Economics Model Answers Twelve - 2013

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Economics Homework - [1 - 2 - 3 - 4 - 5 - 6 - 7 - 9 - 10 - 11 - 12]

1. Which concept in Economics do you think is the best self-motivator, which you might use to achieve more?

Answers vary, but could include a discussion of opportunity costs, the benefits of competition, efficiency, maximizing marginal utility, Gresham's law, the Coase theorem, economic profits (as opposed to accounting profits), advantages of long run planning, how time is equivalent to money, etc.

2. Which is true about the average fixed costs (AFC) of a firm?

(a) A firm can eliminate these costs by shutting down in the short run.
(b) As output increases, AFC decreases.
(c) As output increases, AFC increases.
(d) AFC is part of average variable costs.

Briefly explain your answer.

B is the correct answer, because AFC is fixed costs divided by total output: FC/Q. As Q increases, the outcome decreases.

3. What is one of the primary responsibilities of the Federal Reserve Bank?

Control the interest rates of banks (which controls the flow of money), and keep banks from failing.

4. Review: Suppose that after completing this course, you start a new company. In your first year, you "broke even" (had zero profits), and in your second year you want to increase your revenue and profits. After careful study of your market, you decide that you can increase your revenue by increasing your price. Therefore your good must be price elastic/inelastic (choose one).

The good must be price inelastic.

5. A monopolistic competitive firm has the following characteristic that is lacking for a perfectly competitive firm:

(a) There are low barriers to entry.
(b) MR = MC in the long run.
(c) P > MC
(d) There are many competitors.

Choose one of the above and explain your answer.

The correct answer is "C". A monopolistic competitive firm has the characteristic "P > MC", which is not true for a perfectly competitive firm. A monopolistic competitive firm does not have to repeatedly lower its prices to keep up wih the competition. "A monopolistic competitive firm has the characteristic of P>MC, which is not true for a firm in perfect competition. This characteristic arises because the goods in monopolistic competitive firms are not perfect substitutes, and the price can be set higher than the marginal cost without a loss in revenue." (by student NL)

6. If you were to loan someone money, why would you want him to pay you something extra (interest) when he pays back the loan? Give at least one reason.

Here are two reasons: the time value of money, and something extra to compensate you for taking the risk that your loan will not be paid back.

7. Review: is the cost of the bus for the March for Life trip to D.C. a "fixed cost" or a "variable cost"? Explain, assuming for the purpose of this question that one and only one bus can be used (in reality, we used several buses).

The cost of the bus is a fixed cost, because it is the same cost whether there is one person on the bus (or no one), and whether there are 47 people on the bus. The cost does not "vary" with the output.

8. Suppose I will pay you $1000 in two years, and the interest rate is 10% per year, compounded annually. How much should you pay me today to receive $1000 in two years? Show your work.

Work backwards: at 10% interest, $1000 in two years is the same as $1000/1.1=$909.09 in one year. That is because $909.09 generates $1000 in one year at 10% interest. Then we have to work backwards one more year to get to "today": $909.09/1.1=$826.45. So the answer is $826.45 - that is what we would need to receive today for it to be the same as $1000 in two years, at 10% interest compounded annually. Check our answer: $826.45 times 10% = $82.65. Add that and our total in one year is it would require $1000/1.1=$909.10. Repeat that process for the second year and the total is $909.10 plus $90.91=$1000.01 (the extra penny is due to rounding error).

9. Explain why in long-run equilibrium the price charged in monopolistic competition is greater than marginal cost but equal to average total cost.

In monopolistic competition there are almost no barriers of entry. A new firm can easily enter the market if products were selling above average total cost. If they charged more than ATC they would be undersold by the competition, and if they charged less then they would loss money overall. "In a firm in monopolistic competition, the long-run equilibrium price is equal to average total cost (ATC) because there are very few barriers to entry into the market. If price were greater than average total cost, then other firms would set their price lower (equal to ATC) in order to compete. In contrast, the price need not be equal to marginal cost (MC) in the short run since not all of the goods are perfect substitutes." (by student NL)

10. Economics is sometimes called the “dismal science” because economists predicted population to grow faster than the food supply, marginal returns to diminish, and profits to vanish. But, in fact, there is an abundance of food and profits have not vanished. Why is economics not so dismal after all?

Because new inventions and hard work by people create wealth, charity, ingenuity, and so on.

