Assignment:
Part 1: Multiple Choice and Short Answer.
Instruction: For each of the multiple choice questions, please include a short explanation with your answer, or for problems where you need to calculate an answer, please show all your work.
Question 1. Is absed on the following production possibilities table:
machine Food
A 0 50
B. 1 45
C. 2 38
D. 3 28
E. 4 15
F. 5 0
If the economy is currently producing at point B and wishes to change its output composition to point C, what will be the opportunity cost of increasing the production of machines?
2. Which one of the following expressions best states the idea of opportunity cost?
A. "A penny saved is a penny earned."
B. "He who hesitates is lost."
C. There is no such thing as a free lunch.'
D. "All that glitters is not gold."
3. Economic scarcity applies in:
A. capitalist countries only, as witnessed by households who cannot afford to purchase all their necessities.
B. socialist countries only, as witnessed by the long lines for consumer goods.
C. developing countries only, as measured by their relatively low income per capita.
D. no countries, since by the late 20th century humans have solved the problem of scarcity.
E. all societies, regardless of their economic systems.
4. Unemployment of at least one factor of production:
A. causes the production possibilities curve to shift outward.
B. can exist at any point on a production possibilities curve.
C. is illustrated by a point outside the production possibilities curve.
D. is illustrated by a point inside the production possibilities curve.
E. causes the production possibilities curve to shift inward.
5. The invention of a machine that allows cows to milk themselves has led to an increase in milk production and a decrease in the price of milk. Farmers complain about the effect of this new technology on the price of milk because they now earn less income for each liter of milk they sell. They ask the government to set a price floor for milk at the old price level (above the current equilibriumprice). If the government agrees to introduce a price floor, what will be the result?
A. excess demand for milk.
B. excess supply of milk.
C. neither a shortage nor a surplus of milk.
D. a decline in the price of milk.
6. Joe sold gold coins for $1000 that he bought a year ago for $1000. He says, 'At least I didn't loses any money on my financial statement." His economist friend points out that in effect he did lose money, because he could have received a 3 percent return on the $1000 if he had bought a bank certificate a deposit instead of the coins. The economist's analysis in this case incorporates the idea of:
A. opportunity costs.
B. marginal benefits that exceed marginal costs.
C. imperfect information.
D. normative economics
7. Kara Was out jogging and despite being tired, decided to run one more mile. Based on her actions, economists would conclude that Kara:
A. must be an avid runner.
B. decided that the marginal benefit of rug one more mile would outweigh the cost of the additional mile.
C decided that the marginal cost of running one more mile would outweigh the benefit of the additional mile.
D. was not very tired, so the marginal cost of the extra mile was very low.
Part II:Short Essay-
1. Consider these two quotes:
i) "In the wheat market, demand often exceeds supply and supply sometimes exceeds demand."
ii) "The price of wheat rises and falls in response to changes in supply and demand." In which of these two statements are the terms "supply" and "demand" used correctly? Please explain in two to three sentences. (You are welcome to include a diagram with your explanation.)
2. Your friend, who has never studied economics, complains to you that economics makes no sense, She argues, for example, that the laws of demand and supply cannot explain the following observations: Golf course fees and the number of golf games sold in Florida during the summer months ("out of season") are lower than the number of games and the fees charged during the winter months ("in season").
Lobster prices, in contrast, are relatively high and the number sold relatively low when lobster is "out of season" as compared to prices and quantity sold during other times of the year.
Explain to your friend how these observations fit the laws of supply and demand. Illustrate your answer on supply and demand diagrams for the lobster and golf markets respectively. Please be sure that your diagrams are dearly and fully labeled,
3. Consider the following information on techniques of widget production available to a business fiat), and on the cost/price per unit of each resource employed to produce widgets:
Resources /Factor of production Price per unit of resource($) Technique 1 Technique 2 Technique 3
(Amount of Resources need under each technique)
Labor $2 5 2 3
Land $4 2 4 2
Capital $3 2 4 5
Entrepreneurial Ability $3 4 2 4
Assume that the business firm finds that its profit is greatest when it produces $90 worth of widgets. Suppose also that all three of the above techniques will Produce the desired ($40) amount of output.
a) Given the current resource prices noted above, which technique will the firm choose? Why? (Show your work.) Will production using that technique entail a profit or a loss? What will be the amount of that profit or loss? Given your answer, will the industry expand or contract? When wilt that expansion or contraction end?
b) Assume now that a new technique (technique 4) is available. It combines 2 units of labor with units of land, 6 units of capital, and 3 units of entrepreneurial ability. Will the firm adopt the new technique? Explain briefly.
c) Suppose an increase in the supply of capital causes the price of capital to fall to $1 per unit. All other resource prices remain unchanged. Which technique will the producer now choose? Explain.
4. Suppose that the demand and supply schedules for rental apartments in the city of Gotham are as given in the following table:
|
Monthly
|
Apartments Demanded
|
Apartments Supplied
|
|
$2500
|
10,000
|
15,000
|
|
$2000
|
12,500
|
12,500
|
|
$1500
|
15,000
|
10,000
|
|
$1000
|
17,500
|
7,500
|
|
$500
|
20,000
|
5,000
|
a) What is the market equilibrium rental price per month and the market equilibrium number of apartments demanded and supplied?
b) If the local government can enforce a rent-control law that sets the maximum monthly rent (Pc) at $1500, will there be a surplus or shortage of apartments? Of how many units? And how many units will actually be rented each month?
c) Suppose that a new government is elected into office that wants to keep out low-income households. It declares that the minimum rent (Pf) that can be charged is $2,500 per month. If it can enforce the price floor, will there be a surplus or shortage of apartments? Of how many units? And how many units will actually be rented each month?
d) Suppose that the government wishes to decrease the market equilibrium monthly rent by increasing the supply of housing. Assuming that the demand remains unchanged, by how many units of housing would the government have to increase the supply of housing in order-to get the market equilibrium rental price to fall to $1,500 per month?
5. Advanced: Assume that the demand for a commodity is represented by the equation P = 8 - 0.2Qd and supply by the equation P = 4 + 0.2Qs, where Qd and Qs are quantity demanded and quantity supplied, respectively, and P is the price. Using the equilibrium condition Qs = Qd, solve the equations to determine equilibrium price. Now determine equilibrium quantity.