Economics Homework Five Answers - Student Twenty-One

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Michelle F

1. Define, in your own words, economic “efficiency”. Use it in an example sentence.

Efficiency is the best or most productive use of time, goods and services. “Doing all of your errands at once is more efficient than doing multiple trips"

Excellent, and so true about running errands.

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?

Goods A and B are substitutes, while goods X and Y are compliments.

Correct, but spell it "complements" with two "e"s.

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?



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 steaks, and which type are hamburgers?

Steaks are normal goods, hamburgers are inferior.

Right again!

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 that in the absolute absence of transaction costs, the free market will produce the most efficient use of goods and services, regardless of the provider. This assumption is the keystone of the entire theorem. The entire theorem is based on the idea the transaction costs are a hindrance to the productivity of society as a whole. Without this assumption, the theorem would be meaningless.

Very good, perhaps the best in the class. Your answer comes closes to capturing the insight of the theorem. It could be a bit better if it explained how transaction costs interfere on an individual level, impeding his or her ability to negotiate efficient outcomes.

6. What does an owner do when his marginal revenue exceeds his marginal cost? Explain.

Make/provide more of whatever it is he is selling. Marginal cost is the additional cost of producing one more unit of the good in question. Marginal revenue is the additional revenue received from the sale of each additional unit. So if your marginal revenue exceeds the marginal cost you are making a profit on each extra unit produced and sold. So then the owner would increase his production until the Marginal revenue was equal to the marginal cost.


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 government regulations are transaction costs, and that transaction costs are a hindrance to efficiency. Hindrances are by nature typically undesirable. The effect? Reduced production, less efficient use of time, goods, and services, and a less wealthy society. Reaganomics is, to some degree, similar to the Coase theorem.

Excellent answer, and superb reference to Reaganonomics!


8. The greater the number of substitutes for a good, is it more or less price elastic? Explain briefly.

More. If it is easier to find a substitute for the good when the price is raised, more people will buy a substitute.


9. The smaller the proportion of income consumed by the purchase of a good, is it more or less income elastic? Explain briefly.

Less. It wouldn’t be consuming much of someone’s income, so if their income decreased, the good could still be afforded. If the overage persons income went up, that good wouldn’t be something they would rush to buy, because they had had it the whole time.

Correct again. Did you mean "overage" or "overall?

I meant to say average. oops.

10. Would government prefer taxing a good that is price elastic or price inelastic? Explain briefly.

Inelastic. If the price for a good that is inelastic increases, the quantity demanded will not decrease nearly as much as it would have if the good were very elastic.


11. Calculate the income elasticities for the two goods in question 4.

steak 0.4 hamburgers -0.2


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.

-0.1 Ketchup and french fries are compliments because the number is negative, and because they taste really good together.

Superb. ("complements", not "compliments")
Perfect work! Absolutely terrific. 120/120. Congratulations!--Andy Schlafly 19:51, 22 October 2009 (EDT)