Economics Homework Five Answers - Student Eight

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Economics Homework 5

Duncan B.

1. Efficiency is the way of doing something so that you spend minimal time and resources to get the maximum benefit.

Superb. Concise and complete. Could use as a model.

2. If goods are substitutes, the cross elasticity is positive; if the goods are complements, it is negative. Thus, A and B are substitutes and X and Y are complements.

Correct, with an excellent explanation.

3. Your marginal cost is $20: $100/5=20.

Correct.

4. Hamburgers are an inferior good, because your demand for them goes down as your income rises. Steak is a normal good: your demand for it increases as your income rises.

Correct again.

5. In the absence of transaction costs, maximum economic efficiency is found. The first part of the theorem "in the absence of transaction costs," is unrealistic, but without it you cannot have maximum efficiency.

It's more than issue of efficiency. It's also the insight that people will bargain for the most efficient outcome, that the free market finds the best use of property and ideas due to the freedom to negotiate rights. (Minus 1).

6. When a producer's marginal revenue (the amount of money which one more unit sells for) exceeds his marginal cost (the amount needed to produce one more unit), he makes and sells more, until MR=MC. At that point, if he made more, MR would eventually be less than MC, and he would actually lose money.

Superb.

7. The Coase Theorem says that government-induced transaction costs hamper a free economy, reducing the incentive to invent and create new things. As transaction costs increase, efficiency decreases.

Excellent.

8. 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.

Excellent, with a terrific explanation. May use as a model.

9. The smaller amount of income that is consumed by the purchase of a good, the more inelastic it is. For example, if the price of a $0.50 stick of gum went to $0.60(a 20% increase) very few would not buy it or instead buy something else. By contrast, if a sports car went from $50,000 to $60,000 (also a 20% increase) fewer would buy it.

You're right that it is more inelastic, but the question asks about income elasticity. A change in price for the good has nothing to do with this. Income elasticity relates the change in demand for the good to a change in income by the buyer. (Minus 1).

10. The government prefers to tax price inelastic goods, so that if there is a radical upwards shift in price or a radical downward one in income, most will still purchase it.

Superb.

11. Steak=0.08 Hamburger=-0.04

No, that's too small. Steak is 10%/25% = 0.4. Hamburger is -5%/25% = -0.2. Not sure how you got your numbers. (Minus 2).

12. The cross elasticity is %∆(quantity demanded of good Y)/% ∆(change in price of good X). Thus, for this problem, it is -10%/50%, or -0.2. These goods are complements, as the cross elasticity for complements is always negative.

The denominator should be 100% here: the price went from 10 to 20 cents. That's a 100% increase. The answer is -0.1. (Minus 1).
Score :105/110. You had some superb answers but missed other questions. Good work, and a bit more patience and care will lead to perfect work!--Andy Schlafly 19:24, 17 October 2009 (EDT)
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