Download Assignment 1 Dute Sept 13 2002

Name: Bryon D Gaskin.
Course Econ 201 Macroeconomics
Text Principles of Macroeconomics
Instructor Steve Scheer
Macroeconomics--ECN 201
Assignment for Unit 1
Chapters 1-3 Taylor Text, 3rd edition
Remember to explain your responses thoroughly. Be careful most of the questions have
several parts. Be sure to answer the complete question. Please answer every question to
complete the full assignment. There are no optional questions.
1. Compare two countries. In one country, the government sets prices and never adjusts
them. In the other country, the government adjusts prices daily, endeavoring to
allocate resources to consumers to satisfy their tastes. Are either of these a market
economy? Why or why not? Answer: No, neither of the above two
situations are market economies. They are both examples command
economies because the government is setting the prices. Although in
the second example where the government adjusts prices on a daily
basis, is probably a more efficient economy than then the first example
where the prices remain fixed, it lacks some of the key components of a
MARKET ENCONOMY, namely the fact that prices are determined by
individuals and firms participating in the market. Although in the
second example the government tries to meet the tastes of the consumer,
that situation is no always advantages. For example, everybody would
like it if the cost of a new BMW was $2500.00 USD, but that is not very
efficient, and not necessarily a good economic mandate.
When the
government sets the prices of items just to suit the tastes of the
consumer, then that is clearly an example of a command economy and not
a market economy.
2. Look at figure 1.2, on page 9 of your textbook, and compare points I and D. What is
the opportunity cost of moving from I to D? What are some ways that the economy
can move out of the inefficient area inside the production possibilities curve?
Answer: The opportunity cost is null or 0, because, point “I” is
inefficient. When we examine point “I” we see that 100 movies are
being produced and 18,000 computers are produced. When examine point
“D” we see that 400 movies are produced, and 18,000 computers are
produced. If there was a true opportunity cost between points I and D,
then as more movies where produced, then less computers would have to
be produced. One easy example is a better division of labor. Say the
United States has just approved an new trade agreement with Latin
America, and now all of a sudden, many of the documents need to be
translated into Spanish, and it needs to be done quickly. Since this
is a new concept to many firms, they start by shifting a large portion
of their employment staff to transcribing documents. Most of these
people do not speak Spanish at all or only speak it a little bit. So
the time it takes the average worker to translate a one page document
is 8.3 hours. That 8.3 hours is time that is not spent on generating
sales, streamlining business operations and so on. As this trend
continues, the production of goods X, Y, Z begin to drop off, given the
same amount of workers working in the workforce.
To cut it down even
further; take company A which makes TV’s. Company A has 100 employees,
50 are professionals, the other 50 are in the union.. Normally with
100 employees company A makes 10,000 TVs a month. But since, this new
requirement for translating all of those documents into Spanish,
production has dropped to 6,000 TV’s a month. Of the 100 employees,
493715754
1
Name: Bryon D Gaskin.
Course Econ 201 Macroeconomics
Text Principles of Macroeconomics
Instructor Steve Scheer
35% have been pulled from their regular duties, and now translating
documents and every one of the people translating documents is from the
professional staff. Later management learns that there are 10 people
who are working for the union who are bilingual in English and Spanish,
and those people can translate a 1 page document in 15 minutes. So it
is decided to put those 10 people translating and return the others to
their original jobs. As a result, production increases, but the number
of workers did not.
3. The following table shows the number of physical examinations given by doctors at an
HMO with three different-size clinics: small, medium, and large. The larger the clinic,
the more patients the doctors can handle.
Exams per
Small Clinic
0
20
28
35
40
Exams per
Medium Clinic
0
30
42
53
60
Exams per
Large Clinic
0
35
49
62
70
Number of
Doctors
0
1
2
3
4
A. Graphically illustrate the relationship between doctors and physical exams given
with three curves where the number of doctors is on the horizontal axis and the
number of examinations is on the vertical axis.
Physical Exams
Exams
80
70
70
60
50
40
30
62
53
49
42
35
30
20
10
0
60
Small
40
35
Med
Large
28
20
0
0
1
2
3
4
Doctors
B. Describe how the three relationships compare with one another. The first task is to
identify what is being evaluated. They are the following:
x=the number of doctors
y=the number of exams
z=the size of the clinic.
