Problem set 1
PART A:
1) What are ‘assumptions'? Why do economists make them? Give an example. George Box once said that: ‘All models are wrong but some are useful'. Explain what he meant.
2) What is a market economy? Can you think of any alternatives?
3) Why is there a trade-off between efficiency and equity? Provide an example.
4) What is the opportunity cost of an item, and how is it similar or different from its accounting cost? Which one is greater?
PART B:
5) You have a free ticket to see the U2 in concert, this ticket having no resale value. Beyoncé is performing on the same night, which is your second-best alternative. The Beyoncé ticket costs $220, and on any given day you would be willing to pay up to $300 to see Beyoncé (i.e. this is how much you value it). Assume there are no other costs of seeing either concert.
a. Assuming you could not get the Beyoncé ticket for free, what is your (net) opportunity cost of seeing the U2 concert? Explain your answer.
b. Now assume you could get the Beyoncé ticket for free, what is your (net) opportunity cost of seeing the U2? Explain your answer.
c. Continuing from part b, how will your answer change if you can re-sell the free Beyoncé ticket for its face value of $220?
d. Suppose your third best alternative is to watch a U2 DVD at home, to which you place a monetary value of $30, and the DVD rental is $2. How will this affect your answers above?
6) Adam Smith is often said to be to Economics what William Shakespeare is to English. To Adam Smith, individuals interacting through the marketplace promote general economic well-being even if guided only by their self-interest, as if an ‘invisible hand' was guiding them. (Note that he did not say that people should necessarily be ‘selfish'. He said that even if they are, their actions in the economy - as long as they play by the ‘rules' - indirectly help others).
a. Pick any one person (a member of your family, friend, a celebrity like Angelina Jolie etc), and give examples of their activities that are in line with Smith's conclusion.
b. Do YOU generally agree with Smith's conclusion? Why or why not?
7) Reflection and critical thinking
a. Write two good questions about any issues covered in this problem set. (Note: being able to ask good questions shows that you attempt to understand the material at a deeper level).
b. Describe some real-world situation (from business or personal life) in which you could apply the above economic concepts and theories, and briefly explain how.
Problem set 2:
PART A:
1) Beer and pies are complements because they are often enjoyed together. When the price of beer rises, what happens to the supply, demand, quantity supplied, quantity demanded and the price in the market for pies? Support your answer with a diagram.
2) Over the last 35 years, technological advances have reduced the cost of computer chips. Explain how this affected the market for computers, the market for computer software, and the market for typewriters (provide a diagram in each case) (hint: realize that a computer chip is an input into the production of computers, which makes supplying the computer cheaper).
3) Draw a production function that exhibits diminishing marginal product of labour. Draw the associated total-cost curve. Explain the shapes of the two curves you have drawn.
4) Mary lives in Brisbane and runs a business that sells guitars. In an average year, she receives $1 million from sales of guitars. Of this sales revenue, she must pay the manufacturer a wholesale cost of $500,000. She also pays wages and utility bills totalling $150,000. If she does not operate this guitar business, she can work in an accounting firm and receive an annual salary of $75,000. She owns her showroom. If she chooses to rent it out, she will receive $50,000 in rent per year. Assume that the value of this showroom does not depreciate during the year. No other costs are incurred in running this guitar business. What is Mary's profit from the accounting (and tax) point of view? What is her economic profit?
PART B:
5) Suppose that the price of tickets at your local movie theatre is determined by market forces.
Currently, the demand and supply schedules are as follows:
|
Price ($)
|
Quantity demanded
|
Quantity supplied
|
|
4
|
1000
|
800
|
|
8
|
800
|
800
|
|
12
|
600
|
800
|
|
16
|
400
|
800
|
|
20
|
200
|
800
|
a. Draw the demand and supply curves. What is unusual about this supply curve? Why might this be true?
b. What are the equilibrium price and quantity of tickets?
c. Demographers tell you that next year there will be more movie goers in the area. The additional people will have the following demand schedule:
|
Price ($)
|
Quantity demanded
|
|
4
|
400
|
|
8
|
300
|
|
12
|
200
|
|
16
|
100
|
Now add the old demand schedule and the demand schedule for the new people to calculate the new demand schedule for the entire area. What will be the new equilibrium price and quantity?
