Bryon Gaskin
Instructor: Perry Hollowell
Econ 202 IVY TECH FALL 2002
PRINCIPLES OF MICROECONOMICS
ECN 202
Unit 2 Assignment
In every unit assignment it is important to answer your questions with a lot of thought.
One reason some students find economics “challenging” is because answers are rarely black or white. Once you have conquered the language, then you are ready to apply the economic concepts to explain the behavior of consumers, firms, and governments.
1. What is consumer sovereignty? What does it have to do with determining what goods and services are produced? Who determines how goods and services are produced? Who receives the goods and services in a market economy? In a centrally planned economy?
A.
What is consumer sovereignty? Consumer sovereignty refers to the concept that driven by profit business yield control the decision of what is produced or offered, to the consumer. The consumer has the highest say and ultimate authority in what is produced and how much, and make this decision via the purchases they make.
B.
What does it have to do with determining what goods and services are produced? Consumer sovereignty is basically the result of consumer choice. Because the choices they make given their limited resources, determine what and how much is produced. Take two very different countries, India and the United States; hamburger restaurants are very popular in the US, but not in India. Why, the answer is most directly related to the fact that the cow is sacred in India and therefore; to kill a cow and turn it into hamburger to be sold to consumers, would not be a very viable business. Consumer sovereignty dictates that the production of hamburger in the United States a viable good that is produced, in
India, consumer sovereignty dictates that hamburgers are not a viable good that is produced.
C.
Who determines how goods and services are produced? It is the firms, who decide how goods and services are produced, as the consumer sovereignty dictates what to produce, the firms make changes to the resources they use to produce the goods. The goal of firms is to make a profit; therefore they will use the resources in the least-cost combination possible in order to maximize profit.
D.
Who receives the goods and services in a market economy? The consumers, who are willing and have the ability to purchase goods and services, are the people who receive goods and services in a market economy.
E.
In a centrally planned economy? In a centrally planned economy, the government determines, what is produced, and for whom it is produced. Since market forces are not in place in this type of economy, there is little reason for firms to try and become more efficient by allocating recourses that have the lowest-cost combination in order to maximize profit.
20 pts./100 pts.

Bryon Gaskin
Instructor: Perry Hollowell
Econ 202 IVY TECH FALL 2002
2. Explain the difference between industrialized countries and developing countries. How would you account for this difference? (Hint: It is possible to use the PPC to answer this question).
A.
What is the difference between industrialized countries and developing countries?
One of the major differences between industrialized countries and developing countries is interdependence. Industrialized countries are far fewer in number, and are very dependent on one another.
Changes in one of the industrialized countries affect the other industrialized countries to some extent. Developing countries are not like that, for one; changes in the economy of a developing country may or may not effect other developing countries, and if these changes do affect some of the industrialized countries, it rarely affects all of them, and the degree that the industrialized countries are effected is limited. The main products exported between developing and industrialized countries differ as well.
Developing countries tend to export agricultural goods and minerals, while industrialized countries tend to export more manufactured goods. Industrialized countries typically lend to developing countries and do not tend to borrow from them.
20pts./100pts.
B.
How would you account for the difference? The difference between industrial and developing countries has many causes, but one of the main reasons, is that industrialized countries have a comparative advantage at producing manufactured goods than do developing countries, because they can produce more of manufactured goods for less cost than can developing countries.
Like wise developing have a comparative advantage when it comes to some types of agricultural products (specifically ones that do not grow well in the climate of the US or some of the countries of
Europe and Japan) or for some types of minerals that are not readily abundant in the US or other industrialized countries.
Because industrialized countries tend to have a better trained work force, better technology, and tend to be free market economies, they are more efficient than developing countries at producing most goods and services and therefore can produce more with less. It all goes back to the Production Possibilities
Curve. Take technology for example, and increase in technology, will shift the PPC to the right, which means more goods and services can be produced. Industrialized countries have better technology than developing countries, and so continues the cycle.
Developing countries tend to borrow money from industrialized countries and do not tend to lend to them. Industrialized countries lend this money to developing countries, developing countries use as an investment to try and shift their PPC to the right.
3. Why would an externality be referred to as a market failure? List 3 forms of market failure and how might they can be “corrected”?
A.
Why would an externality be referred to as a market failure? First lets look at what is a market failure. A market failure takes place when the market is not as efficient as possible. Next look at what an externality is, it is a cost or a benefit that is incurred by someone who is not directly related in the transaction. Now, why is an externality considered a market failure; because; a market system is efficient only the market price reflects the total cost

