firms 4.4.

[Related to Don’t let this happen to you] A student writes the following: ‘Increased production leads to a lower price, which in turn increases demand.’ Do you agree with his reasoning? Briefly explain.

An increase in production implies a shift of the supply curve to the right. This shifts the equilibrium to a lower price, with a new quantity demanded. This change is a result of a movement along the curve however, not a shift. 

Ch. 4

RQ 1.3p106, PA 1.11p106, PA 2.5p107

1.3. In the circular flow of expenditure and income, why must the value of total production in an economy equal the value of total income? Total production must equal total income as both are measuring the same thing. For example, if $30 is spent on a T-shirt at a clothing store, then $15 of this may go to the clothing store, another $10 to the person who printed the design on the T-shirt and another $5 to the person who made the t-shirt from material. In the end, the $30 spent on the T-shirt goes to the income of the people who provided the T-shirt. As a result, total production is the same as total income.  1.11. [Related to Solved problem 4.1] Suppose that a simple economy produces only the following four goods and services: textbooks, hamburgers, shirts and cotton. Assume that all of the cotton is used in the production of shirts. Use the information in the following table to calculate nominal GDP for 2015.

𝐺𝐷𝑃 = (100 × 60) + (100 × 2) + (50 × 25) = $7450  Cotton is an intermediate good 2.5. What would you expect to happen to household production as unemployment rises during a recession? What would you expect to happen to household production as unemployment falls during an economic expansion? Would you therefore expect the fluctuation in actual production—GDP plus household production—to be greater or less than the fluctuation in measured GDP? As unemployment rises, it is likely household production will increase, as household incomes will be less and hence families will look to produce goods and services at home rather than pay for these.  In an economic expansion, it is likely household production will decrease, household incomes rising and hence more money being spent on goods on services rather than producing by themselves.  Therefore, actual production (GDP plus household production) will fluctuate far less than measured GDP as household production adjusts accordingly with changes in measured GDP. 

Week 4 Ch. 4

RQ 2.3p106, RQ 3.1p108

2.3. Why is GDP an imperfect measure of economic wellbeing? What types of production does GDP not measure? Even if GDP included these types of production, why would it still be an imperfect measure of economic wellbeing? GDP is an imperfect measure of wellbeing because the following are not considered: 1. 2. 3. 4. 5.

Distribution of GDP Value of leisure Level and quality of health and education Not adjusted for pollution Not adjusted for changes in crime and other social problems

Furthermore, GDP does not measure household production and the underground economy.  3.1. Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next? How does the ABS deal with the problem inflation causes with nominal GDP? Nominal GDP is a poor measure of total production because the monetary value of products increase with inflation from year to year, even if the quantity of that good produced does not. As a result, nominal GDP is simply not comparable from year to year. The ABS uses real GDP which is a measure of the total volume of goods and services produced in an economy. The ABS uses chain volume measures, essentially using a base year’s price, only measuring the change in quantity, allowing for a comparable figure. When there is inflation, nominal GDP overstates the increase in total production. Ch. 5

RQ 1.3p138, RQ 2.2p139, PA 2.7p139, RQ 3.2p141, PA 1.10p138

1.3 What is the most important factor in explaining increases in real GDP in the long run? What supportive government policies are crucial for long-run economic growth? Real GDP increases in the long run from technological change. The most important factor in explaining the increases in real GDP in the long run is increases in labour productivity. The government can help achieve this by: 1. 2. 3.

Providing secure rights to private property Establishing an independent court system enforcing contracts Developing and maintaining an efficient financial system

2.2. How does the financial system—either financial markets or financial intermediaries—provide risk sharing, liquidity and information for savers and borrowers? The financial system allows for risk sharing which occurs through the numerous available investments for savers and borrowers. Furthermore, liquidity is provided through fast and easy ways to convert these investments into cash. It provides liquidity by providing savers with markets in which they can sell their holdings of financial securities. Finally, information is always available through the numerous financial institutions and incorporating this information into the prices of the financial investments offered. 2.7.