11. What is "Keynesian economics" and what is your view of it?

Keynesian economics claims that government interference, and especially government spending, is good for the economy.

12. An agreement by different firms with each other to reduce output is illegal. Why should that be illegal?

Yes, because reducing output is harmful to the public. In economic terms, reducing output causes a "deadweight loss."

13. Nash equilibrium, revisited: What is the Nash equilibrium for two gas stations (an oligopoly) that are situated immediately across the street from each other? In other words, what price do they sell at, expressed in terms of one of their cost measures? Explain the process that reaches that "equilibrium".

They sell at MR=MC. If one firm were to sell higher, than the other firm would boost its profits by reducing its price to where MR=MC. "The outcome would be when MR = MC. One gas station could lower its original price to get more business, but then the second station would lower its price as well so it doesn’t lose business. This would continue until both gas stations lower their prices to where cost equals price." (by student CM)

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Economics Model Answers Seven - 2013

(Difference between revisions)5.  Explain the difference between total cost, average cost, and marginal cost.5.  Explain the difference between total cost, average cost, and marginal cost.:Total cost is the entire costs that a firm has, including all fixed and variable costs. Average cost equals this total cost divided by the quantity of goods produced, which is TC/Q.  Marginal cost is the additional expense for making one additional unit.:Total cost is the entire expense that a firm has, including all fixed and variable costs. Average cost equals this total cost divided by the quantity of goods produced, which is TC/Q.  Marginal cost is the additional expense for making one additional unit.6.  Suppose you decide you could profitably set the price for a homeschool dinner event at $15 per ticket, and it would have attracted 150 people.  You also determine that 50 out of the 150 people who would have attended would have paid $20 per ticket and 10 out of the 150 would have paid $25 per ticket, and 5 out of the 150 would have paid $30 per ticket, because they would have enjoyed and benefited so much from it.  However, this homeschool dinner event was never held because no one "got around to it."  What is the loss in wealth or consumer surplus due to the fact that the event was ''not'' held?6.  Suppose you decide you could profitably set the price for a homeschool dinner event at $15 per ticket, and it would have attracted 150 people.  You also determine that 50 out of the 150 people who would have attended would have paid $20 per ticket and 10 out of the 150 would have paid $25 per ticket, and 5 out of the 150 would have paid $30 per ticket, because they would have enjoyed and benefited so much from it.  However, this homeschool dinner event was never held because no one "got around to it."  What is the loss in wealth or consumer surplus due to the fact that the event was ''not'' held?

Economics Homework - [1 - 2 - 3 - 4 - 5 - 6 - 7 - 9 - 10 - 11 - 12]

1. Identify the four elements of perfect competition.

1. Many buyers (consumers) and sellers (firms). 2. Goods that are perfect substitutes for each other. 3. A market where there is perfect knowledge needed to choose what to buy 4. A market that has perfect mobility or access to resources.

2. Describe how you might use competition, perhaps even competing with yourself, to motivate yourself to achieve more.

Set a goals for yourself each day. Write them down at the beginning of the day, and then "compete" with your list to see how many of the goals you achieve.

3. Write the equations for TC, FC, ATC, and AFC, and give an example of how they would be used.

TC = FC + TVC , which is the sum of the fixed cost and variable cost. Example: the total cost of running a gas station is the cost of the building and the gas pumps and the wages for the workers and the gasoline itself, which includes both fixed and variable costs. FC = TC when the quantity Q produced by your firm is zero. Example: the fixed cost (FC) for a restaurant is the cost of renting or buying the building, cooking equipment, and utensils such as forks and spoons. ATC = TC / Q , which is the average total cost per unit of the good produced. For example, if the total cost for making 100 pizzas a day is $500, then the average total cost (ATC) is $500 / 100 = $5 per pizza. AFC = FC / Q , which is the fixed cost per unit of the good produced. For example, if the fix cost of the pizza palor (just the building, cooking equipment, and utensils such as forks and spoons) is $300 per day, then the average fixed cost (AFC) is $300 / 100 = $3 per pizza.

4. Do you think the converse of Gresham's Law is true with respect to speech and conversation? Specifically, does good speech or conversation (such as discussing the Bible) drive out bad speech? Explain.

Yes, just as bad speech tends to drive out good speech, an effort at good speech (for example, talking about the Bible) does tend to drive out bad speech. But it takes effort, or else people seem to drive towards uninformative, unspiritual chatter.

