1
ECON 247: Assignment 1A
79%
Due Date: After you have completed Unit 5
Credit Weight: 10% of your final grade
1.
Which economic principle is applicable in each of the following cases? Justify your answer.
(2 marks each)
a.
Saudi Arabia and Russia, the two largest producers of oil, increased the
production of oil in March 2020, leading to a sharp decrease in the price of oil,
worldwide. A further decrease in the global demand for oil due to the COVID-19
pandemic exacerbated the problem by decreasing the oil price below zero. As a
result, 50,000 jobs vanished in the US oil industry.
0/2 The more appropriate one is principle 4 – US industry lays off workers – no incentive to
produce with negative prices
The economic principle applies here is #10 Society Faces a Short - run Trade-off
Between Inflation and Unemployment.
Because of excess production in oil price, one will see a drop in price. Basic
economic logics: production increase but no increase in demand, suppliers will
decrease price. The Covid-19 pandemic demands people to stay at home and
reprimand them to drive unless it is necessary, thus less vehicle traffic results in
less fuel consumption.
In a nutshell, a fall in price leads to a decrease in inflation but as demand is
reduced so is the need for less people hence increase in the unemployment rate.
b.
2/2During the COVID-19 pandemic in Canada, many people lost their jobs and
many industries shut down their businesses. In this difficult time, federal and
provincial governments intervened and announced financial support for local
businesses and for citizens who lost their jobs. This support works against the
“free market economy” view that suggests that markets should work without
government intervention.
The economic principle applies here is #7 Governments can sometimes improve
market outcomes.
“One reason we need government is that the invisible hand can work its magic
only if the government enforces the rules and maintains the institutions that are
key to a market economy.” (pg11, Mankiw, Kneebone, & McKenzie, 2020)
c.
2/2The difference between the standard of living in the USA and Pakistan is huge.
One common factor between the two countries is that both countries have a
population of more than 200 million. Pakistan has a low standard of living
ECON247v11_Assignment_1A
© Athabasca University March 4, 2021
2
because workers there do not have proper education or skills and do not have
access to capital and technology.
The economic principle applies here is #8 A country’s standard of living depends
on its ability to produce goods and services.
“What explains these large differences in living standards among countries and
over time? The answer is surprisingly simple. Almost all variation in living
standards is attributable to differences in countries’ productivity—that is, the
amount of goods and services produced from each unit of labour input.
To boost living standards, policymakers need to raise productivity by ensuring
that workers are well educated, have the tools needed to produce goods and
services, and have access to the best available technology.” (pg13, Mankiw,
Kneebone, & McKenzie, 2020)
2.
a. 2/ 4 Identify each of the following topics as being part of microeconomics or
macroeconomics:
(1 mark each)
i.
Saudi Arabia is the world’s largest producer of crude oil.
Macroeconomicsmicro – deals with a specific industry rather than
economy as a whole
ii.
In the short run, a decrease in employment would result in higher inflation.
Microeconomicsmacro – deals with economy as a whole
iii.
Jewelry shops operate in a monopolistic competitive market structure.
Microeconomics
iv.
A depreciation in the Canadian dollar would make Canadian exports more
competitive in the international market.
Macroeconomics
b. 4/4 Identify each of the following statements as positive or normative. (1 mark each)
i.
An increase in the price of a product, X, other things being equal, would
decrease the quantity demand for that product.
Positive statement
ii.
The passing grade in economics should be 60%.
Normative statement
iii.
The number of students in my class is 30.
Positive statement
iv.
The government needs to reduce its budget deficit.
ECON247v11_Assignment_1A
© Athabasca University March 4, 2021
3
Normative statement
ECON247v11_Assignment_1A
© Athabasca University March 4, 2021
4
3.
Suppose the following table shows the production possibilities for an economy.
Production
Point
A
B
U
Good X
Good Y
8
5
5
5
10
5
(1 mark each)
a.
For good Y, what is the opportunity cost of moving from point A to point B?
Opportunity cost = what one give up / what one gain
= (8-5) / (10-5)
=3/5
= 0.6
0/1 give up 3 units of Good X
b.
