Changes

(a) is the correct answer since in the short run there are many fixed costs, but in the long run there are only variable costs.

(a) is the correct answer since in the short run there are many fixed costs, but in the long run there are only variable costs.

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:Nope, though your statement about the long run is correct.  The firm is still stuck with his fixed costs even if he shuts down (makes output go to zero).  It would be like the bus ride to DC if the trip were canceled the morning of the trip.  The bus company would still want to be paid for setting aside the bus and driver for a day.  (Minus 2).

 

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"?  

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, not protectionism, is causing people in the USA to lose their jobs to workers in China. Protectionism opposes trade between countries since people believe money is not everything and that trading with China is as if you were sharing your candy with your enemy. I personally think free trade is the way to go since it pushes each country to do what they do best and not waste their time on producing a certain good when they could more efficiently produce a different good. Trying to do another’s job will result in mistakes, an increase in transaction cost, and less consumer surplus.

Free trade, not protectionism, is causing people in the USA to lose their jobs to workers in China. Protectionism opposes trade between countries since people believe money is not everything and that trading with China is as if you were sharing your candy with your enemy. I personally think free trade is the way to go since it pushes each country to do what they do best and not waste their time on producing a certain good when they could more efficiently produce a different good. Trying to do another’s job will result in mistakes, an increase in transaction cost, and less consumer surplus.

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:Superb analysis, and I particularly like your analogy about "sharing your candy with your enemy."

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

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

The Federal Reserve Bank, an independent central bank, is in existence to adjust the discount rate - the interest that is charged to commercial banks.

The Federal Reserve Bank, an independent central bank, is in existence to adjust the discount rate - the interest that is charged to commercial banks.

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:Excellent.

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).  

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).  

To raise the price of your goods produced they must be inelastic, which means that the consumers will be willing to pay any price for that certain good.

To raise the price of your goods produced they must be inelastic, which means that the consumers will be willing to pay any price for that certain good.

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:Right, although you overstate it a bit.  Consumers are not necessarily willing "to pay any price for that certain good."  The point is that consumer demand does not decline much when the price increases for an inelastic good.  PxQ, which is revenue, increases when P increases for an inelastic good.

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.  

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.  

Long run costs are variable unlike short run costs which are fixed. If you pay for the tickets before hand the price will be cheaper because there are so many airline companies to choose from, which causes it to be a variable cost. If you wait until the day before the flight to buy your tickets you will not have any other options except to buy that expensively priced ticket. The price of that ticket is fixed since you have no options or “variables” to choose otherwise. You are basically forced to pay an extra amount of money if you want that ticket since the quantity has decreases 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.

Long run costs are variable unlike short run costs which are fixed. If you pay for the tickets before hand the price will be cheaper because there are so many airline companies to choose from, which causes it to be a variable cost. If you wait until the day before the flight to buy your tickets you will not have any other options except to buy that expensively priced ticket. The price of that ticket is fixed since you have no options or “variables” to choose otherwise. You are basically forced to pay an extra amount of money if you want that ticket since the quantity has decreases 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.

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:Good analysis, particularly near the end.  The early part of your answer overstates the fixed versus variable point, but you have the right idea.

Honors:

Honors:

:Fantastic suggestion!  Will probably use as a model answer.

:Fantastic suggestion!  Will probably use as a model answer.

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:78/80.  Well done on the last homework.  Congratulations on your terrific homework throughout the course!