5. Explain the difference between total cost, average cost, and marginal cost.

Total cost is the entire expense that a firm has, including all fixed and variable costs. Average cost equals this total cost divided by the quantity of goods produced, which is TC/Q. Marginal cost is the additional expense for making one additional unit.

6. Suppose you decide you could profitably set the price for a homeschool dinner event at $15 per ticket, and it would have attracted 150 people. You also determine that 50 out of the 150 people who would have attended would have paid $20 per ticket and 10 out of the 150 would have paid $25 per ticket, and 5 out of the 150 would have paid $30 per ticket, because they would have enjoyed and benefited so much from it. However, this homeschool dinner event was never held because no one "got around to it." What is the loss in wealth or consumer surplus due to the fact that the event was not held?

The loss in consumer surplus is the sum of the extra amount that everyone benefited above the $15 they paid for the tickets. The amount of this consumer surplus varies from individual to individual, and then it is all summed up. It is the extra amount that people would have paid, but did not have to because the ticket price was lower than what they would have paid. So the consumer surplus for this question is: 5 TIMES ($30 - $15) = $75 10 TIMES ($25 - $15) = $100 50 TIMES ($20 - $15) = $250 The total sum is $75 + $100 + $250 = $425 Thus the consumer surplus is $425.

7. Explain what the "CPI" is, and why the real price of a good is decreasing if its price remains constant while the CPI increases from year-to-year. An example of this might be the real price of laptop computers from 2012 to 2013.

The CPI is the Consumer Price Index, which helps measure inflation from month-to-month, based on how prices change for a set of non-farming goods. A CPI of "100" was the average for the period 1982-84. In January 2004, the CPI was 185.2, and in July 2009, the CPI was 215.351. This means that a dollar in 2009 was worth less than 1/2 the value of a dollar in 1982-1984, because a typical good (like a candy bar) cost more than twice as much as a typical good in 1982-1984. Laptop computers cost about the same in 2013 as 2012, but the CPI increased over that same time. This means the value of a dollar decreased from 2012 to 2013. If the same number of dollars can buy the same laptop in 2013 as 2012, than the real price of that laptop computer decreased

8. Explain what the Producer Surplus is, and provide an example.

Producer surplus is the wealth obtained by a seller (firm) because he was able to sell his good at a price higher than what he was willing to accept. Example: if supply equals demand for a new car at a price of $25,000, the car dealer will receive that price even though he would be willing to sell some of those new cars for less than $25,000. His producer surplus is the sum of all of the extra amounts he received above what he was really willing to sell each car for. On a supply-and-demand graph, the "producer surplus" is the area above the supply curve but below the line at the price where the good is sold.

9. Suppose the underlying labor market is perfectly competitive, but there is a minimum wage above the market rate. Then suppose that the supply of labor increases. Explain what the result is and why.

Unemployment increases, because there are no available jobs for the additional supply of labor.

10. What is the firm's profit or loss when Q=0 in the honors discussion above? (Answer simply in terms of another cost measure.) Is the firm profitable?

When Q=0 then the the firm's total cost (TC) is equal to its fixed cost (FC). The firm that shuts down is losing less money than if it stayed open and produced more Q, but the firm is still losing money. How much money does a firm that shuts down lost? Its total cost is equal its fixed cost: the firm has a loss of FC.

11. (Challenging, with extra credit) Prove mathematically that MC>MR for all Q>0 in the honors discussion above. (Hint: define MC in terms of the change in AVC, and then regroup the terms and draw conclusions about them to show MC>MR).

MR=P, and in perfect competition, AVC=MC. Here, when Q>0, AVC>MR, which is why the firm shuts down. But if AVC>MR, then AVC>P because P=MR. Because AVC=MC, then MC>P and MC>MR, as the question asked.