For good X, what is the opportunity cost of moving from point B to point A?
Opportunity cost = what you sacrifice / what you gain
= (10-5) / (8-5)
=5/3
=1.67
0/1 give up 5 units of Good Y
c.
For good X, what is the opportunity cost of moving from point U to point A?
1/1Opportunity cost = what you sacrifice / what you gain
= (5-5) / (8-5)
=0/3
=0
d.
1/1Suppose points A and B are on the production possibility frontier. What
conclusion can be drawn about production point U?
The production points from the table reveals that production point U is not producing to its full
capacity when compared to production points A and B. This means that resources are not being
fully utilised at production point U.
ECON247v11_Assignment_1A
© Athabasca University March 4, 2021
5
4.
9/9Answer the questions below using the data in the following table, which shows a
market for a product that has significant social benefits.
Price
$16ffff
12ffff
8ffff
4ffff
2ffff
a.
Quantity Demanded
10
20
30
40
45
Quantity Supplied
70
60
50
40
35
What would the equilibrium price and quantity be?
(1 mark)
The equilibrium price is $4 while the equilibrium quantity is 40
b.
Suppose the price is currently at $2. What problem would exist in the economy?
What would you expect to happen to price?
(2 marks)
When the price is at $2, the quantity demanded is 45 and the quantity supplied is
35. Hence, there will be a shortage of the goods on the market which will cause
the price to increase. Consumers will feel the squeeze by paying a higher price.
c.
Suppose the price is currently $12. What problem exists in the economy? What
would you expect to happen to price?
(2 marks)
When the price is at $12, the quantity demanded is 20 and the quantity supplied is
60. Hence, there will be a surplus of the goods on the market which will cause the
price to decrease. Producers will feel the squeeze as they will have to settle for a
lower price because there are excess goods of 40 on the market.
d.
Using the midpoint method, calculate the price elasticity of demand if price
changes from $16 to $12. Is this elastic or inelastic?
(2 marks)
Price elasticity of demand by mid points method is:
Elasticity = [(Qd2 – Qd1) / midpoint Q] ÷ [(P2 – P1) / midpoint P]
= [(20-10)/15] / [(12-16)/14]
= (10/15) / (-4)/14
= 0.67 / -0.29
= 2.31
Demand is considered elastic when the elasticity is greater than 1. In this case it is elastic
ECON247v11_Assignment_1A
© Athabasca University March 4, 2021
6
e.
A government subsidy is given to consumers that increases demand by 20 units at each
price. What is the new equilibrium price and quantity?
(2 marks)
At point price of $8, the quantity demanded is 30 and the quantity supplied is 50.
With a subsidy the quantity demanded will increase by 20 units, hence the new
demanded quantity at price $8 is 50. This will be the new equilibrium point, price
of $8, quantity demanded, and quantity supplied is 50 units
5.
a. 2.5/3 Describe the short-run and long-run impact of a binding price ceiling (rent
control) on the housing market. Include the important role of elasticity of demand and supply in
your answer. (3 marks)
“The short-run effects of rent control:supply – perfectly inelastic; demand inelastic Because the supply and demand for apartments are relatively inelastic,
the price ceiling imposed by a rent-control law causes only a small shortage of
housing.
The long-run effects of rent control: Because the supply and demand for
apartments are more elastic, rent control causes a large shortage.”
(pg125, Mankiw, Kneebone, & McKenzie, 2020)
b.
3/3Given the following diagram, calculate the level of unemployment if the price
floor (minimum wage) is set at $15.
(3 marks)
$35
$33
$30
$28
$25
Price Floor
$23
$20
$18
$15
$13
$10
$8
7.50
$5
$3
$0
Quantity
ECON247v11_Assignment_1A
© Athabasca University March 4, 2021
7
When the price is set at $15
Unemployment = Qs- Qd
= 70-40
= 30
The level of unemployment is 30 due to the price flooring of $15
6. 3/3 How may the following changes in price affect the total revenue? That is, would total
revenue increase, decrease, or remain unchanged?
(3 marks)
7.
a.