6) You plan to set up an ice-cream van. The van itself costs $1000. The permit costs $500. The ingredients for each cone of ice-cream cost $1, the hourly wage of your helper is $10 and you can together produce a maximum of 100 cones per hour.
a. What is your fixed cost of doing business? What is your accounting (i.e. explicit) variable cost per cone of ice-cream? Explain your answers (hint: the wage of the helper has to be converted into per-cone terms, using that fact that for $10 he can produce 100 cones per hour).
b. Construct a table showing your total cost, average total cost and marginal cost for output levels varying from 0 to 2 cones. Roughly draw the total cost, the marginal cost and the average total cost curves.
c. Mention other explicit as well as implicit costs that may be involved in this type of business. Explain why above some quantity your average variable cost curve is likely to start sloping upward.
7) Reflection and critical thinking
a. Write two good questions about any issues covered in this problem set.
b. Describe some real-world situation (from business or personal life) in which you could apply the above economic concepts and theories, and briefly explain how.
Problem set 3:
PART A:
1) What will happen if a profit-maximising, perfectly competitive firm is producing a quantity at which price is below average total cost but above average variable cost? In your answer make the distinction between the short run and long run.
2) Monopolistically competitive firms as well as oligopolies could increase the quantity they produce and lower the average total cost of production. Why don't they do so?
3) Firms in perfect as well as monopolistic competition can enter and exit the market in the long run. What does it imply about the economic and accounting profits under each market structure? Do they produce the socially efficient quantity of output in the long run? Explain.
4) Explain why and how game theory can be used in understanding interactions between businesses. What is the prisoners' dilemma, and how does it apply to oligopolies?
PART B:
5) Max is a magazine monopolist. His marginal cost of production (per magazine) is constant at $5. His demand information is as follows:
|
Price ($)
|
QD
|
|
50
|
0
|
|
40
|
5
|
|
30
|
10
|
|
20
|
20
|
|
15
|
30
|
|
10
|
50
|
|
5
|
102
|
|
2.50
|
200
|
a. Calculate the total revenue for Max at each price.
b. Calculate the (approximate) marginal revenue for Max at each price.
c. What is Max's profit-maximising output level and price? Compare this with the perfectly competitive equilibrium level of output and price.
6) A small town is served by many perfectly competing supermarkets, which have constant marginal cost.
a. Using a diagram of the market for groceries, show the equilibrium price and quantity. What is the deadweight loss in this case? Show the consumer and producer surplus in the figure.
b. Now suppose that the supermarkets combine to form one chain. Using a new diagram, show the equilibrium price and quantity. What is the deadweight loss in this case? Indicate the consumer and producer surplus, how have they changed?
c. Assume that the newly formed supermarkets chain can perfectly price discriminate. How much will be sold and what will be the deadweight loss in this case? Discuss how policymakers approach these sorts of situations, and why.
7) Reflection and critical thinking
a. Write two good questions about any issues covered in this problem set. (Note: being able to ask good questions shows that you attempt to understand the material at a deeper level).
b. Describe some real-world situation (from business or personal life) in which you could apply the above economic concepts and theories, and briefly explain how.
Problem set 4:
PART A:
1) Defend the argument that the GDP measure of output should be the final value of goods produced, not the sum of all the values of goods produced. Give an example supporting your stance.
2) Discuss the three ways in which the gross domestic product (GDP) can be measured? Why does each of them end up with approximately the same value?
3) Read the beautiful statement by Robert Kennedy on the important aspects that GDP does not include (available in the textbook). Provide an explanation of why this is case, and whether this is a problem.
4) Critically evaluate the following statement: ‘The consumer price index (CPI) and GDP deflator both measure the changes in prices in an economy, and therefore are identical.'
PART B:
5) Consider the graph below showing the relationship between life satisfaction and GDP across and within countries (it originally appeared here:
www.nytimes.com/2008/04/16/business/16leonhardt.html).
a. Briefly describe the main messages of the graph.
b. If YOU were the policymaker, what lessons would you take away from these findings?
6) Consider the following data assuming that these are the only products produced and consumed in the economy:
|
Product
|
2014 Quantity
|
2014 Price ($)
|
2015 Quantity
|
2015 Price ($)
|
|
Beer
|
3
|
5
|
4
|
1
|
|
Chocolate
|
6
|
7
|
8
|
2
|
Using 2014 as the base year answer the following questions:
a. What was the nominal GDP in 2014 and 2015? What was the real GDP in 2014 and 2015?
b. What was the GDP deflator in 2014 and 2015? What was the growth rate of nominal GDP between 2014 and 2015? What was the growth rate of real GDP between 2014 and 2015? What was the growth rate of the GDP deflator between 2014 and 2015?
c. Calculate the value of the basket in 2014 and 2015. Calculate the CPI for 2014 and 2015. Calculate the annual inflation rate over the 2014-2015 period. Compare it with the growth rate of the GDP deflator from part b. and comment.