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Economics Model Answers Twelve - 2013

(Difference between revisions)4.  Review:  Suppose that after completing this course, you start a new company.  In your first year, you "broke even" (had zero profits), and in your second year you want to increase your revenue and profits.  After careful study of your market, you decide that you can increase your revenue by increasing your price.  Therefore your good must be price elastic/inelastic (choose one).4.  Review:  Suppose that after completing this course, you start a new company.  In your first year, you "broke even" (had zero profits), and in your second year you want to increase your revenue and profits.  After careful study of your market, you decide that you can increase your revenue by increasing your price.  Therefore your good must be price elastic/inelastic (choose one).:The good must be price inelastic.5.  A monopolistic competitive firm has the following characteristic that ''is lacking'' for a perfectly competitive firm:5.  A monopolistic competitive firm has the following characteristic that ''is lacking'' for a perfectly competitive firm:

1. Which concept in Economics do you think is the best self-motivator, which you might use to achieve more?

Answers vary, but could include a discussion of opportunity costs, maximizing marginal utility, economic costs, advantages of long run planning, how time is equivalent to money, etc.

2. Which is true about the average fixed costs (AFC) of a firm?

(a) A firm can eliminate these costs by shutting down in the short run.
(b) As output increases, AFC decreases.
(c) As output increases, AFC increases.
(d) AFC is part of average variable costs.

Briefly explain your answer.

B is the correct answer, because AFC is fixed costs divided by total output: FC/Q. As Q increases, the outcome decreases.

3. What is one of the primary responsibilities of the Federal Reserve Bank?

Control the interest rates of banks (which controls the flow of money), and keep banks from failing.

4. Review: Suppose that after completing this course, you start a new company. In your first year, you "broke even" (had zero profits), and in your second year you want to increase your revenue and profits. After careful study of your market, you decide that you can increase your revenue by increasing your price. Therefore your good must be price elastic/inelastic (choose one).

The good must be price inelastic.

5. A monopolistic competitive firm has the following characteristic that is lacking for a perfectly competitive firm:

(a) There are low barriers to entry.
(b) MR = MC in the long run.
(c) P > MC
(d) There are many competitors.

Choose one of the above and explain your answer.

The correct answer is "C". A monopolistic competitive firm has the characteristic "P > MC", which is not true for a perfectly competitive firm. A monopolistic competitive firm does not have to repeatedly lower its prices to keep up wih the competition.

6. If you were to loan someone money, why would you want him to pay you something extra (interest) when he pays back the loan? Give at least one reason.

Here are two reasons: the time value of money, and something extra to compensate you for taking the risk that your loan will not be paid back.

7. Review: is the cost of the bus for the March for Life trip to D.C. a "fixed cost" or a "variable cost"? Explain, assuming for the purpose of this question that one and only one bus can be used (in reality, we used several buses).

The cost of the bus is a fixed cost, because it is the same cost whether there is one person on the bus (or no one), and whether there are 47 people on the bus. The cost does not "vary" with the output.

8. Suppose I will pay you $1000 in two years, and the interest rate is 10% per year, compounded annually. How much should you pay me today to receive $1000 in two years? Show your work.

Work backwards: at 10% interest, $1000 in two years is the same as $1000/1.1=$909.09 in one year. That is because $909.09 generates $1000 in one year at 10% interest. Then we have to work backwards one more year to get to "today": $909.09/1.1=$826.45. So the answer is $826.45 - that is what we would need to receive today for it to be the same as $1000 in two years, at 10% interest compounded annually. Check our answer: $826.45 times 10% = $82.65. Add that and our total in one year is it would require $1000/1.1=$909.10. Repeat that process for the second year and the total is $909.10 plus $90.91=$1000.01 (the extra penny is due to rounding error).

9. Explain why in long-run equilibrium the price charged in monopolistic competition is greater than marginal cost but equal to average total cost.

In monopolistic competition there are almost no barriers of entry. A new firm can easily enter the market if products were selling above average total cost. If they charged more than ATC they would be undersold by the competition, and if they charged less then they would loss money overall.

10. Economics is sometimes called the “dismal science” because economists predicted population to grow faster than the food supply, marginal returns to diminish, and profits to vanish. But, in fact, there is an abundance of food and profits have not vanished. Why is economics not so dismal after all?

Because new inventions and hard work by people create wealth, charity, ingenuity, and so on.

11. What is "Keynesian economics" and what is your view of it?

Keynesian economics claims that government interference, and especially government spending, is good for the economy.

12. An agreement by different firms with each other to reduce output is illegal. Why should that be illegal?

Yes, because reducing output is harmful to the public.

13. Nash equilibrium, revisited: What is the Nash equilibrium for two gas stations (an oligopoly) that are situated immediately across the street from each other? In other words, what price do they sell at, expressed in terms of one of their cost measures? Explain the process that reaches that "equilibrium".

