Economics Homework Five - Model
1. Define, in your own words, economic “efficiency”. Use it in an example sentence.
- Efficiency is the most possible productivity gained from an operation, good, or service with the least amount of time, energy, or money used in transaction costs. An example sentence: It is much more efficient to do the dishes quickly when your mom asks you to than to complain and whine about it. ... (Trisha)
- Minimum waste, with maximum output. (Aran)
- Efficiency is a term used for describing a way of working where you get the maximum done in the minimum time. (Mark)
2. Suppose the cross elasticity of demand for goods A and B is +3.8, and for goods X and Y is -2.7. What can you conclude about the relationship of the goods A and B, and of X and Y?
- ... A and B are substitutes and X and Y are complements, because all complements are negative and all substitutes are positive. (Genevieve)
- If the cross elasticity of goods A & B is 3.8, and goods X & Y is -2.7 we can conclude that goods A & B are substitutes since they are a positive number while goods X & Y are complements since they are a negative number. (Shanna)
3. Suppose it costs you $500 to make your first 5 units, then $200 to make your next 5 units, and then $100 to make your next 5 units. Costs do not decrease further for you. What is the marginal cost for you to make another unit?
- $20 for each additional unit made. (Zachary)
- It would cost me $20 to build a new unit. (Isaac)
4. Suppose your annual income increases from $20,000 to $25,000. Suppose your demand for steak increases by 10% and your demand for fast food hamburgers decreases by 5%. Which type of goods are steak, and which type are hamburgers?
- The demand for steak increases with an income increase, making steak a normal good. The hamburgers are an inferior good; now that you’re able to afford more steak, you don’t want as many of the cheaper and less healthy hamburgers. (Addison)
5. What is the basic assumption of the Coase theorem, and why is that assumption so important to the result of the theorem?
- The basic assumption of the Coase theorem is an absence of transaction costs, and their absence enables the free market to attain the optimal use of a resource no matter who owns it. The assumption is essential because if transaction costs exist, then they impede the ability of people to deal with each other for the optimal result. (Instructor)
- The Coase Theorem is based off of two main ideas, freedom of individual choice and zero transaction costs. The Theorem implies that society would be much better off with lower transaction costs and that efficiency and prosperity can be obtained by reducing or eliminating them all together. (Amanda)
- Without transaction costs to gum the works, there would always be successful economic results between people, because "if there is a will there is a way" in the free market. It important because it operates without regard to a person’s wealth, race, sex or nationality. (Aran)
- The basic assumption of the Coase theorem is that in the absence of transaction costs, an efficient or optimal economic result occurs regardless of who owns the property rights. ... (Deborah)
6. What does an owner do when his marginal revenue exceeds his marginal cost? Explain.
- He will keep selling goods, because as long as marginal revenue exceeds marginal cost, he will want to keep selling goods. (Timothy)
- When an owner’s marginal revenue exceeds the marginal cost, the owner can sell additional goods. The owner will be able to make more money from the additional goods sold. Marginal revenue is any additional revenue a business earns from selling one more unit. (Allie)
7. What does the Coase theorem say about the desirability, and the effect, of government regulations that increase transaction costs?
- The Coase theorem says that with increasing government regulations, transaction costs increase and efficiency is lost. (Anna)
- In applying the Coase theorem with regard to government regulations increasing transaction costs, the consumer will pay more (in time, effort, and money) than he would if the government got out of the way. (Alexander)
8. The greater the number of substitutes for a good, is it more or less price elastic? Explain briefly.
- The more substitutes there are for a good, the more price elastic it is. If the price of a widget rises 10%, and there are several ready-to-hand substitutes for it at a lesser price, far more people will purchase the substitutes, resulting in a large drop in demand for a small increase in price. (Duncan)
9. The smaller the proportion of income consumed by the purchase of a good, is it more or less income elastic? Explain briefly.
- It is most likely less income elastic because the buyer uses so little of his income to purchase the good that he will probably buy the same aount of the good even if his income drops. (Dermot)
10. Would government prefer taxing a good that is price elastic or price inelastic? Explain briefly.
- It depends on what the government is trying to do. If they are trying to increase revenue then they would have it be an price inelastic good. But if they are trying to curb certain behavior then they would have it be a price elastic good. (Sarah)
11. Calculate the income elasticities for the two goods in question 4.
- .10/.25 = .4 = Yed. Thus the income elasticity for steak is .4.
- -.05/.25 = -.2 = Yed. Thus the income elasticity is -.2 for hamburgers. (Kate)
12. Suppose french fries cost $1 and ketchup 10 cents. When the price of ketchup goes up to 20 cents, the quantity demanded for french fries falls by 10%. What is the cross elasticity of demand for french fries with respect to ketchup? Show your work and state whether these goods are complements or substitutes.
- Xed = -10%/100% = -.1 These goods are complements because this is a negative number. (Seth)
13. (Optional) Can you think of any consequence of the Coase theorem that is not mentioned in this Lecture?
- A consequence not mentioned in the lecture of the Coase Theorem is that it reduces the separation between economic classes because the producer's financial situation is no longer important [if the producer has a good in demand]. (Elizabeth)