Price rises and demand is inelastic.
Total revenue increase
b.
Price falls and demand is elastic.
Total revenue increase
c.
Price rises and demand is of unit elasticity.
Revenue remains unchanged
a. 2/2 List two determinants of the price elasticity of supply.
(2 marks)
1. The price elasticity of supply depends on the flexibility of sellers to change the amount
of the good they produce
2. In most markets, a key determinant of the price elasticity of supply is the time period
being considered
(pg108, Mankiw, Kneebone, & McKenzie, 2020)
b.
Evaluate the following statement: “A farmer is producing wheat (a necessity) on
his land. The total production of wheat is Q1 bushels. The price per bushel is $P1.
Due to the introduction of new hybrid seed, the farmer’s productivity increases,
and total production increases from Q1 to Q2. At the same time, the increase in
production lowers the price from $P1 to $P2. The introduction of new hybrid seed
improves the living standard of the farmer.”
(3 marks)
Because the hybrid increases the amount of wheat that can be produced on each
hectare of land, farmers are now willing to supply more wheat at any given price.
In other words, the supply curve shifts to the right. The demand curve remains the
same because consumers’ desire to buy wheat products at any given price is not
affected by the introduction of a new hybrid.
0/3 statement false – wheat – inelastic – P down TR down – so no improvement
ECON247v11_Assignment_1A
© Athabasca University March 4, 2021
8
If the reduced price affords the farmer to sell substantially more than he normally
sells, and his total revenue increases from previously then his standard of living
increases.
If the effect of the reduce price causes the total revenue of the farmer to reduce,
then his living standard is reduced.
If there is no change in the total revenue from previously, then his living standard
remains the same.
c.
4/ 5Assume that the income elasticity of demand for good X is 3.69 and the crossprice elasticity is 1.16. What would happen to demand for X if there is an increase
in income and an increase in price of Y? Explain your answer.
(5 marks)
For good X in plain language when consumers income increase, the demand for good X
increase 3.69 times.normal good Because the quantity of good X demanded and the
price of good Y move in the same direction, the cross-price elasticity is positive. This
means they are substitute goods. Hence, when the price of good Y increases, the
demand for good X will increase.
8.
The following table provides data on the price of Y and the quantity demand for X when
income levels are 100 and 200. Suppose that the price of X is fixed at $7.
Py
0
1
2
3
4
5
6
7
8
9
10
QDx (Income $100)
114.5
115
115.5
116
116.5
117
117.5
118
118.5
119
119.5
QDx (Income $200)
46.5
47.8
49.1
50.4
51.7
53
54.3
55.6
56.9
58.2
59.5
a. 2.5/5 Calculate the income elasticity of demand for good X using the midpoint method
when income increases from $100 to $200 and when the price of good Y is fixed
at $9. Explain your answer.
(5 marks)
Income elasticity of demand = (change in quantity/average quantity /(change in income/average
income)
ECON247v11_Assignment_1A
© Athabasca University March 4, 2021
9
•
Change in quantity = 119-58.2 = 60.8
•
Average quantity = (119+58.2)/2 = 88.6
•
Change in income = 200-100 = 100
•
Average income = (200+100)/2 = 150
(60.8/88.6) / (100/150) = 0.686/0.667 = 0.99 -1.03 inferior good
“most goods are normal goods: Higher income raises quantity demanded” (pg107, Mankiw,
Kneebone, & McKenzie, 2020). Since the income is elasticity of demand is 0.99
and it is positive; it is a normal goods
b. 5/5 Calculate the cross price elasticity of demand for good X when the price of
good Y decreases from $9 to $8 and when income is $100. Explain your answer.
(5 marks)
Cross price elasticity of demand = (change in quantity of a good/average quantity) / (change in
price of other good/average price of other good)
•
Change in quantity = 119-118.5 = 0.5
•
Average quantity = (119+118.5)/2 = 118.75
•
Change in price of other good = 8-9 = -1
•
Average price of other good = (8+9)/2 = 8.5
Cross price elasticity of demand = (0.5/118.75) / (-1/8.5) = 0.004/-0.118= -0.30.034
The elasticity is -0.3 a negative hence the goods is a substitute.
