Questions:
1. South Korea is economically advanced relative to North Korea by all the standard measures of economic well-being (e.g., per capita income, GDP, food consumption). North Korea devotes a larger proportion of its economic resources to military/defense endeavors than does South Korea. And yet South Korea spends more on military/defense than does North Korea.
a.Using the economic principle of the Production Possibility Curve (PPC) (or Production Possibility Frontier), show these characteristics of the two Korean countries in terms of consumer goods ("butter") and military goods ("guns') in the space below. Remember to label each axis.
b. If the South Korean economy grew from 2010 to 2012, but all of the growth took place in the consumption sector (i.e., in "butter"), in the space below draw what the 2012 PPC for South Korea would look like compared to the 2010 PPC.
c. Why is the Production Possibility Curve typically drawn concave from below (i.e., bulging outward)?
2. The New York City (NYC) Parks Department recently changed its pricing policy with regard to the use of tennis courts in public parks. According to a story in the Wall Street Journal of 8/5/2012, "Single-pay passes for an hour of court time jumped to $15 from $7." Under the new price level, this resulted in a drop in single-play passes to 27,000 compared to 40,000 before.
a. What economic principle (or "law") is represented in this story?
b. In your own words, what is this law?
c.Someone in NYC says, "anybody could have told the Parks Department that this huge price increase is going to cause a decrease in demand for tennis courts." Do you agree? Why or why not?
d.What tennis players in NYC, if any, will be better off economically by this policy that raises the price of playing tennis?
e. Based on the two data points you have, is the demand for single-pay passes elastic or inelastic? Exact calculations are not necessary for a correct answer.
f. Based on your response to part e. of this question, will the NYC Parks Department "take in" more revenue or less as a result of the new price policy? Exact calculations need not be shown.
3. The United States currently is experiencing one of the worst droughts in recent American history. Using demand and supply analysis, answer the following questions. Use a diagram to illustrate your answer for parts a. through d. of this question.
a.What is the likely effect of the drought on the market for corn?
b. Many of you consumed soft drinks sweetened by high fructose corn syrup (HFCS). HFCS, as the name suggests, is made from corn. What is the likely effect of the drought on the market for soft drinks?
c. Sugar is a substitute for HFCS in the production of some foods and beverages. What is the likely effect of the drought on the market for sugar?
d.Corn is used in the feeding (or "fattening") of cattle before they are sold to a slaughterhouse or processing plant to become a meat product. Veal is the meat of young cattle (or "calves). What is the likely effect of the drought upon the market for veal and why?
e.What is the likely effect of the drought on the revenue of corn producers?
4. Faced by protests about the price of corn during the drought, the government imposes price controls on the price of corn in the form of a ceiling price.
a. In the space below, draw a demand-supply diagram showing the ceiling price, where the ceiling price is effective.
b.Will the ceiling price cause a shortage or a surplus of corn? Show this on your diagram above.
c.Assume you are an employee at the Department of Agriculture who monitors the government price controls on corn. Describe two kinds of responses (by a seller) to an effective ceiling price that you might expect to observe.
d. According to government authorities, the price control is instituted to prevent "price gouging" in this particular market. If the price control is effective, do buyers in this market spend more or less money, in total, on the product or service?
5. The economic recession has been especially tough on the housing industry (i.e., the industry that builds new houses). The government decides to help the industry by supplying one-half of all the building materials for any new house at zero price. The contractor who is building the new house has to pay for the other half at market prices. So, for example, if 10,000 bricks are needed to build a new house, the contractor buys 5000 of them, and the government supplies 5000 at zero price to the contractor.
a. In the space below, show on a graph, the effect of this program on the demand and supply of new housing.
b. A house is not a home without furnishings (e.g., furniture, carpets, appliances, and the like). In the space below, show on a graph, the initial effect of this program on the demand and supply of home furnishings.
c.A critic of the government's policy complains, "The subsidy makes no sense. When the policy kicks into effect, demand for housing will increase, and the price will be bid right back up again to its original level." Comment on the validity of this statement.
6. Four questions about sheets and pillows.
a. If the demand for linen sheets is a normal good, what will be the effect of the recession on the demand for linen sheets?
b. Same question as in part a. of this question, but the demand for linen sheets is an inferior good?
c . If linen sheets are substitutes for satin sheets, and the price for satin sheets goes up, what happens to the demand for linen sheets (ceteris paribus)?
d. Fans of country & western music will know a song made famous by Tammy Wynette: "Satin sheets to lie on, satin pillows to cry on," which is a sad tale about a woman who is very well off economically (i.e., she has satin sheets, satin pillows, and also a Cadillac and wears tailor-made clothes) but she is not happy, for reasons explained in the song. In the language of economics, what would one call the relationship between satin sheets and satin pillows? If you do not care for country & western music, you may base your answer instead on tennis rackets and tennis balls or bread and butter.
7. The government is persuaded that the equilibrium market price for some good or service is too low, and sets an effective minimum price above that level.
a. In the language of economics, what is this kind of regulated price called?
b. Show in a diagram below an illustration of this kind of price control?
c. If effective, will this governmentally-pegged price cause a surplus or a shortage? Show the extent or magnitude of this on your diagram above.
8. Vocabulary is important in lots of subjects. It is in economics. So please define or demonstrate your familiarity with terms below.
a. provide an example of a positive statement and a normative statement (be sure to label each)
b. the elasticity of demand where, at that price-quantity combination, total revenue is maximized
c. the invisible hand
d. economic concept of cost
e. two prerequisites for a market economy
f. cross-elasticity of demand for substitute goods versus cross-elasticity of demand for complements.
g. the distinction between an English auction versus a Dutch auction?