Problem 1: Economists Edward Lazear and Robert Michael have calculated that the average family spend two and a half times as much on each adult as they do each child.
a) Does this mean that children are deprived and that the distribution is unfair?
b) Do you think these percentages change with family income? If so, how?
c) Do you think that the allocation would be different in a family in a Soviet-style socialist country than in a capitalist country? Why?
Problem 2: One of the specific problems Soviet-style socialist economics had was keeping up with capitalist countries technology.
a) Can you think of any reason inherent in a centrally planned economy that would make innovation difficult?
b) Can you think of any reason inherent in a capitalist country that would foster innovation?
c) Joseph Schumpeter, a famous Harvard economist of the 1930s, predicted that as firms in capitalist societies grew in size they would innovate less. Can you suggest what his argument might have been?
d) Schumpeter’s prediction did not come true. Modern capitalist economies have had enormous innovations. Can you provide explanations as to why?
Problem 3: Draw hypothetical supply and demand curves for tea. Show how the equilibrium price and quantity will be affected by each of the following occurrences:
a) Bad weather wreaks havoc with the tea crop.
b) A medical report implying tea is bad for your health is published.
c) A technological innovation lowers the cost of producing tea.
d) Consumers’ income falls. (Assume tea is a normal good.)
Problem 4: You’re a commodity trader and you’ve just heard a report that the winter wheat harvest will be 2.09 billion bushels, a 44 percent jump, rather than an expected 35 percent jump to 1.96 billion bushels.
a) What would you expect would happen to wheat prices?
b) Demonstrate graphically the effect you suggested in a a.
Problem 5: State whether supply/demand analysis used without significant modification is suitable to assess the following:
a) The impact of an increase in the demand for pencils on the price of pencils.
b) The impact of an increase in the supply of labor on the quantity of labor demanded.
c) The impact of an increase in aggregate savings on aggregate expenditures.
d) The impact of a new method of producing CDs on the price of CDs.