9.
a. 5/5 What is the difference between a “change in supply” and a “change in quantity
supplied”?
(5 marks)
A change is supply is the shift in the supply curve. “Any change that raises the
quantity that sellers wish to produce at a given price shifts the supply curve to the
right. Any change that lowers the quantity that sellers wish to produce at a given
price shifts the supply curve to the left”. (pg75, Mankiw, Kneebone, & McKenzie,
2020)
A movement along a fixed supply curve is called a “change in the quantity
supplied.” “The price is on the vertical axis, so a change in price represents a
movement along the supply curve”. ”(pg76, Mankiw, Kneebone, & McKenzie,
2020)
ECON247v11_Assignment_1A
© Athabasca University March 4, 2021
10
b.
8/8How will each of the following events shift the demand and/or the supply
curve for bread? Also, indicate the effect of each event on equilibrium price and
equilibrium quantity. That is, do equilibrium price and equilibrium quantity rise,
fall, or remain unchanged? Or, is the answer indeterminate because it depends on
the magnitude of the shift?
(8 marks)
i.
The price of flour decreases.
A decrease in the price of flour we will see a reduced cost of production,
hence the supply curve will shift to the right. The equilibrium quantity will
increase, and the equilibrium price will decrease.
ii.
Consumer income increases, and bread is a normal good.
Bread is considered a normal goods; as consumer income increases, they
will demand more bread at every price. The demand curve will shift
rightwards. Both the equilibrium price and quantity will increase.
The price of lettuce wraps (a substitute of bread) increases, and sellers
expect the price of bread to fall next month.
Bread is considered a substitute for lettuce wraps. As the price for lettuce
wraps increases, we will see an increase in the demand for bread at each
given price. In anticipation that the price will increase next month, the
seller will want to increase quantity to capture at the high price now.
Hence, the demand curve will shift rightwards. Equilibrium price is
indeterminate because it depends on the magnitude of the shift, but the
equilibrium quantity will for sure increase.
iii.
iv.
The number of sellers decreases, and consumers expect the price of bread
to be higher next month.
If there is a reduction in the number of sellers on the market automatically
there will be less supply, hence the supply curve will shift leftwards. As
consumers anticipate the price for bread will increase next month, they
will buy up more today for later time. Also, the demand curve will shift
rightwards. Equilibrium price will increase but equilibrium quantity is
indeterminate.
c. 3/3 The demand and supply of leather boots in Canada are given by the following
equations: QS = 25 + 20P and QD = 1225 – 10P. What are the market equilibrium
price and quantity?
(3 marks)
Quantity demanded = Quantity supplied
Qd = Qs
1225 – 10P = 25 + 20P
1225-25 = 20P + 10P
ECON247v11_Assignment_1A
© Athabasca University March 4, 2021
11
1200 = 30P
P = 1200/30
P = 40
Market equilibrium price is $40
I can plug in the equilibrium of $40 is any one of the formula Qd or Qs
Using Qd = 1225 – 10P
Qd = 1225 – 10 (40)
Qd = 1225 – 400
Qd = 825
Market equilibrium quantity is 825
10.
a. 4/4
Based on the following data on taxable income and amount of tax, identify each
type of tax system as progressive, regressive, proportional, or lump sum.
(4 marks)
i.
Tax System A
This is a progressive tax system because the rate increases gradually
4000/40000*100= 10%
12000/80000*100= 15%
24000/120000*100= 20%
ii.
Tax System B
This is also a progressive tax system
6000/40000*100= 15%
13600/80000*100= 17%
22800/120000*100= 19%
iii.
Tax System C
This is a regressive tax system
6000/40000*100= 15%
9600/80000*100= 12%
12000/120000*100= 10%
iv.
Tax System D
This is clearly lump sum tax system
ECON247v11_Assignment_1A
© Athabasca University March 4, 2021
12
Taxable
Income
$40,000
$80,000
$120,000
b.
