Homework 1

Tanya Tong
ECON 124: T/Th 11:10
October 25, 2018
Homework #1
1A. Competitive markets are important for continued economic progress because they provide a
stimulated economy in which competitors are finding more efficient ways to utilize their
resources. Competition maximizes the efficiency of resources and skills while keeping costs low
and increasing productivity. Competition forces companies to be more innovative and strive to
become the best in the industry. Profitable companies are able to stay in business while
companies that are consistently suffering losses will go out of business to free up resources for
those that are profitable.
1B. Excessive government regulation reduces the competitive environment by making it more
difficult for new companies to start up which decreases innovation. New businesses can’t even
start up or grow out of the small form if larger pre-existing ones are dominating the marketplace.
If a larger business is being limited by the government, that does sometimes result in a small or
newer business swooping in with innovation that the bigger company may not be able to do.
Companies that are already profitable have no competition to compare themselves with in order
for the economy to further maximize our resource potential. Regulations that limit the
destruction of natural resources (environmental regulations), ensure safe business practices and
minimum wage requirements should be imposed to maintain a safe working environment for
society. Regulations that hinder the process of starting a business that don’t necessarily
encourage safe business standards should not be imposed.
1C. An example of excessive regulation is when taxi drivers, who serve as independent
contractors, had to limit their driving time while renting the taxi from 24 hours to 11 hours. This
regulation was put into place to reduce accidents but ended up decreasing the demand for taxis
and increasing the amount of accidents since drivers would end up driving constantly for 11
hours instead of spanning out their driving over the 24-hour time period.
2A. The Malthusian Trap refers to the human sex tendency to create more children despite not
having the technology available to provide food. This trap implies that people will reach a steady
state of equilibrium to maintain a subsistence level of existence. Malthus believed that we would
be stuck in this trap since the resources are continuously decreasing as the population continues
to increase at an exponential rate.
2B. The Endogenous Growth Theory argues that economic growth is generated by the growth of
population which in turn leads to more innovations and technologies that can be used to support
the larger population. This theory believes that innovations from within human capital will help
support a lasting environment using incentives to lure people into innovating better technologies.
Previous theories believed that humans will continuously grow without taking into consideration
the sustainability of the future generations which will eventually lead to maintaining a
subsistence lifestyle.
2C. Based on the world today, the endogenous growth theory seems to be the most accurate due
to the increased population and increased innovation which has allowed us to further maximize
our available resources to support the larger population. Advances in agricultural techniques and
food storage has allowed for food surpluses so that only a small percentage of the population is
in the agricultural industry while others are involved in specialized labor.
3A. The socially optimal solution would be if all 5 participants donated all $10 into the
community pot in which each participant would receive a payout of $30 (a $20 profit for each
person). The “self-interested” theory states that one individual will withhold their $10 while the
remaining 4 will donate their money into the community pot. The self-interested individual will
receive $34, a $24 profit, while the other participants who are playing the socially optimal
strategy will only receive $24 or a $14 profit).
3B. The Hazda tribe would spend more time hunting a giraffe even with the lower chance of
success since overall it would lead to “hunting insurance” and cooperation could potentially be
traded for sexual favors within the community or a number of other resources as well. There is
also a societal expectation that others will also cooperate which in turn should reduce the effort
to hunt for extended amounts of time in addition to a greater chance of success thanks to the
additional cooperation.
3C. Individuals are encouraged to cooperate using either one out of two methods in which
uncooperative individuals are punished or if there was a greater incentive to cooperate.
Typically, the most effective method as shown in the previous sections would be punishing those
who did not follow the social norm to be cooperative. Whereas in the Hanza tribe, there was an
incentive to be cooperative since men were able to gain more sexual relationships, and
consequently, more children as well.
5A. One incentive created by a legal system that protects private property right is for owners to
use their resources in ways that are considered beneficial to others in which the owner is
maximizing the use and profitability of their property. A second incentive of private property
rights is for owners to make sure that their property does not damage others’ property so that
there are no repercussions to pay for by doing so.
5B. Money serves three functions: it acts as a medium of exchange, serves as a unit of account,
and is a store of value. Since it acts as a medium of exchange, money is commonly accepted as a
method of payment. A unit of account simplifies transactions by reducing the exchange ratio
between goods giving them a monetary value instead of having to find a double coincidence of
wants. Money also serves as a store of value in which it can be held under someone’s possession
without losing its monetary value.
5C. Lower tax rates are important for economic growth since it will increase worker productivity
and encourage working since they will have more disposable income after doing so. Lower tax
rates will encourage individuals to generate innovations to reduce costs so that their profit
margin will increase. If the higher tax brackets receive tax breaks that could possibly lead to
more investments and eventually greater output.
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