They sell at MR=MC. If one firm were to sell higher, than the other firm would boost its profits by reducing its price to where MR=MC.

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Economics Model Answers Twelve - 2013

(Difference between revisions)1.  Which concept in Economics do you think is the best self-motivator, which you might use to achieve more?1.  Which concept in Economics do you think is the best self-motivator, which you might use to achieve more?:Answers vary, but could include a discussion of opportunity costs, maximizing marginal utility, economic costs, advantages of long run planning, how time is equivalent to money, etc.2.  Which is true about the average fixed costs (AFC) of a firm?2.  Which is true about the average fixed costs (AFC) of a firm?:B is the correct answer, because AFC is fixed costs divided by total output: FC/Q. As Q increases, the outcome decreases.3.  What is one of the primary responsibilities of the Federal Reserve Bank?  3.  What is one of the primary responsibilities of the Federal Reserve Bank?  :Control the interest rates of banks (which controls the flow of money), and keep banks from failing.4.  Review:  Suppose that after completing this course, you start a new company.  In your first year, you "broke even" (had zero profits), and in your second year you want to increase your revenue and profits.  After careful study of your market, you decide that you can increase your revenue by increasing your price.  Therefore your good must be price elastic/inelastic (choose one).4.  Review:  Suppose that after completing this course, you start a new company.  In your first year, you "broke even" (had zero profits), and in your second year you want to increase your revenue and profits.  After careful study of your market, you decide that you can increase your revenue by increasing your price.  Therefore your good must be price elastic/inelastic (choose one).5.  A monopolistic competitive firm has the following characteristic that ''is lacking'' for a perfectly competitive firm:5.  A monopolistic competitive firm has the following characteristic that ''is lacking'' for a perfectly competitive firm:Choose one of the above and explain your answer.Choose one of the above and explain your answer.:The correct answer is "C".  A monopolistic competitive firm has the characteristic "P > MC", which is not true for a perfectly competitive firm. A monopolistic competitive firm does not have to repeatedly lower its prices to keep up wih the competition. 6.  If you were to loan someone money, why would you want him to pay you something extra (interest) when he pays back the loan?  Give at least one reason.6.  If you were to loan someone money, why would you want him to pay you something extra (interest) when he pays back the loan?  Give at least one reason.9.  Explain why in long-run equilibrium the price charged in monopolistic competition is greater than marginal cost but equal to average total cost.9.  Explain why in long-run equilibrium the price charged in monopolistic competition is greater than marginal cost but equal to average total cost.:In monopolistic competition there are almost no barriers of entry. A new firm can easily enter the market if products were selling above average total cost.  If they charged more than ATC they would be undersold by the competition, and if they charged less then they would loss money overall.10.  Economics is sometimes called the “dismal science” because economists predicted population to grow faster than the food supply, marginal returns to diminish, and profits to vanish.  But, in fact, there is an abundance of food and profits have not vanished.  Why is economics not so dismal after all?10.  Economics is sometimes called the “dismal science” because economists predicted population to grow faster than the food supply, marginal returns to diminish, and profits to vanish.  But, in fact, there is an abundance of food and profits have not vanished.  Why is economics not so dismal after all?:Because new inventions and hard work by people create wealth, charity, ingenuity, and so on.11.  What is "Keynesian economics" and what is your view of it?11.  What is "Keynesian economics" and what is your view of it?:Keynesian economics claims that government interference, and especially government spending, is good for the economy.12.  An agreement by different firms with each other to reduce output is illegal.  Why should that be illegal?12.  An agreement by different firms with each other to reduce output is illegal.  Why should that be illegal?13.  Nash equilibrium, revisited:  What is the Nash equilibrium for two gas stations (an oligopoly) that are situated immediately across the street from each other?  In other words, what price do they sell at, expressed in terms of one of their cost measures?  Explain the process that reaches that "equilibrium".13.  Nash equilibrium, revisited:  What is the Nash equilibrium for two gas stations (an oligopoly) that are situated immediately across the street from each other?  In other words, what price do they sell at, expressed in terms of one of their cost measures?  Explain the process that reaches that "equilibrium".[[Category:Economics lectures]]

1. Which concept in Economics do you think is the best self-motivator, which you might use to achieve more?

Answers vary, but could include a discussion of opportunity costs, maximizing marginal utility, economic costs, advantages of long run planning, how time is equivalent to money, etc.