Tax System A
Tax System B
Tax System C
Tax System D
$4,000
$12,000
$24,000
$6,000
$13,600
$22,800
$6,000
$9,600
$12,000
$5,000
$5,000
$5,000
Suppose that the demand and supply functions are linear. An increase in the tax
rate will always increase the tax revenue and decrease the deadweight loss.
Explain.
(6 marks)
o Elasticity of supply and demand has an effect on deadweight loss.
o In this scenario however, supply and demand are inelastic.
o Changes in the tax rates would not make many changes on demand and
supply since the supply demand and supply functions are linear
o Hence, an increase tax revenue due to the increase tax rate
o And a decrease in the deadweight loss of taxation
o Changes in prices for the goods would not influence demand and supply
o 0/6 statement false – depends on what part of Laffer curve tax is on
11.
a. 3/ 4 List and define different policy options that a government can apply to correct for
negative externalities.
(4 marks)
The different policy options that a government can apply to correct negative
externalities are:
1. Corrective taxesand subsidies: Any goods during the production process that
causes a negative externality, the government will impose a taxation on those
goods. Hence, the cost of production of the goods will increase resulting in a
reduced quantity being produced.
2. Permitstradeable permits system: this is another option available whereby the
government will issue permits in which companies can only produce negative
emissions up to a certain amount as permitted by the permits.
3. Command and control method: “The government can remedy an externality by
making certain behaviours either required or forbidden. For example, it is a crime
to dump poisonous chemicals into the water supply. In this case, the external costs
to society far exceed the benefits to the polluter. The government therefore
institutes a command-and-control policy that prohibits this act altogether”
(pg. 225, Mankiw, Kneebone, & McKenzie, 2020).
ECON247v11_Assignment_1A
© Athabasca University March 4, 2021
13
b. 4/4 Define private goods and public goods and give two examples of each. (4 marks)
Private goods are both excludable and rival in consumption. Consider an icecream cone, for example. An ice-cream cone is excludable because it is possible
to prevent someone from eating one—you just don’t give it to her. An ice cream
cone is rival in consumption because if one person eats an ice-cream cone,
another person cannot eat the same cone. Most goods in the economy are private
goods like ice cream cones. Another example of private goods is a car.
Public goods are neither excludable nor rival in consumption. That is, people
cannot be prevented from using a public good, and one person’s use of a public
good does not reduce another person’s ability to use it. For example, a tornado
siren in a small town is a public good. Once the siren sounds, it is impossible to
prevent any single person from hearing it (so it is not excludable). National
defence is also an example of public goods.
(pg.243, Mankiw, Kneebone, & McKenzie, 2020)
12.
10/10The following table shows the production of meat and wheat produced in tonnes per
day for Germany and Canada.
(2 marks each)
Canada
Germany
a.
Meat
200
200
Wheat
300
150
Which country has an absolute advantage in producing wheat? Why?
Canada has the absolute advantage in producing wheat. This is because it
produces the highest quantity.
b.
What is the opportunity cost of producing one tonne of meat in Canada?
Canada opportunity cost of producing one tonne of meat is:
= what you sacrifice/what you gain
= 300 wheat/200 meat = 1.5 wheat
c.
What is the opportunity cost of producing one tonne of wheat in Canada?
ECON247v11_Assignment_1A
© Athabasca University March 4, 2021
14
Canada opportunity cost of producing one tonne of wheat is:
= what you sacrifice/what you gain
= 200 meat/300 wheat= 0.67 meat
d.
Which country has the comparative advantage in producing meat? Why?
Comparative advantage is the country with the lowest opportunity cost when producing a
particular good.
Germany opportunity cost of producing meat:
= what you sacrifice/what you gain
= 150 wheat/200 meat= 0.75 wheat
Hence, Germany has the comparative advantage of producing meat
e.
Which country has the comparative advantage in producing wheat? Why?
Germany opportunity cost of producing wheat:
= what you sacrifice/what you gain
= 200 meat/150 wheat = 1.33 meat
Hence, Canada has the comparative advantage of producing wheat
ECON247v11_Assignment_1A
© Athabasca University March 4, 2021