All three of the curves represent positive curves or positive slopes. As the number of
doctors increase so do the number of physical exams. However, it appears that in larger
the clinic the more exams given per doctor. For example, given 1 doctor per each of the
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Name: Bryon D Gaskin.
Course Econ 201 Macroeconomics
Text Principles of Macroeconomics
Instructor Steve Scheer
3 different clinic sizes, the ratio of exam per doctor is 20 to 1 for small clinics, 30 to 1 for
medium clinics and 35 to 1 for large clinics. When one looks at the maximum number of
doctors in this case 4, we see a ration for small clinics of 10 exams per doctor, for
medium clinics a ratio of 15 exams per doctor, and for the large clinic 17.5 exams per
doctor.
C. Is a change in the number of doctors a shift or a movement along the curve? The
change in the number of doctors is a movement along the
curve; because as one as one increases, the other
increases. When both of the variables increase this is a
positive correlation, when one increases and the other
decreases, that is a negative correlation. Basically a
movement along the curve takes place when no other factor
influences the variables on the x and y axis, in other
words x and y change, but the fundamental relationship
between the two does not change.
D. Is a change in the size of the clinic a shift or a movement along the curve? The
change in the size of the clinic is a SHIFT of the Curve. The
reason for this is because this variable is not represented in
either the x or y axis. The size of the clinic can be thought of
as z. As the size of the clinic changes, so does the number of
exams a given per doctor. In other words, x (in this case the
number of doctors ) stays constant, but y (number of exams given)
changes, and the change is not caused by x, but instead is caused
by z.
4. What is the difference between the overall price level and relative price? Which
information is more useful if you are interested in the change in spending on a
particular good? Which measure is more useful if you are interested in inflation?
Please explain. Relative price is the price of a good or service as
compared to the average cost of all other goods and services. Relative
prices are used to when wanting to determine information about
inflation. Overall Price, is as it sounds, it is the total dollar
amount of a specific good or service. To further illustrate the point,
if starting in 1990 the spending of consumers for movies tickets was
$100 billion dollars, and 2000 the consumer spending was $250 billion
dollars, those two figures are Overall Prices, they do not take into
consideration any other figures. Now if we compare them with the cost
of other goods and services such as the GDP, in 1990 the DGP is $6000
billion dollars and in 2000 the GDP is $10,000, then we get relative
prices of 1.6% for 1990 and 2.5% for 2000.
5. Why is it typical for economists to make the ceteris paribus assumption when making
predictions? Economists of then use the Latin term ceteris paribus,
which means, all other things held constant, to make generalizations
about complex situations, relationships, or processes, in order to
create a model for making a prediction in reference to an event or
trend. Ceteris paribus, is what allows economists to think of
relationships in an almost “perfect world” mind frame. So that they
can say, if the economy produces 10,000,0000 of x, then we will it will
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Name: Bryon D Gaskin.
Course Econ 201 Macroeconomics
Text Principles of Macroeconomics
Instructor Steve Scheer
take 200,0000 y to produce it, (given of course all of other things
equal or held constant.) A good of example of the reverse of certeris
paribus, is when something unexpected in economy happens. About 3
years ago, the price of memory for computers was coming down, and this
had been the trend for years. So the trend was expected to continue,
but then there was an expected shortage of electronic components coming
from Taiwan, this rose the price of memory to levels higher than they
were 4 years previous.
All of it’s benefits for being able to help
make predictions, ceteris paribus has a competitor that it sometimes
wins, and that is Chaos.
6. Consider the following supply and demand model of the world coffee bean market (in
billions
of pounds).
Price per
Pound
$ .39
$ .38
$ .37
$ .36
$ .35
Quantity
Supplied
Quantity
Demanded
1500
1000
700
600
550
525
600
700
900
1200
A. Is there a shortage or a surplus when the price is $.39? What about $.35? Explain the
reasons for your answers. At $.39 there is surplus of coffee beans,
because the Quantity Supplied is greater than the Quantity Demanded, or
more simply Supply is greater than demand.
B. What are the equilibrium price and the equilibrium quantity for this coffee bean
market? How did you derive that answer? The equilibrium price for the
coffee bean market is $.37 per pound. The equilibrium price is the
price where the Quantity Supplied and the Quantity Demanded are equal.
