Difference between revisions of "Economics:Model Answers"

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Model Answers in bold:

Lecture One Assignment

Introductory: 1. In three sentences or less, what do you hope to learn in this course?

To learn how businesses try to make money and how consumers try to keep money.

2. Give two short examples each of “normative statements” and “positive statements.”

Positive: fish live in trees. (NOTE that a positive statement is a factual claim that need not be true.)

Normative: people should eat less fast food.

3. Describe a few transaction costs associated with buying something.

Spending time looking for a store that sells it, and then spending more time look for the store that sells it at the lowest price, and then spending and money traveling to the store to buy it.

Intermediate: 4. Give some examples of scarcity created entirely by man (rather than nature), such as a ticket on the maiden voyage of the Titanic. Why do people create and emphasize scarce things? Does the illusion of scarcity increase the price? Does television prefer talking about scarce items? Why?

The office of President of the United States.

Tickets at the Super Bowl.

Being the first man to step foot on the moon.

5. What do you think are the main reasons that the “invisible hand” is preferable to government dictating how a pencil should be made? Rank your reasons in order of importance.

1. The invisible hand motivates people to work harder.

2. The invisible hand motivates people to reduce waste.

3. The invisible hand motivated people to invent and create.

4. No single entity, such as government, is smart enough at planning.

5. The invisible hand can adjust to change more quickly than government.

6. Why can volunteer work sometimes be more efficient and productive than hired labor? Where is the invisible hand for volunteer work?

Charity provides religious and spiritual rewards, which can be an even greater motivator than money. Also, there are fewer transaction costs in charity, as fewer people are trying to make money as middlemen.

Honors: Write an essay of about 300 words on one or more of the following topics:
7. Read the account of the multiplication of the loaves by Jesus. Matthew 14:13-21. After reading that, do you think scarcity really does exist?

Maybe not. It didn't on that day with Jesus. Perhaps scarcity is a human illusion, and the result of turning away from God.

8. What is money, really?

Perhaps it is only a form of speech. Often it is given more meaning than it really has. People who win the lottery end up worse off than those who lose.

9. Should spending money be protected by the free speech clause?

Yes, because otherwise politicians are censoring valid criticism of their work.

10. Does the U.S. Constitution protect private property?

Yes, such as the Fifth Amendment.

Lecture Two Assignment

Introductory: 1. In a free market, the price and quantity at which goods are sold are where __________ equals ___________.

2. Suppose the price demand curve is P = $20 - Q, where P is price and Q is quantity. Also suppose the price supply curve is P = $4 + Q. At what price and quantity will the good be sold?

Intermediate: 3. Draw the supply and demand for air. In addition, draw the supply and demand for a good that costs $10000000000000000000000000 trillion dollars.

4. Suppose 1000 persons in a town each have the following weekly demands for gas, and the gas stations have the following weekly supplies:

Gallons Demand Price/gallon Supply Price/gallon 10 $2.50 $.50 20 $2 $.75 30 $1 $1 40 $.75 $1.50

(A) What is the price and overall quantity of gas sold each week? (B) Suppose Congress declares war and imposes a price control of $.75 per gallon. At what price and overall quantity will gas sell each week?

5. Suppose the government limits the supply of Toyota cars that can be imported in 2008 to a certain quota. What effect does this have on the supply curve, and on the equilibrium price? Who is helped by this import quota, and who is hurt? Be as specific as possible.

6. Suppose you went to see the opening of your favorite new movie, but it is sold out. However, there are four independent scalpers are (illegally) reselling their tickets outside. Four strangers are each willing to pay the scalpers at most $15, $10, $9 and $8 for a ticket. The scalpers are initially willing to sell each of their tickets for at least $7, $8, $9, and $12. The eight of you get together and bargain, and then tickets are sold at a common price. What is the price and how many tickets sell at that price? Should scalping be illegal in New Jersey?

Honors: Write an essay of about 300 words total on one or more of the following topics:
7. Should government regulations require and monitor honest and full disclosure of information by sellers to buyers?
8. Should price discrimination be illegal?
9. What is an economic incentive for excluding homeschooled athletes from high school sports? Should that be legal?
10. Describe your view of if or how government should regulate medical prices.
11. “Economic theory of law and the public domain - When is Piracy Economically Desirable?” See http://lexnet.bravepages.com/media1.html

Lecture Three Assignment

VII. Assignment

Read and, if necessary, reread the above lecture. Complete the homework assignments through the level in which you choose to enroll in this course:

Introductory: 1. In a free market, the responsiveness of demand to a change in price is known as its ____________.

2. A good that is addictive often has (elastic or inelastic) demand for it. Choose the correct answer.

3. Give examples of a complement and a substitute for breakfast eggs.

Intermediary: 4. Describe a perfectly elastic demand curve, and a perfectly inelastic one.

