Kashkin Lev
Homework #1
1.
a. The unemployment rate in the United States was 4.9 percent in January 2008.
MACROECONOMICS
b. A U.S. software firm discharged 15 workers last month and transferred the work to
India. MICROECONOMICS
c. An unexpected freeze in central Florida reduced the citrus crop and caused the price
of oranges to rise. MICROECONOMICS
d. U.S. output, adjusted for inflation, grew by 2.2 percent in 2007. MACROECONOMICS
e. Last week Wells Fargo Bank lowered its interest rate on business loans by one-half of
1 percentage point. MICROECONOMICS
f. The consumer price index rose by 2.8 percent in 2007. Most likely MACROECONOMICS
2.
Production Alternatives
Type of production A
B
C
D E
Automobiles
0
2
4
6 8
Industrial Robots
30 27 21 12 0
1) (2 points) Show these data graphically. Upon what specific assumptions is this
production possibilities curve based?
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The curve is based on the employment rate, available resources, available
technology for production, and both goods.
2) (3 points) If the economy is at point C, what is the cost of one more automobile? Of
one industrial robot? Explain how the production possibilities curve reflects the law
of increasing opportunity costs.
 One more automobile would cost 4.5 IR (2 automobiles = 9 IR).
 One more industrial robot would cost 1/3 automobiles (6 IR = 2
automobiles).
It only costs 3 IR to manufacture the first two cars; the next two come at a cost of 6
IR. Therefore, it will cost 12 IR to manufacture the last 2 automobiles. This
demonstrates that every extra car produced comes at a greater cost than the one
before.
3) (1 point) If the economy characterized by this production possibilities table and
curve were producing 3 automobiles and 20 industrial robots, what could you
conclude about its use of its available resources?
The resources of a given economy are not managed and used properly.
4) (2 points) What would production at a point outside the production possibilities
curve indicate? What must occur before the economy can attain such a level of
production?
It is not possible to produce outside the production possibilities curve. To change the
curve in a more productive way, a company would need to apply more resources,
like changing the quality/quantity of resources, or applying new methods and
technology.
3.
Explain how (if at all) each of the following events affects the location of a country’s
production possibilities curve (you need to show graphically in each case what will happen with PPF;
will PPF shift or there will be a movement alone PPF and in which direction. Do not forget to explain
your answer!): I DID NOT FIND A TOOL TO GRAPH THE ANSWERS, SO I WILL JUST EXPLAIN IN
WORDS:
a.
(2 points) The quality of education increases.
The curve will shift out, as people get smarter and have more and better resources to use.
b.
(2 points) The number of unemployed workers increases.
No affect the location of curve. Production moves inward, away from the curve.
c.
(2 points) A new technique improves the efficiency of extracting copper from ore.
The curve will shift outward as it is possible to produce more with existing resources.
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d.
(2 points) A devastating earthquake destroys numerous production facilities.
The curve will shift inward due to the destruction of available resources.
4.
(4 points) On average, households in China save 40 percent of their annual income each
year, whereas households in the United States save less than 5 percent. Production
possibilities are growing at roughly 9 percent annually in China and 3.5 percent in the United
States. Use graphical analysis of “present goods” versus “future goods” to explain the
differences in growth rates.
5.
(2 points) Studies indicate that married men on average earn more income than unmarried
men of the same age and education level. Why must we be cautious in concluding that
marriage is the cause and higher income is the effect?
One of the reasons for married men to have a higher income, is because that they need
more money for him and his wife (maybe also kids) to keep the family. The second reason
could be that the wealth of a man is a reason that he gets married (man’s income is
attracting potential wives).
6.
a. (1 point) Graph the accompanying demand data.
Price Qd
5
1
4
2
3
3
2
4
1
5
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7. (7 points) How would the following changes in price affect total revenue? That is, would
total revenue increase, decline, or remain unchanged?
a. Price falls and demand is inelastic. decrease
b. Price rises and demand is elastic. decrease
c. Price rises and supply is elastic. increase
d. Price rises and supply is inelastic. increase
e. Price rises and demand is inelastic. increase
f. Price falls and demand is elastic. increase
g. Price falls and demand is of unit elasticity. Remain the same
8. (12 points) Use determinants of elasticity of demand and your own reasoning in judging
whether demand for each of the following products is probably elastic or inelastic ( in this
task you need to say if demand for these goods is elastic or not and why):
a.
Bottled water; elastic, because there are other substitutions like water fountains, tap water
and other bottled drinks
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b.
Toothpaste; inelastic, because there are very few substitutions, and it is an everyday
necessity.
c.
Crest toothpaste; elastic, because there are many other toothpaste brands that can
substitute crest.
d.
Ketchup; inelastic, because there are not many substitutions for ketchup, and it is often used
e.
Diamond bracelets; elastic, because it is a luxury good and it in not a necessity, people
mustn’t wear diamonds (ex. People drink water and brush their teeth everyday)
f.
Microsoft Windows operating system; inelastic, because it is a necessity at all workplaces
throughout the world and there are not many good substitutions
9. (2 points) In November 1998 Vincent van Gogh’s self-portrait sold at auction for $71.5
million. Portray this sale in a demand and supply diagram and comment on the elasticity of
supply.
The supply is completely inelastic – because there is only one unit. The $71.5 million price is
determined where the downward sloping demand curve intersected this supply curve.
If there were more units (all other portraits would have to copies), than the demand would probably
decrease a lot.