Download Economics 102 Name

1
Economics 102
Chapter 2:
In-Class Assignment
Form into groups of three or four people. Since this is your first in-class assignment, take a few
minutes to introduce yourselves. Then, do the following two questions. Write your answers as a
group in the space provided.
1. We have described four factors of production: natural resources, labor, capital, and
entrepreneurship. Think of any restaurant you have ever been to: Dennys, MacDonalds, Taco
Bell, Pizza Hut, or any other.
Write a list of some of the things used by that restaurant that would qualify as
natural resources.
Write a list of some of the things used by that restaurant that would qualify as labor.
Write a list of some of the things used by that restaurant that would qualify as capital.
Who is the entrepreneur in this restaurant and what does the entrepreneur do?
2. We have defined opportunity cost as the value of everything that is sacrificed when one
decides to do something. You have decided to take Principles of Microeconomics this semester.
What is the opportunity cost of this decision? Try to consider all of the sacrifices you expect to
make. Then, try to put a dollar value on them so that you can determine exactly what you are
giving-up.
The opportunity costs are composed of:
I estimate that the dollar value of the opportunity costs of taking Principles of Microeconomics is:
$_____________________________________ Show how you arrived at this number.
3. This class is concerned with rational decision-making. This involves considering the marginal
benefit and marginal opportunity cost for each unit. Form into groups. Discuss among
yourselves how you would use the procedure for rational decision making in each of the
following situations. Then write briefly in the space what you have concluded.
1. A family must decide how many children to have.
2. You have taken a quiz and received a grade of 3 out of a possible 10 points (F). You are
allowed to take a second version of the quiz. If you do so, you can raise your grade to a
maximum of 7 out of 10 (C) as long as your score on the second quiz is at least 7. Since you
scored poorly on the first version, you will need to study carefully. There are 570 maximum
possible points in the course. Will you take the second version of the quiz? Why?
3. You are driving home from Phoenix. You stop at a Dennys in a small town for dinner. You
have never been in this small town before and are not likely to ever be there again. Your dinner
is fine and so is the service. Your bill is $10. Use the procedures for rational decision-making to
determine whether or not you will leave a tip for the person who waited on your table.
2
Economics 100/102
Name________________________
Class 3: In Class Assignment
1. In each case, state whether you believe the demand for the product is relatively elastic
or relatively inelastic? Then, provide reasons for your conclusion.
1. American Online (AOL).for access to the Internet as well as other services
2. Paying a bill by first class mail
3. Services of a doctor to fix a broken arm
4. Services of a doctor for plastic surgery (changing one's appearance)
5. Japanese automobiles (such as Toyota or Nissan)
6. A burger at MacDonalds
7. Use of cigarettes
8. Flights on American Airlines to see New York City as a tourist
9. Tickets to the movies
10. Courses at Palomar College
3
Economics 102
Name______________________
Class #4
In Class Assignment
The demand curve in Chapter 4 was drawn with the assumption that the population is
two million people. This is repeated here as Quantity Demanded1. Now, assume that the
population rises to 3 million people. The demand schedule changes and is shown below
as Quantity Demanded2.
1
2
3
4
5
6
7
8
9
10
11
Price
Quantity Demanded1
$340,000
$320,000
$300,000
$280,000
$260,000
$240,000
$220,000
$200,000
$180,000
$160,000
$140,000
$120,000
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
Quantity Demanded2
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
12000
13000
Plot the new points and draw the new demand curve on the same paper as used in
Chapter 4. Show the relation between the original and the new demand curves.
The new demand curve has shifted to the _______________ (right or left?)
Besides the increase in population, then shift in the demand curve that you have depicted
could have been caused by:
1. a/an ___________________(increase or decrease?) in the incomes of homebuyers
2. a/an ___________________(increase or decrease?) in the interest rates that people
will pay to borrow money to buy homes
3. a/an ___________________(increase or decrease?) in rents on apartments
4. a change in tastes so that buyers prefer homes _______________(more or less?)
5. buyers’ expecting that the prices of new homes will _______________(increase or
decrease?) in the near future
4
Economics 102
Name_______________________
Chapter 6: In Class Assignment #1
In Chapter 4, you were given a demand schedule for new homes. Earlier in this chapter,
you were given a supply schedule for new homes. These are repeated here.
Price
Quantity Demanded
Quantity Supplied
1
2
3
4
5
6
7
8
9
$340,000
$320,000
$300,000
$280,000
$260,000
$240,000
$220,000
$200,000
$180,000
$160,000
$140,000
$120,000
$100,000
10
11
12
13
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
12000
14,000
13,000
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
If the price of homes is $320,000, there will be a _______________(shortage or surplus?)
equal to _____________________ homes.
If the price of homes is $120,000, there will be a _______________(shortage or surplus?)
equal to _____________________ homes.