Consider the following data for a closed economy:

Y = $11 trillion C = $8 trillion

I = $2 trillion TR = $1 trillion T = 3 trillion Use the data to calculate the following: a.

Private saving

𝑆𝑃𝑟𝑖𝑣𝑎𝑡𝑒 = 𝑌 + 𝑇𝑅 − 𝐶 − 𝑇 = 11 + 1 − 8 − 3 = $1𝑡𝑟𝑖𝑙𝑙𝑖𝑜𝑛 b.

Public saving

𝑆𝑃𝑢𝑏𝑙𝑖𝑐 = 𝐼 − 𝑆𝑃𝑟𝑖𝑣𝑎𝑡𝑒 = $2 − $1 = $1𝑡𝑟𝑖𝑙𝑙𝑖𝑜𝑛 c.

Government purchases

𝑌=𝐶+𝐺+𝐼 𝐺 = 𝑌 − 𝐶 − 𝐼 = 11 − 8 − 2 = $1𝑡𝑟𝑖𝑙𝑙𝑖𝑜𝑛  d.

The government budget deficit or budget surplus

𝑆𝑢𝑟𝑝𝑙𝑢𝑠 = 𝑇 − 𝑇𝑅 − 𝐺 = 3 − 1 − 1 = $1𝑡𝑟𝑖𝑙𝑙𝑖𝑜𝑛  3.2 Briefly describe the effect of the business cycle on the inflation rate and the unemployment rate. Why might the unemployment rate continue to rise during the early stages of a recovery? In an expansion, the inflation rate will rise and the unemployment rate will decrease.  In a contraction, the inflation rate will decrease and the unemployment rate will rise.  At the early stages of a recovery, firms have already had an unplanned increase in inventories and must sell these first before employing persons again. Furthermore, the employment process is relatively slow. The unemployment rate may continue to rise during the early stages of a recovery because employment may grow more slowly than the labour force 1.10 a. If Australian GDP per capita continued to grow at a rate of 3 per cent per year, how many years will it take for real GDP per capita to double? 𝑌𝑒𝑎𝑟𝑠 𝑡𝑜 𝐷𝑜𝑢𝑏𝑙𝑒 =

70 3

= 23.33𝑦𝑒𝑎𝑟𝑠

b. The economy of China has boomed since the late 1970s, having periods of double-digit economic growth rates. At an 8 per cent growth rate in real GDP, how many years would it take for China’s economy to double? 𝑌𝑒𝑎𝑟𝑠 𝑡𝑜 𝐷𝑜𝑢𝑏𝑙𝑒 =

70 8

= 8.75𝑦𝑒𝑎𝑟𝑠

Week 5 Ch. 6

RQ 1.1p168, PA 1.7p169, RQ 2.2p169, PA 2.5p170, PA 2.6p170

Review Questions 1.1. Why does a country’s economic growth rate matter? A country’s economic growth is important because it signifies the quality of life in the country. Long-run economic growth is a key indicator to quality of life, and hence the growth rate provides useful information for individuals, businesses and the government.  Problems and Applications 1.7. that:

[Related to Making the connection 6.2] In his book The White Man’s Burden, William Easterly writes

Routine childhood immunization combined with measles vaccination in seven southern Africa nations starting in 1996 virtually eliminated measles in those countries by 2000. A national campaign in Egypt to make parents aware of the use of oral rehydration therapy from 1982 to 1989 cut childhood deaths from diarrhea by 82 percent over that period. a. Is it likely that real GDP per capita increased significantly in southern Africa and Egypt as a result of the near elimination of measles and the large decrease in childhood deaths from diarrhoea? If these events did not increase real GDP per capita, is it still possible that they increased the standard of living in southern Africa and Egypt? Briefly explain. It is likely that real GDP did increase in these countries as a result of improved health conditions. Improved health indicates a healthier work force, increasing labour productivity. Furthermore, ...