In the above, at $.37 per pound, Quantity Supplied=Quantity Demanded.
C. Graph the supply and the demand curve (Utilizing one set of axis).
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Name: Bryon D Gaskin.
Course Econ 201 Macroeconomics
Text Principles of Macroeconomics
Instructor Steve Scheer
7. Use the supply and demand model to explain what happens to the equilibrium price
and the equilibrium quantity in the orange juice market in each of the following cases.
(Each case is independent of one another.)
A. The New England Journal of Medicine issues a widely publicized report that says
vitamin C cures cancer, and orange juice is the best source of vitamin C.
This falls under consumer information. This consumer information will
cause the demand curve to shift to the right. There will be an increase
in the quantity demanded for orange juice. This will cause the cause
the equilibrium price to increase as well.
Once all factors have been taken into account the equilibrium price is
reached by a movement along the curve. This is always the case, the
shift of the curve happens, then the movement along the curve is kind
of like s settling point until the equilibrium price is reached.
B. A freeze in Florida destroys half the orange crop. This falls under
environmental factors, this will shift the supply curve to the left.
Basically what has happened is that supply has decreased, and therefore
there is a new equilibrium price that will be higher. Once all factors
have been taken into account the equilibrium price is reached by a
movement along the curve. This is always the case, the shift of the
curve happens, then the movement along the curve is kind of like s
settling point until the equilibrium price is reached.
C. There is a sudden inflow of cheap orange juice imports from South America. The
sudden inflow of cheep orange juice will shift the supply curve to the
left. As the supply curve moves to the left there will equilibrium
price will fall. This happens because there is a greater quantity
supplied, and therefore there is less quantity demanded. Once all
factors have been taken into account the equilibrium price is reached
by a movement along the curve. This is always the case, the shift of
the curve happens, then the movement along the curve is kind of like s
settling point until the equilibrium price is reached.
D. A major orange juice producer finds lead contamination in some containers, and
this finding makes the nightly news. This is tricky and cannot be
answered completely without know more facts, because both supply and
demand curves could possibly be affected. As to whether the
equilibrium price falls or rises will be depended on which effect is
more powerful. The determining factor will be is the decrease in the
quantity supplied greater than the decrease in the quantity demanded
because of the news report. Obviously, if the goods were contaminated,
then they there as a decrease in quantity supplied, and if it made the
news, there would be fear factor that would decrease the demand.
Regardless of the whether equilibrium price moves up or moves down, the
process will be the same, a shift of on curves will take place, then
the equilibrium price will be reached as movement along the curve.
8. Why is it necessary for people to stand in line for days before the sale of concert
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Name: Bryon D Gaskin.
Course Econ 201 Macroeconomics
Text Principles of Macroeconomics
Instructor Steve Scheer
tickets for the most famous performers? The reason for this is that there is
a Price Ceiling for the concert tickets, when this happens, there is a
greater quantity demanded than there is quantity supplied. If market
forces where in action, then, there would be no need for a line because
eventually a equilibrium price would be met. Is the price mechanism
working properly?
Why are scalpers present on these occasions (outside the doors before the concert)?
The scalpers actually represent the true supply and demand model. The
scalpers are not restricted by the price ceiling the way the ticket
office is. If we look at this from the supply standpoint, what happens
is that there is a actually a ceiling on the supply. If there are
20,000 seats available for a concert, then there will only be 20,000
seats available, no matter what the demand for those seats is. Because
the quantity demanded for the tickets for the most famous performers
higher than the quantity supplied, then the selling price is actually
below the equilibrium price or market price (when tickets are purchased
from the ticket office.) Because there is a set price for which the
ticket office can sell the tickets, it is very similar to a Maximum
Price Law that the government might set on a good. When of the side
effects of a maximum price law is a black market. Hence, this is where
the scalper’s role comes into place.
An interesting note about the supply and demand curves for the scalper.
The curves will have many different shifts. The reason, TIME. The
equilibrium price will be highest before the concert beings, then after
the concert begins there will be a constant lowering of the equilibrium
price. Supply will stay the same but the demand will decrease, as the
demand curve shifts to the left, the equilibrium price or market price
on the street will decrease.
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