The equilibrium price is equal to $_________________ and the equilibrium quantity of
homes is equal to ___________________.
Draw the demand curve and the supply curve on the graph paper on the back of the page.
Show the equilibrium price and the equilibrium quantity on the graph.
In Chapter 5, there was a shift in the demand for new homes to the right. The data are
given below.
Price
The quantity demanded is:
The quantity supplied is
Demand1
Demand2
1
2
3
4
5
6
7
8
9
10
11
12
$340,000
$320,000
$300,000
$280,000
$260,000
$240,000
$220,000
$200,000
$180,000
$160,000
$140,000
$120,000
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
12000
13000
14000
13000
12000
11000
10000
9000
8000
7000
6000
5000
4000
3000
5
Page 2
What is the new equilibrium price? $_______________
What is the new equilibrium quantity of new homes? ________________
Show the shift on the graph on the back of the page. Show the new equilibrium price and
quantity of new homes.
Because of the shift in the demand, there is now a _________(shortage or surplus?) equal
to _________ new homes. This will cause the price of new homes to ________(rise or
fall?). The change in the price will __________(increase or decrease?) the quantity
demanded for new homes and ___________(increase or decrease?) the quantity supplied
of new homes.
In Chapter 6, there was a shift in the supply of new homes to the right. The data are
given below:
Price
quantity demanded
quantity supplied
new quantity supplied
1
2
3
4
5
6
7
8
$340,000
$320,000
$300,000
$280,000
$260,000
$240,000
$220,000
$200,000
9 $180,000
10 $160,000
11 $140,000
12 $120,000
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
14000
13000
12000
11000
10000
9000
8000
7000
6000
5000
4000
3000
16000
15000
14000
13000
12000
11000
10000
9000
8000
7000
6000
5000
What is the new equilibrium price? $_______________
What is the new equilibrium quantity of new homes? ________________
On a different graph on the next page, redraw the original demand and supply curves.
Then, show the shift in supply. Show the new equilibrium price and quantity of new
homes.
Because of the shift in the supply, there is now a _________(shortage or surplus?) equal
to _________ new homes. This will cause the price of new homes to ________(rise or
fall?). The change in the price will __________(increase or decrease?) the quantity
demanded for new homes and ___________(increase or decrease?) the quantity supplied
of new homes.
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Economics 102
Name______________________
Chapter 6: Assignment
1. Assume that the market for automobiles begins in equilibrium. Draw the demand and
supply curves for automobiles in the graph below. Label all axes and curves. Show the
equilibrium price and quantity.
Then, buyers’ incomes fall due to a recession. Make the appropriate change on the
graph. Show the new equilibrium.
When the new equilibrium is reached, the price of automobiles will have
___________(risen or fallen?) and the quantity of automobiles sold will have
___________________(risen or fallen?)
Price of Automobiles
____________________________________
0
Quantity of Automobiles
2. Assume that the market for automobiles begins in equilibrium. Draw the demand and
supply curves for automobiles in the graph below. Label all axes and curves. Show the
equilibrium price and quantity.
Then, there is an increase in the wages paid to automobile workers (a cost of
production). Make the appropriate change on the graph. Show the new equilibrium.
When the new equilibrium is reached, the price of automobiles will have
___________(risen or fallen?) and the quantity of automobiles sold will have
___________________(risen or fallen?)
Price of Automobiles
____________________________________Quantity of Automobiles
7
Economics 102
Name___________________________
Class #6: In Class Assignment #1
Assume there is a well defined geographic area of a city. The area is composed
exclusively of apartments and is populated by low-income residents. The people who
live in the area tend to stay in that area because (1) they cannot afford to live in other
areas of the city, (2) they prefer to live with people of their own ethnic group, or (3) there
is discrimination against them in other areas of the city. Rents paid are a very high
percent of these people’s incomes.
(!) Would the demand for apartments in this area be relatively elastic or relative
inelastic? State why?
(2) Would the supply of apartments in this area be relatively elastic or relative inelastic?
State why?
(3) Draw the demand curve and the supply curve as you have described them, showing
the initial equilibrium price and quantity. Label carefully.
Price
0
Quantity
(4) Now assume that the government creates a rent supplement program. Under this program,
the renter is required to pay 30% of income in rent. Any additional rent is paid by the
government – up to a limit. For example, a low-income person with an income of $500 per
month would be required to pay $150 (30%) in rent. If the rent is $350, the other $200
would be paid by the government. Analyze the results of this program. Show the changes on
the graph and explain what will result. Who gains and who loses from this program?
(5) Instead, assume that the government decides to provide a building subsidy to people who
build apartments in this low-income area. A certain percent of their costs of production will be
paid by the government. Analyze the results of this program. Show the results on the graph and
explain what will result.
