Economics Homework Thirteen - Model

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1. 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 true: AFC is fixed costs divided by total output: FC/Q. As Q increases, the result becomes less. (Duncan)

2. Some politicians complain about how people are losing their jobs to workers in China. Is this problem the result of "free trade" or "protectionism"?

Free trade encourages outsourcing. Outsourcing is the act of a company firing one employee and giving the job to someone in a foreign country, such as China, at a much lower pay rate. Free trade and outsourcing saves a firm money because the government does not impose regulations on foreign wages. (Allie)

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

The Federal Reserve Bank controls the interest rates of banks which controls the flow of money. (James)
Keeping the banks from failing.(Aran)

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. (Zachary)

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.

A monopolistic competitive firm has the characteristic "P > MC" that is lacking in a perfectly competitive firm. The reason for this is that a monopolistic competitive firm does not have to continuously lower its prices to beat its competitor. This means that the monopolistic competitive firm can raise its prices to a certain extent and still have many customers, thus, its Price will exceed its Marginal Cost. In a perfectly competitive firm, however, this does not happen. (Trisha)

6. You can go on www.orbitz.com and watch the price of airline tickets change from day-to-day. If you pick fixed dates of travel, such as Jan. 15 to fly somewhere and Jan. 18 to return, then you will notice that the closer you get to those dates, the higher the price of the ticket usually is. In other words, the earlier in advance that you can buy a ticket, the cheaper it usually is. Explain how this illustrates a basic difference between long run and short run costs.

Basically, short run costs tend to be higher, usually because there is a greater demand for them. It pays to think ahead and get things before the demand for them dramatically increases. (Anna)
...You are basically forced to pay an extra amount of money if you want that ticket since the quantity has decreased and the tickets are scarcer and, as we all know, when something become “limited” the price automatically increases since the value of that item increases. (Veronika)

7. Pick any aspect of monopolistic competition (other than problem 5 if you answered that) and explain it.

The firms sell slightly differentiated goods because if the goods were all the same, then they would be very price elastic. If one producer increased his price then many consumers would buy substitutes. (Mark)
One aspect of monopolistic competition I believe some people do not understand is that there are almost no barriers of entry. A new firm can easily enter the market if its product that can partially substitute for another company's product. (Leonard)

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

If the price charged in long-run equilibrium is equal to average total cost, this means that in the long run the firm is breaking even, but not making much or even any extra profit. This is true because when price goes higher than average total cost, another firm will almost certainly jump in and cause a possibly detrimental decrease in the first firm’s demand. It’s too risky to raise the price significantly above the average total cost. (Addison)
If they charged more there would be competition and if they charged less they would loss money overall. (Anthony)

9. 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 of new inventions that create wealth, and charity, ingenuity, art, etc. There are things that cannot be worked into the economist sums that have an enormous effect on the economy. There is more to life than profits and losses, numbers and formulas. You can’t predict ingenuity or measure charitableness. Maybe people don’t want to put all of their profits into their business, maybe they want to donate it, or fund research, or simply bank it. Because God knows how to run the world better than any economist and all their predictions mean absolutely nothing if what they predict isn’t in God’s plan. (Michelle)

10. "Protectionism" is a pejorative (negative) word. Can you think of a more positive, flattering word to express the same concept in a supportive way?

A better name for “protectionism” could be patriotism because they are trying to protect America's jobs and economy so that makes them patriotic. (Seth)

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

Keynesian economics is a version of economics that says that government interference is a good thing that makes the economy better and creates more jobs and things like that. My view of it is that if a government followed Keynesian economics, the country that government is in charge of would collapse in a few years. Because if the government took the time to do the research, they would realize that government control just makes things worse instead of making things better like Keynesian economics says it does. (Seth)
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