Economics Homework Seven - Model

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1. Identify the four elements of perfect competition.

1. Many buyers and sellers.
2. Goods that are perfect substitutes for each other.
3. Perfect knowledge in the market.
4. Perfect mobility of resources. (Anna)
The four elements of perfect competition are lots of competitors, lots of things to compete over (perfect substitutes), knowing what all is going on, and everyone has to have the same opportunities. (Seth)

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

I would use competition with myself by setting a goal for myself. Having completed that goal, I would set a higher goal for myself and compete with my earlier achievements trying to get better and better. (Trisha)
I believe that it is the will to win that motivates us. You cannot win without motivation so with competition people tend to do their best. (Aran)

3. We are going to have our midterm in two weeks. Think of a question that you would like to see answered or clarified at the next class.

I would like to see long run and short run explained more clearly. (Isaac)
Good question. The "long run" is a period long enough for a firm (company) to vary ALL all its inputs and costs and factors of production, including even its plant size, in order to achieve the lowest possible average costs. An example is how the New York Yankees can built an optimal new stadium in the long run. The "short run" is a time so short that the firm can vary its output only through a more or less intensive use of existing resources, without adjusting fixed costs like plant capacity. Adding temporary bleachers (at significant average cost for the fans who can sit in them) is an example. (Instructor)
Can you please clarify in more simplistic terms what the Coase theorem is? (Allie)
Great question. The Coase theorem means that the free market will cause the best use of resources, as long as transaction costs do not interfere. Imagine a beautiful soccer field, and lots of kids who want to play. The owner of the field wants it to be used, and making some money is better than making no money from it. The players want to play, and are willing to pay something. The free market will result in the owner and players negotiating a fee or conditions for using the field, and the field will be used in a productive way by people playing games ... as long as there is not too much "red tape" or middlemen or other problems impeding that result. If, for example, the owner cannot be reached because no one can find him, or if he requires a 100 pages of forms to be filled out, or if the city restricts playing soccer there, then the transaction costs prevent the best use of the soccer field. But as long as there is not interference by transaction costs, there will be an efficient use of the field no matter who owns it, because the owner and players will reach an agreement for its best use. (Instructor)

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

Absolutely! I know from personal experience this is completely true. A particular group of friends that I hang out with had "bad speech", and the more I hung out with them over the months, being with them yet not talking bad like them, they definitely realized that I didn't talk like that, and I have seen them over the months totally eliminate bad words from their vocabulary when around me. I didn't have to say anything to them, because just like the converse of Gresham's Law states, the good of my own conversation drove out the bad in theirs! (Deborah)

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

Total cost is the entire costs your firm sustained from the time you started, including the building of factories, purchase of machines, advertising, wages, production, and many others. Average cost is the total cost divided by number of goods produced (TC/Q). Marginal cost is the amount to produce one more unit. (Duncan)
Total Cost refers to the sum of both Fixed Costs and Variable Costs. The Average cost is the total cost, divided by the output. Marginal cost is the additional cost of good when the quantity is increased. (Zachary)

6. Suppose you decide you could profitably set the price for a homeschool dance 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, the homeschool dance 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 consumer surplus is the excess benefit that people obtained above the price that they paid (or, in this case, would have paid). Thus the consumer surplus that would have occurred is 50 persons times ($20-$15=$5 each) plus 10 times ($25-$15=$10 each) plus 5 times ($30-$15=$15), which equals $250 plus $100 plus $75, which equals $425. By not holding the event, this wealth was lost. (Instructor)

7. Is there perfect competition between homeschooling and public schools? If not, explain the imperfections.

There is not perfect competition: a) there are many buyers, but few sellers; b) they are not perfect substitutes- homeschooling has 1 on 1 teaching and public schools do not; c) there is not perfect knowledge- the buyers (parents) do not know what homeschooling is usually like; d) there are not identical costs. (Mark)
No, there is not a perfect competition between public school and homeschool. First, a public school teacher teaches 20 plus kids with 1 teacher and maybe a helper. They are told what to teach, the Bible cannot be taught, and they have removed God from the classroom. The Homeschool teacher has only a few children and can provide one on one teaching with each child individually. They decide what is important to teach, they can teach the Bible, and they can incorporate God into all the lessons. (Shanna)
... Comparing home schooling to public schooling is like comparing democracy to communism. (Jonathan S.)

8. Define the term "competition" in a new way by using another powerful term developed in this course.

Competition is really just an avenue for substitution, in that consumers will choose the other product based on the lower price. And the price was driven down by the competition betwen two companies to make the sale. (Will)
Competition is a means of reaching greater efficiency among participants in the free market. (Addison)

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.

The result is a shortage of jobs. The supply of people willing to work increases as wages increase, but at the same time, less employer are willing to pay quite so many employees as before at the higher wage. When using the free market, it is difficult to get the benefits of the free market if the supply and demand is being artificially adjusted. (Michelle)

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?

The firm is not profitable. When Q=0 the only cost is fixed cost .... (Sarah)