2. Which is true about the average fixed costs (AFC) of a firm?

(a) A firm can eliminate these costs by shutting down in the short run.
(b) As output increases, AFC decreases.
(c) As output increases, AFC increases.
(d) AFC is part of average variable costs.

Briefly explain your answer.

B is the correct answer, because AFC is fixed costs divided by total output: FC/Q. As Q increases, the outcome decreases.

3. What is one of the primary responsibilities of the Federal Reserve Bank?

Control the interest rates of banks (which controls the flow of money), and keep banks from failing.

4. Review: Suppose that after completing this course, you start a new company. In your first year, you "broke even" (had zero profits), and in your second year you want to increase your revenue and profits. After careful study of your market, you decide that you can increase your revenue by increasing your price. Therefore your good must be price elastic/inelastic (choose one).

The price must be inelastic.

5. A monopolistic competitive firm has the following characteristic that is lacking for a perfectly competitive firm:

(a) There are low barriers to entry.
(b) MR = MC in the long run.
(c) P > MC
(d) There are many competitors.

Choose one of the above and explain your answer.

The correct answer is "C". A monopolistic competitive firm has the characteristic "P > MC", which is not true for a perfectly competitive firm. A monopolistic competitive firm does not have to repeatedly lower its prices to keep up wih the competition.

6. If you were to loan someone money, why would you want him to pay you something extra (interest) when he pays back the loan? Give at least one reason.

7. Review: is the cost of the bus for the March for Life trip to D.C. a "fixed cost" or a "variable cost"? Explain, assuming for the purpose of this question that one and only one bus can be used (in reality, we used several buses).

8. Suppose I will pay you $1000 in two years, and the interest rate is 10% per year, compounded annually. How much should you pay me today to receive $1000 in two years? Show your work.

9. Explain why in long-run equilibrium the price charged in monopolistic competition is greater than marginal cost but equal to average total cost.

In monopolistic competition there are almost no barriers of entry. A new firm can easily enter the market if products were selling above average total cost. If they charged more than ATC they would be undersold by the competition, and if they charged less then they would loss money overall.

10. Economics is sometimes called the “dismal science” because economists predicted population to grow faster than the food supply, marginal returns to diminish, and profits to vanish. But, in fact, there is an abundance of food and profits have not vanished. Why is economics not so dismal after all?

Because new inventions and hard work by people create wealth, charity, ingenuity, and so on.

11. What is "Keynesian economics" and what is your view of it?

Keynesian economics claims that government interference, and especially government spending, is good for the economy.

12. An agreement by different firms with each other to reduce output is illegal. Why should that be illegal?

13. Nash equilibrium, revisited: What is the Nash equilibrium for two gas stations (an oligopoly) that are situated immediately across the street from each other? In other words, what price do they sell at, expressed in terms of one of their cost measures? Explain the process that reaches that "equilibrium".

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Economics Model Answers Eleven - 2013