7) Reflection and critical thinking
a. Write two good questions about any issues covered in this problem set. (Note: being able to ask good questions shows that you attempt to understand the material at a deeper level).
b. Describe some real-world situation (from business or personal life) in which you could apply the above economic concepts and theories, and briefly explain how.
Problem set 5:
PART A:
1) Compare and contrast human capital, H, physical capital, K and labour, L. What are main differences between these variables?
2) Read the case study on pages 610-613 of the textbook regarding climate change. Briefly summarize the issue and your views on this topic.
3) Consider some partially renewable resource (such as wood). Describe the process by which free- market pricing might stop the degradation/depletion of the resource. Can you think of any reasons for this process not to be effective in the real world?
4) What are diminishing returns to capital what is the implication for economic growth of different countries over time? (Hint: think about what is predicted to happen to the gap between rich and poor countries). Use examples of countries in Table 7.1 where this implication seems to be confirmed in the data in the period 1950-2011, as well as those that contradict this implication.
|
Adult Population
|
100
|
|
Not in Labour Force
|
25
|
|
Unemployed
|
20
|
|
Employed
|
55
|
PART B
5) Go to www.gapminder.org/tools. Before you proceed, use YOUR OWN judgement to answer the following question: Which country today has the lowest death rate during the 1st year of life (i.e. infant mortality): Singapore, Sweden or Venezuela? Then in the graph for Y-axis select: "Infant mortality rate (per 1,000 births)", and for X-axis select "time". From the list of the countries, select Singapore, Sweden, Venezuela, AND one other country of your choice. Press play.
a. Describe the data you observe, contrasting the outcomes in the four countries.
b. Try to provide brief explanations for the main trend. What is your prediction about how future outcomes will evolve in most countries? Why?
c. Using the Gapminder application, choose any two variables for the axes that you find of interest and run the application (you can choose specific countries or look at all of them). Describe your choice and the observations you have made analysing the data.
6) Read the News box on pages 180-183 of the textbook (this is in the 6th edition, not the earlier ones).
a. Outline the Millennium Development Goals of the United Nations.
b. Explain to what extent the goals are being achieved.
c. Write down two more goals that you think would be worthwhile, and explain why.
7) Reflection and critical thinking
a. Write two good questions about any issues covered in this problem set. (Note: being able to ask good questions shows that you attempt to understand the material at a deeper level).
b. Describe some real-world situation (from business or personal life) in which you could apply the above economic concepts and theories, and briefly explain how.
Problem set 6:
PART A:
1) What is the "rate of unemployment", what components does it consists of, and how is it calculated? What happened to this rate in Australia during 1970-1983, during 1992-2008, and since 2009?
2) The Labour Force Survey conducted by the Australian Bureau of Statistics counts someone who works as little as one hour per week as "employed". What are the implications of this for the accuracy of the calculated rate of unemployment?
3) Suppose a firm decides to pay its employees "efficiency wages" that are much higher than in other comparable firms. What may be the reasons for this and what do you expect will be the effects?
4) Consider the following labour market data.
Calculate the labour force, the percentage of people not in the labour force, the rate of unemployment, and the labour force participation rate.
PART B
5) Minimum Wages and Unions
a. Assume an industry without legal minimum wages and unions. Show in a diagram how the equilibrium wage W* is determined, and briefly explain all the concepts in the diagram.
b. Now suppose a minimum wage, WMIN, is legislated at a level lower than W*, i.e. WMIN
c. Now suppose a minimum wage is legislated at a level higher than W*, i.e. WMIN>W*. Show it in the diagram and explain what the labour market outcomes will be.
d. Now suppose a workers' union is created and successfully negotiates wage WUNION, which is above both W* and WMIN, i.e. WUNION>WMIN>W*. Explain what the labour market outcomes will be compared to the previous part.
6) Go to the latest LFS by the ABS at: www.abs.gov.au/ausstats/[email protected]/mf/6202.0.
a. Using the seasonally adjusted data, what is the latest labour force participation rate? Briefly checking some online sources is it lower or higher than in other countries? Provide some explanations for the difference.
b. Spend about 10 minutes going through the website and report at least one observation you find interesting or surprising, and a possible explanation for it.
7) Reflection and critical thinking
a. Write two good questions about any issues covered in this problem set. (Note: being able to ask good questions shows that you attempt to understand the material at a deeper level).
b. Describe some real-world situation (from business or personal life) in which you could apply the above economic concepts and theories, and briefly explain how.