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VERONIKAF IN PROGRESS

VERONIKAF  

 

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

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

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?  

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 would be perfect substitutes and X and Y would be complements of each other because substitutes are always positive and complements are always negative.

A and B would be perfect substitutes and X and Y would be complements of each other because substitutes are always positive and complements are always negative.

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?  

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?  

Steak is a normal good because its demand increases when the consumer income increases. A hamburger is an inferior good because when consumer income increases the demand decreases.

Steak is a normal good because its demand increases when the consumer income increases. A hamburger is an inferior good because when consumer income increases the demand decreases.

5. What is the basic assumption of the Coase theorem, and why is that assumption so important to the result of the theorem?  

5. What is the basic assumption of the Coase theorem, and why is that assumption so important to the result of the theorem?  

The Coase theorem states that without transition cost our economy would be efficient regardless of who owns what. Most economists did not believe that the Coase theorem was solid, but eventually came to understand the truth behind it. The Coase theorem perfectly describes the meaning of efficiency without transaction costs.

The Coase theorem states that without transition cost our economy would be efficient regardless of who owns what. Most economists did not believe that the Coase theorem was solid, but eventually came to understand the truth behind it. The Coase theorem perfectly describes the meaning of efficiency without transaction costs.

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

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

He stops or closes his business because by continuing he would be losing money since his income would be less than his outcome. For example, it would not make sense to keep a crafts store open in the middle of the night because almost no people would come and while waiting for those few customers the owner would be spending the money on electricity and employees. Instead of making money, it would be falling out of your pocket.

He stops or closes his business because by continuing he would be losing money since his income would be less than his outcome. For example, it would not make sense to keep a crafts store open in the middle of the night because almost no people would come and while waiting for those few customers the owner would be spending the money on electricity and employees. Instead of making money, it would be falling out of your pocket.

7. What does the Coase theorem say about the desirability, and the effect, of government regulations that increase transaction costs?  

7. What does the Coase theorem say about the desirability, and the effect, of government regulations that increase transaction costs?  

When the government tries to regulate transaction costs they are actually making, in theory, the economy less efficient. Spending less money on a certain item is great, but if you buy an item that is a cheaper version of the original good, there are problems that come with it that compensate for the money saved. Just as you encounter problems with a cheap item, you receive cheap services and goods when the government controls transaction costs. To make things cheaper you must have cheaper ways to get the goods, which would decrease that good’s value. For example, if you hired a doctor that asked for less money than another doctor, his work will most likely be of less quality. Transaction costs are like a scale: when you decrease one side the other side has to increases so it is balanced.

When the government tries to regulate transaction costs they are actually making, in theory, the economy less efficient. Spending less money on a certain item is great, but if you buy an item that is a cheaper version of the original good, there are problems that come with it that compensate for the money saved. Just as you encounter problems with a cheap item, you receive cheap services and goods when the government controls transaction costs. To make things cheaper you must have cheaper ways to get the goods, which would decrease that good’s value. For example, if you hired a doctor that asked for less money than another doctor, his work will most likely be of less quality. Transaction costs are like a scale: when you decrease one side the other side has to increases so it is balanced.

Honors

Honors

No essay this week. Instead, complete all of the following problems:  

No essay this week. Instead, complete all of the following problems:  

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

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

The good would be less elastic (inelastic) because the increase in price by a small amount would cause consumers to buy a substitute if there were many from which to choose. Usually when a price of a certain good goes up, some people buy a substitute, but not all. When there are many substitutes for a good that increases in price, many people will then buy a substitute because there will be a variety for all the picky people.

The good would be less elastic (inelastic) because the increase in price by a small amount would cause consumers to buy a substitute if there were many from which to choose. Usually when a price of a certain good goes up, some people buy a substitute, but not all. When there are many substitutes for a good that increases in price, many people will then buy a substitute because there will be a variety for all the picky people.

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

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

It would be more income elastic because the purchaser would be willing to spend more than before since their income has increased. Since the income of that consumers has increased the price of that good has proportionally decreased.

It would be more income elastic because the purchaser would be willing to spend more than before since their income has increased. Since the income of that consumers has increased the price of that good has proportionally decreased.

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

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

The government would probably prefer taxing a good that is price inelastic because the purchaser would have no other choice but to buy that certain good because an inelastic good is a necessity. The consumer would need that certain good to stay alive, i.e. food and water.

The government would probably prefer taxing a good that is price inelastic because the purchaser would have no other choice but to buy that certain good because an inelastic good is a necessity. The consumer would need that certain good to stay alive, i.e. food and water.

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

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

Steak=4.4    Hamburger=3.8

Steak=4.4    Hamburger=3.8