5. If the demand curve is a straight line having negative slope (i.e., increasing quantity as price decreases), then draw or describe the shape of its curve for price elasticity of demand:

6. Describe what a negative income elasticity of demand means. Give an example of a good or service that might have a negative income elasticity of demand.

Honors: 7. Suppose the demand for a special type of colored corn is inelastic. Suppose there was a disease that uniformly killed 20% of all the cornstalks, but did not affect demand at all (i.e., the public was not scared by the disease). Explain if corn farmers are better or worse off due to the disease, and why.

Write an essay of about 200 words total on one or more of the following topics:
8. Should there be a minimum wage law?
9. Does free trade add value or simply redistribute wealth?
10. Is economics almost always determinative of the outcome on political issues, such as elections?

Lecture Four Assignment

VI. Assignment

Read and, if necessary, reread the above lecture. Complete the homework assignments through the level in which you choose to enroll in this course:

Introductory: 1. The total utility of a good represents the consumer’s _________________.

2. Conservatives say a bad effect of raising the minimum wage is that it causes more students to drop out of school. Why would that happen?

Intermediary:

3. A student likes swimming and playing the violin. The first hour she swims she improves by 6 units of utility, and then each successive hour she improves by half the rate of the hour before it. The first hour she practices the violin she improves by 4 units of utility, then each successive hour she improves at a rate of 90% the hour before it. In 3 total hours to practice, how should she maximize her utility?

4. How might one’s overall “utility” include religious goals that have nothing to do with money? Be specific.

5. Suppose you manage a golf course for profit. You poll your customers and find that, each month, they value their first game at $30, their second game at $20, their third at $10, fourth at $0, and refuse to play any more in the same month. It is impractical to charge based on whether someone has previously played a round this month. How do you best charge your customers?

6. Bad British economic policies and a fungus wiped out the basic food supply of potatoes in Ireland between 1846 and 1849, killing 500,000 and sending many Irish to the United States. Do you think potatoes might have been an “inferior” good then? What would you expect the income effect of the shortage of potatoes to have been?

Honors:

7. Do you think a Giffen good really exists? Can you see any possible political bias in the claim that Giffen goods exist? Your views, please.

8. Suppose you are a rational consumer who makes purchases by maximizing marginal utility. One day you hear that the price on a good you purchase (e.g., milk), falls by 30%. The Law of Demand says you should buy more of it. Using only the assumption that you maximize marginal utility, prove the Law of Demand as best you can.

9. Suppose a friend of yours announced that when he has a choice between a cheaper good made in China and a more expensive good made here, he will buy the latter based on his opposition to communism. Is he being irrational?

Lecture Five Assignment

VI. Assignment

Read and, if necessary, reread the above lecture. Then answer these questions:

Introductory: 1. Your boss asked you to work overtime. Is that a short-run or long-run solution for him?

2. Explain briefly economic “efficiency”. Give an example of something that is efficient, and something else that is not. Intermediate: 4. Your widget company has the following costs: Producing 10 widgets, your costs are $2000. Producing 8 widgets, your costs are $1800. Producing 6 widgets, your costs are $1500. Producing 4 widgets, your costs are $1200. Producing 2 widgets, your costs are $800. Producing 0 widgets, your costs are $400. What is your fixed cost? What is your MC for widgets 7 & 8? What are your average costs for producing 4 widgets?

5. A regulator had to choose new regulation A or B: (A) imposed substantial new transaction costs on consumers, while (B) did not. Which option would the Coase Theorem tend to prefer? Say why.

6. Explain why a businessman fixes his production or supply of goods at the point where his marginal cost equals his marginal revenue.

7. Explain the difference between marginal cost and average cost.

Honors: Write a 300-word essay on one or more of the following:

10. Democratic politicians complain about the gap between the rich and poor. Would the economy work any better if the gap were smaller? Assume the absence of transaction costs.

11. The Fifth Amendment says “nor shall private property be taken for public use, without just compensation.” How does that benefit the economy?

12. “The pen is mightier than the sword.” Assuming that the sword is used mainly to seize property, explain a purely economic justification for that statement.

Lecture Six Assignment

Introductory: 1. “Accounting profit” is ________ minus _________.

2. Suppose your company spends $10,000 on labor and $30,000 on equipment for an output of 5000 widgets. You increase your labor costs to $15,000 and your equipment costs to $45,000, and your output increases to 8000. Describe your return to scale: increasing, constant, or decreasing?

Intermediate: 3. Suppose the population doubled and the other utilized economic inputs (air, water, capital, etc.) doubled as needed. What would happen to economic output, such as new inventions and food production? In other words, what is the return to scale from increasing population (labor) and other inputs?