(Difference between revisions)1.  Briefly define each of these terms: monopsony, economic rent, and economic profits.1.  Briefly define each of these terms: monopsony, economic rent, and economic profits.:A [[monopsony]] is when there is only one buyer, as in the example of only one company to employ people (buy labor) in a small town.:Economic rent is the extra revenue obtained above the minimum amount that would occur in a perfectly competitive market, as in the example of the extra profits a monopolist is able to earn due to his monopoly.:Economic profit is the profit earned when opportunity costs are considered.  It is usually less than the accounting profit, which is merely money received minus money paid.2.  Define, in your own words, what a "production possibilities curve" is.2.  Define, in your own words, what a "production possibilities curve" is.:A production possibility curve is a graph that illustrates the different combinations of goods that a nation can produce.  Moving along the production possibilities curve represents transferring resources from one good (or service) to the other.3.  Review: how is the elasticity of demand for labor related to the price elasticity of demand for the product of that labor?3.  Review: how is the elasticity of demand for labor related to the price elasticity of demand for the product of that labor?:If the good produced by the firm is ''highly'' price elastic, then a small increase in price causes a large decrease in demand for the good, and thus a large decrease in output by the firm.  But this large decrease in output means there must be a large decrease in the number of workers needed to produce that output.  Thus the demand for labor is highly elastic when there is high price elasticity of demand for the product of that labor.  Notice how in economics it helps to consider the extreme case to get the right answer.  4.  Do you think that government policy should give high priority to the Lorenz curve?  Explain the issue that a Lorenz curve addresses, and whether you think that should be a high priority of government economic policy.4.  Do you think that government policy should give high priority to the Lorenz curve?  Explain the issue that a Lorenz curve addresses, and whether you think that should be a high priority of government economic policy.:An example of a Lorenz curve is [http://ingrimayne.com/econ/AllocatingRationing/MeasuringIncomeDist.html here].:The Lorenz curve shows the actual distribution of income among people in society, compared with what an equal distribution of income in society. Thus the Lorenz curve illustrates inequality in wealth distribution.  But if government tries to make wealth distribution equal, then it reduces opportunity and discourages people from working to making more money.  The result is an overall loss in total wealth in society, as occurs in communist systems.5. Look again at Figure A (on p.3).  What is the opportunity cost of shifting production from B to C?  5. Look again at Figure A (on p.3).  What is the opportunity cost of shifting production from B to C?  6. Review:  explain again what AFC, AVC and ATC are, and how they relate to each other.  When should a firm shut down in the short run?6. Review:  explain again what AFC, AVC and ATC are, and how they relate to each other.  When should a firm shut down in the short run?:AFC is average fixed costs, which are the total fixed costs divided by number of units produced. AVC is average variable costs, which are the total variable costs divided by number of units produced. AFC+AVC=ATC.  Stated another way, ATC is average total costs, which is FC+VC/Q. If AVC>P, then a firm should shut down in the short run.7. What is needed to reach point D in Figure A (on p.3)?  (In other words, what causes a production possibilities curve to shift outward?)7. What is needed to reach point D in Figure A (on p.3)?  (In other words, what causes a production possibilities curve to shift outward?):There would need to be a shift in the production possibility frontier of the goods outward, due to an increase in the production and efficiency, in order for point D to be reached. This increase in overall output of goods could occur due to advances in technology, an increase in the workforce, or better equipment available for businesses.8.  Look again at Figure C (on p.1) in the lecture (the first graph in this Lecture).  At what point is total revenue maximized?8.  Look again at Figure C (on p.1) in the lecture (the first graph in this Lecture).  At what point is total revenue maximized?:Total revenue is ''maximized'' when marginal revenue equals 0 (crosses the x-axis).  This is the quantity at Point E, and the price on the demand curve corresponding to that quantity.9.  Explain why the production possibilities curve is convex (opening downward like the top of a circle) rather than concave (opening upward like the inside of a bowl) or a straight line.9.  Explain why the production possibilities curve is convex (opening downward like the top of a circle) rather than concave (opening upward like the inside of a bowl) or a straight line.:It is convex because it is inefficient converting a factory from the production of one good to another.  The maximum total number of goods that can be produced will be near the mid-point, and the overall total declines as all the factories are converted to producing only one good or the other.10.  Suppose you are a monopsony, and you must pay $9 per hour ($9/hr) to hire nine workers, but in order to hire one more worker you must pay $10/hr.  The tenth worker will bring in $15 extra per hour to the firm’s revenue.  Do you hire the tenth worker?10.  Suppose you are a monopsony, and you must pay $9 per hour ($9/hr) to hire nine workers, but in order to hire one more worker you must pay $10/hr.  The tenth worker will bring in $15 extra per hour to the firm’s revenue.  Do you hire the tenth worker?:No, you do not hire the tenth worker. If you were to hire the tenth worker, then that hiring would end up costing you $19 an hour ($10 for the extra work plus an additional $1 per nine workers to raise their wage to $10 per hour), while resulting in revenue of only $15. That would be a loss of $4 an hour, and you would not want to incur that loss.11.  In the term "comparative advantage," to what does the adjective "comparative" refer?  What is the term actually "comparing"?  Explain.11.  In the term "comparative advantage," to what does the adjective "comparative" refer?  What is the term actually "comparing"?  Explain.:It is a "comparison of the comparisons."  What really matters is how much more efficiently a nation can produce one good relative to another good, compared with how much more efficiently the other nation can produce one good relative to another good.  But don't get too tangled up in this detail for purposes of the exam.  Any comparison of nations and their production of two goods on the exam is likely a question about comparative advantage, and the correct answer will almost certainly be for the cheaper country to produce what it produces best.[[Category:Economics lectures]]

Economics Homework - [1 - 2 - 3 - 4 - 5 - 6 - 7 - 9 - 10 - 11 - 12]

1. Briefly define each of these terms: monopsony, economic rent, and economic profits.

A monopsony is when there is only one buyer, as in the example of only one company to employ people (buy labor) in a small town. Economic rent is the extra revenue obtained above the minimum amount that would occur in a perfectly competitive market, as in the example of the extra profits a monopolist is able to earn due to his monopoly. Economic profit is the profit earned when opportunity costs are considered. It is usually less than the accounting profit, which is merely money received minus money paid.

