Changes

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?

:Because the demand for steak increases when the consumers' income increases, steak must be a normal good. The opposite is true for hamburgers in this question:  the demand for hamburgers decreased when the buyers' income increased, so it must be an inferior good.  This makes sense:  as people make more, they substitute steak for hamburger.

:Because the demand for steak increases when the consumers' income increases, '''''steak must be a normal good'''''. The opposite is true for hamburgers in this question:  the demand for hamburgers decreased when the buyers' income increased, so '''''hamburger must be an inferior good'''''.  This makes sense:  as people make more income, they substitute steak for hamburger.

4. What does an owner do when his marginal revenue exceeds his marginal cost? Explain, including what will eventually happen to the marginal revenue compared with the marginal cost for the owner.

4. What does an owner do when his marginal revenue exceeds his marginal cost? Explain, including what will eventually happen to the marginal revenue compared with the marginal cost for the owner.

:An owner increases his output and keeps selling more and more, as long as his marginal revenue exceeds his marginal cost.  Eventually his marginal revenue will decrease as his goods become less scarce (because he made so many of them).  When his marginal revenue declines to the amount of his marginal cost, then the owner stops making additional product because he is not earning a profit on any additional units.  He wants to avoid losing money from an oversupply.

:An owner increases his output and keeps selling more and more, as long as his marginal revenue exceeds his marginal cost.  Eventually his marginal revenue will decrease as his goods become less scarce (because he made so many of them).  When his marginal revenue declines to the amount of his marginal cost, then the owner stops making additional product because he is not earning a profit on any additional units.  He wants to avoid losing money from an oversupply of his own good.

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

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

: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.