Bryon Gaskin
Instructor: Perry Hollowell
Econ 202 IVY TECH FALL 2002 and total benefits of not only the production, but the consumption of the good or service. Because someone else must either bare the cost then the decisions made cannot fully reflect the opportunity costs.
B.
List 3 forms of market failure. a.
Market Imperfections: These happen as a result of imperfect information. b.
Externalities: Externalities happen when the costs or the benefits are borne by someone who is not involved in the transaction directly. c.
Public goods: These are goods in which the consumption cannot be limited to only the person who purchased the goods.
C.
How might these three forms of market failure be corrected? The government may step in to help correct these issues by doing some of the following: a.
The government provides public goods into order to alleviate the free loader problem that would exist if private firms were the providers of the goods. b.
Activities that create externalities can be either taxed or subsidized by the government. c.
Government can police some industries to promote competition while at the same time it can regulate other industries where free market competition may not exist; in order to promote competition.
20pts. /100 pts.
4. People sometimes argue that imports should be limited by government policy. Suppose a government quota on the quantity of imports causes net exports to rise. Using the circular flow diagram as a guide, explain why total expenditures and national output may rise after the quota is imposed. Who is likely to benefit from the quota? Who will be hurt?
A.
Why if the government puts a quota on imports, causes net exports to rise, why would total expenditures and national output rise after a quota is imposed, explain using the circular flow diagram?
In the circular flow diagram, start with the government, the government issues the quota, less imports coming in would, if all other things held equal, would increase net exports. For example, if before quotas were imposed and imports versus exports were 1000 imports and 500 exports, the net exports would equal negative 500.
If after quotas are implemented, imports equal 750, and exports equal 500, then net exports is still negative, but still, net exports have increased from negative 500 to negative 250.
However; in reality, that is not what would happen, by implementing quotas on imports the only thing that has been affected is outside supply, no curbs have been set on demand.
Therefore the demand still exists, and the US firms will ramp up production to meet those demands. By producing more, GDP will increase because more of the goods will be produced in the US.
Also expenditure will be higher as well, because of the lower competition of lower cost, or perhaps better valued foreign cars, the price of the cars will increase. Expenditure also increases, because for the firms to be able to produce more cars, they need to either pay for more employees, or pay the employees that they already have for longer hours.

Bryon Gaskin
Instructor: Perry Hollowell
Econ 202 IVY TECH FALL 2002
B.
Who is likely to benefit from the quota? If for example; the government puts a quota on the amount of cars imported into the
United States, then the workers who produce American made cars benefit.
C.
Who is likely to be hurt by the quota? In the same light, if the government puts a quota on the amount of cars imported, makers of foreign made cars are hurt, but also, the consumer is hurt in the long run, because this creates a market failure. The consumer may not be getting the best car for the price; because competition to some extent has been stifled.
20pts./100 pts.
5. Why would privately owned recourses have less chance for abuse than those with no ownership? Goods with no ownership are subject to over consumption if there is no ownership. If any resource, be it natural or other that has no ownership; it can potential be abused, if it can be used to create other resources. The example in the book uses the example of the government creating markets for fishing rights. You can put limits on how long something can be done, and how often it can be done, but until there is an actual ownership, then someone one can always build a better mouse trap to side step it, and over consumption will take place. In dealing with privately owned resources, there is an automatic guard to over consumption, the owner! The owner has vested interest making sure that what he has is not taken advantage, it is in the owner’s own best self-interest to control the consumption of his resources. When a good has no ownership, then there is no one with a vested interest in preventing its over consumption and abuse. When trying to prevent over consumption of something, limiting the methods of consumption and the length of time that consumption can take place, will not prevent over consumption. For this to be prevented, you have to limit the actual consumption and not the mechanisms by which consumption is reached.
10 pts./100 pts.
6. Give an example of how a resource either became extinct or severely endangered because it was not owned by someone. You may use any country to answer this question.
The American bald eagle was almost hunted to extinction because it was highly prized. No one really owned the bald eagle, so there was not reason to pay for the rights to kill it for trophy or sport, or for food, so to the hunter it seemed like a free ride, meaning the actual resource (the bird) cost him nothing. When the federal government band the killing of bald eagles the government became of the owner of the bald eagle, and therefore had the say in what happened or did not happen. Although, one is not likely to find bald eagles on the asset side of the U.S. Government’s balance sheet, by protecting the bald eagles, there has been a value assigned to their life in the event that their life is taken illegally. In a court of law if some is determined to be guilty for killing a bald eagle, then the debt they repay is not to the bald eagle, but to the owner of the bald eagle, the federal government, and federal government is owned by the public. That value is

Bryon Gaskin
Instructor: Perry Hollowell
Econ 202 IVY TECH FALL 2002 defined in the actual monetary fine and more importantly the value of time lost to the guilty party should jail time be served.
It is human nature to run one’s life in order to do what will better one’s own self interest. So, if given the option of buying eating at
McDonalds for free or paying to eat at Burger King, most people would choose to eat at McDonalds because they don’t associate a cost with eating there, and the product that Burger King offers is comparable.
When something has no owner but is demanded, there is a rush to get as much of it as possible and abuse, over consumption and extinction may take place.
10pts./100 pts.