2. Define, in your own words, what a "production possibilities curve" is.

A production possibility curve is a graph that illustrates the different combinations of goods that a nation can produce. Moving along the production possibilities curve represents transferring resources from one good (or service) to the other.

3. Review: how is the elasticity of demand for labor related to the price elasticity of demand for the product of that labor?

If the good produced by the firm is highly price elastic, then a small increase in price causes a large decrease in demand for the good, and thus a large decrease in output by the firm. But this large decrease in output means there must be a large decrease in the number of workers needed to produce that output. Thus the demand for labor is highly elastic when there is high price elasticity of demand for the product of that labor. Notice how in economics it helps to consider the extreme case to get the right answer.

4. Do you think that government policy should give high priority to the Lorenz curve? Explain the issue that a Lorenz curve addresses, and whether you think that should be a high priority of government economic policy.

An example of a Lorenz curve is here. The Lorenz curve shows the actual distribution of income among people in society, compared with what an equal distribution of income in society. Thus the Lorenz curve illustrates inequality in wealth distribution. But if government tries to make wealth distribution equal, then it reduces opportunity and discourages people from working to making more money. The result is an overall loss in total wealth in society, as occurs in communist systems.

5. Look again at Figure A (on p.3). What is the opportunity cost of shifting production from B to C?

350 cars.

6. Review: explain again what AFC, AVC and ATC are, and how they relate to each other. When should a firm shut down in the short run?

AFC is average fixed costs, which are the total fixed costs divided by number of units produced. AVC is average variable costs, which are the total variable costs divided by number of units produced. AFC+AVC=ATC. Stated another way, ATC is average total costs, which is FC+VC/Q. If AVC>P, then a firm should shut down in the short run.

7. What is needed to reach point D in Figure A (on p.3)? (In other words, what causes a production possibilities curve to shift outward?)

There would need to be a shift in the production possibility frontier of the goods outward, due to an increase in the production and efficiency, in order for point D to be reached. This increase in overall output of goods could occur due to advances in technology, an increase in the workforce, or better equipment available for businesses.

8. Look again at Figure C (on p.1) in the lecture (the first graph in this Lecture). At what point is total revenue maximized?

Total revenue is maximized when marginal revenue equals 0 (crosses the x-axis). This is the quantity at Point E, and the price on the demand curve corresponding to that quantity.

9. Explain why the production possibilities curve is convex (opening downward like the top of a circle) rather than concave (opening upward like the inside of a bowl) or a straight line.

It is convex because it is inefficient converting a factory from the production of one good to another. The maximum total number of goods that can be produced will be near the mid-point, and the overall total declines as all the factories are converted to producing only one good or the other.

10. Suppose you are a monopsony, and you must pay $9 per hour ($9/hr) to hire nine workers, but in order to hire one more worker you must pay $10/hr. The tenth worker will bring in $15 extra per hour to the firm’s revenue. Do you hire the tenth worker?

No, you do not hire the tenth worker. If you were to hire the tenth worker, then that hiring would end up costing you $19 an hour ($10 for the extra work plus an additional $1 per nine workers to raise their wage to $10 per hour), while resulting in revenue of only $15. That would be a loss of $4 an hour, and you would not want to incur that loss.

11. In the term "comparative advantage," to what does the adjective "comparative" refer? What is the term actually "comparing"? Explain.

It is a "comparison of the comparisons." What really matters is how much more efficiently a nation can produce one good relative to another good, compared with how much more efficiently the other nation can produce one good relative to another good. But don't get too tangled up in this detail for purposes of the exam. Any comparison of nations and their production of two goods on the exam is likely a question about comparative advantage, and the correct answer will almost certainly be for the cheaper country to produce what it produces best.

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