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1. 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 (i.e., are they substitutes or complements)?

 

1. 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 (i.e., are they substitutes or complements)?

:The positive cross-elasticity for goods A and B mean that as the price of one good increases (and thus its demand decreases), then the demand for the other good increases.  '''''A and B must be substitutes because the demand for one good increases as the demand for the other good decreases'''''.  The negative cross-elasticity for goods X and Y mean that as the price of one good increases (and thus its demand decreases), then the demand for the other good decreases.  '''''X and Y must be complements because the demand for one good increases as the demand for the other good increases'''''.

:The positive cross-elasticity for goods A and B mean that as the price of one good increases (and thus its demand decreases), then the demand for the other good increases.  '''''A and B must be substitutes because the demand for one good increases as the demand for the other good decreases'''''.  The negative cross-elasticity for goods X and Y mean that as the price of one good increases (and thus its demand decreases), then the demand for the other good decreases.  '''''X and Y must be complements because the demand for one good increases as the demand for the other good increases'''''.

2. Suppose it costs you $500 to make each of your first 5 units, then $200 to make each of your next 5 units, and then $100 to make each of your next 5 units. Costs do not decrease further for you. What is the marginal cost for you to make another unit, after you have made 15 units? What is your overall average cost per unit after you make your 16th unit? Compare the two and comment on how whether they are equal, and why.

2. Suppose it costs you $500 to make each of your first 5 units, then $200 to make each of your next 5 units, and then $100 to make each of your next 5 units. Costs do not decrease further for you. What is the marginal cost for you to make another unit, after you have made 15 units? What is your overall average cost per unit after you make your 16th unit? Compare the two and comment on how whether they are equal, and why.

:The marginal cost for units 11-15 is $100/5 = $20 for each unit.  The marginal cost for the next unit, the 16th unit, is the same:  $20.   

:The marginal cost for each of units 11 through 15 is $100.  The marginal cost for the next unit, the 16th unit, is the same:  $100.   

:The average cost is the total cost ($500 plus $200 plus $100 plus $20) divided by the total number of units (16), which equals $820/16 = $51.25 .  Marginal cost is usually lower than average cost because average cost includes fixed costs, like building a factory, while marginal cost includes only the extra expenses for one more unit.

:The average cost is the total cost ($500x5 plus $200x5 plus $100x5 plus $100) divided by the total number of units (16), which equals $4100/16 = $256.25 .  Marginal cost is usually lower than average cost because average cost includes fixed costs, like building a factory, while marginal cost includes only the extra expenses for one more unit.

3. 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?

3. 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?

:The Coase theorem says that transaction costs interfere with efficient levels of activity.  When there are no transaction costs, then the free market attains the optimal use of a resource no matter who owns it. If transaction costs exist, then they impede the ability of people to deal with each other for the optimal result. Government regulations increase transaction costs, and thus are bad for the economy.

:The Coase theorem says that transaction costs interfere with efficient levels of activity.  When there are no transaction costs, then the free market attains the optimal use of a resource no matter who owns it. If transaction costs exist, then they impede the ability of people to deal with each other for the optimal result. Government regulations increase transaction costs, and thus are bad for the economy.