4. Suppose you hire an employee who just took this course, and he says you should invest everything you have in a new facility to reap long-run efficiencies. Why might you say “no”?

5. In an online encyclopedia such as Wikipedia or Conservapedia, would you say that the marginal product of adding another contributor (editor) increases or decreases? What does that imply about the growth path of the project?

6. Is obtaining a medical, legal, accounting or other type of license to practice in a profession a short-run or long-run cost? Should the State require licenses for professions?

7. Suppose your classmate’s company grew and grew, until it had 1 million employees. But then the economy had a downturn, and you faced bankruptcy. You were in the legislature and your classmate begged you to sponsor legislation to give his company a special zero-interest government loan to make it through the tough times. Should you?

Honors:

8. Suppose you invented fertilizer that is costly to make but has an ever-increasing marginal product. Suppose you own an acre of farmland in South Jersey, and now must decide between spending your money on buying more acres to use the fertilizer, or making more fertilizer. Which should you do? Explain.

9. A company’s stock price often rises when it announces taking a large one-time write-off (or loss) on its accounting books. Using one or more principles learned in this course, can you explain reasons for that effect on the stock price?

10. The tremendous economic growth of the 1980s and 1990s resulted from the “supply side” economic policies of President Ronald Reagan, which boosted production by cutting taxes and encouraging investment. Why might the supply side be more important than the demand side?

Lecture Seven Assignment

1. The best friend of free enterprise is ___________.

2. Describe how you can use competition to help motivate yourself to accomplish a goal.

3. Until Conservapedia.com began, Wikipedia.com did not have any competition. What often happens to a firm or service when there is no competition? Why?

Intermediate: 4. Suppose you own a widget factory having fixed costs of $10,000. In addition to the $10,000, you have variable costs of $2,500 for each widget you make. Worse, the factory can make only 3 widgets in an entire year! Your widget sells for $5,000. Someone offered to buy your factory for $10,000. Should you sell it?

5. One day, you visit Wal-Mart to see if you can sell it some widgets. Wal-Mart said it has good new and bad news. The good news is that it wants high volume. The bad news is that it wants a price so low that your MC=MR for every unit sold to it. Should you agree? Explain.

6. Suppose you own a company that has marginal cost (MC) = $9, average total cost (total cost divided by total output) = $11, average variable cost (average cost of variable inputs, like labor and materials) = $5 and price of the sold good (P) = $8. Should you make any additional goods at these numbers? Should you shut down your company?

7. Suppose you are running a dinner event at a free facility that has 24 tables seating 8 apiece. Your marginal cost (MC) is $15 per person. Suppose your speaker costs $3500 in fees and expenses. Suppose your demand curve is this: at price P=$15, quantity Q=200; at P=$35, Q=120; at P=$50, Q=70; at P=$60, Q=40; at P=$150, Q=7. How would you price and market your tickets?

Honors:

8. “One of the greatest benefits of competition is accountability.” How?

9. Describe an industry where you think competition is nearly perfect, and another industry where competition is far from perfect, and explain why for both.

10. Is competition always a good thing?

Lecture Eight Assignment

Introductory 1. A monopoly can be extraordinarily profitable because there is no __________.

2. Provide three specific examples of monopolies and describe briefly what they do.

3. Given an example of how you lose time, money, or efficiency due to a specific monopoly.

Intermediate 4. “Monopolies may be bad, but government regulations of monopolies are even worse!” Do you agree? Explain.

5. List ways that monopolies can be established.

6. Suppose Katie likes to paint for money or even for free, but will not pay extra to paint. Suppose also that the monthly demand for her paintings is P = $500 - 50Q. How many paintings does she create each month?

7. List some differences between a monopoly and a competitive industry.

8. Suppose Anthony owns a company having marginal costs of $5 for all his units. If he sells only one, then he reaps $11; selling two fetches a price of $10 piece; selling 3 attains a price of $9; selling four reaps $8; Q=5 would have P=$7; Q=6 has P=$6, etc. A competitive firm would have the same cost and demand numbers. What does Anthony sell at, and what is the social cost of his monopoly?

Honors 9. Estimates are not very accurate about homeschooling, but some guess that 1 out of every 25 students is homeschooled. At what level or fraction would homeschooling end the public school monopoly? Discuss.

10. Suppose you live in a valley where water flows freely and abundantly from a spring. Suppose your entire family uses on average 80 gallons a day. But then a company bought the spring. If the demand curve is a straight line from P=$100, Q=0 to P=$0, Q=80, at what price and quantity would the company sell water?

11. Monopolies: should the government regulate them? If so, how?