(6) From the point of view of improving housing for the poor, which is the better program?
8
Economics 102
Name_______________________
Class #6:
In-Class Assignment #2
Consider the market for grains.
(1) Is the demand for grains relatively elastic or relatively inelastic with respect to the
price? Explain why.
(2) Is the demand for grains relatively elastic or relatively inelastic with respect to
income? Explain why.
(3) Is the supply of grains relatively elastic or relatively inelastic with respect to the
price? Explain why.
(4) On the graph below, draw the demand and supply curves as you have described them.
Show the equilibrium price and quantity.
Price
________________________________
0
Quantity of Grains
9
(5) Over time, the demand for wheat has shifted to the right. Why has this occurred?
(6) Over time the supply of wheat has shifted to the right. Why has this happened?
(7) Which do you believe has shift more over the past century: the demand curve or the
supply curve? Explain why. Then, show these two shifts on the graph.
(8) As a result of these two shifts, the price of wheat will ____________ (rise or fall?)
Because of the price elasticity of demand for wheat, total revenues received by
farmers will __________________(rise or fall?)
The result is that the total profits of farmers will _________________(rise or fall?)
(9) The market is sending a signal to the farmer. What is it telling the farmer to do?
10
Economics 102
In Class Assignment for Class #10
Name___________________
In the class, there were several functions of government noted under laissez faire. For
each of the following, state which function, if any, would be used to justify what
government does.
1. Government provides Homeland Security _____________________
2. Government requires you to have a smog
control device on your automobile.
_____________________
3. Government requires warnings on cigarette
packages of health dangers.
_____________________
3. Government has makes the city park
available to all
_____________________
5. Government makes it illegal to drive
faster than 65 miles per hour
_____________________
6. Government makes it illegal to use
marijuana and cocaine.
_____________________
7. Government pays most of the cost for you
to be a student at Palomar College.
_____________________
8. Government provides Social Security and
Medicare for those who are age 65 and up
9. Government has price supports for farmers
_____________________
_____________________
10. Government subsidizes the arts and public
television & radio
_____________________
11. Government zoning requirements tell you
that you cannot have a business on your
_____________________
property.
12. Government may require all employers to
provide health insurance coverage for
their workers.
_____________________
13. Government owns and controls certain
forest areas (the national forests and the
national parks)
_____________________
11
Economics 102
Name____________________
Chapter #11: In-Class Assignment
1. Earlier, the Farm Programs were described. Both the Price Support Program and the
Acreage Restriction Program are example of price floors. In recent years, these programs
have cost taxpayers $10 to $15 billion per year and have cost consumers perhaps another
$10 billion per year in higher food prices. The beneficiaries of this program are farmers.
However, only a small percent of farmers (large, corporate farms) get the vast majority of
the benefits.
As a group, use the principles of Public Choice to explain how a program that
benefits so few people, costs so many people, and is economically inefficient has been
able to exist for sixty years!
2. The class described bureaucracies and made the assumption that people in
bureaucracies respond to the incentives they are provided. Palomar College is a
bureaucracy. Here is a brief description of the incentives:
(1) The Board of Governors (5 people) are elected by the people for four-year terms.
(2) The administration is paid a fixed salary (on a scale). There are few promotion
possibilities for administrators at Palomar, but some can gain promotion by
moving to other colleges. Administrators can be fired as administrators
but have tenure with the college. (If fired, an administrator would become a
teacher.)
(3) The teachers have tenure (cannot be fired except for cause, after a four year
probation period) and are paid on a fixed salary scale. Teachers have very few
promotion opportunities and rarely leave employment before retirement..
(4) The clerical and other employees (called "classified") are paid on a fixed scale
that depends on the type of job. These people have more promotion opportunities
than teachers, but lower pay. After a brief probation, they can only be fired for
cause.
(5) The amount of money received by the college depends on the number of units
taken by students. Up to a limit, the college receives a certain number of dollars
for each student. These dollars are then allocated to each area of the college in
proportion to its size.
Based on these incentives, what kinds of behaviors would you expect to see? Relate your
answer to any experiences you have had with the college. (If you are not familiar with
Palomar College, the same set of incentives exist for your high school or any other
college attended.)
12
Economics 102
Chapter 22 In Class Assignment
1. Health care costs have been rising very fast. Such costs will rise either because the demand
for health care has been rising or the costs of producing health care have been rising (supply
falling).
Name some reasons that the demand for health care might have been rising in recent years.
Name some reasons that the costs of producing health care might have been rising in recent
years.
2. In 1993, President Clinton proposed the following reforms of the health care system (these
were not passed into law). What arguments can you make that these changes would have been
good for society? What arguments can you make that these changes would have been bad for
society?
(1) All Americans would be guaranteed a comprehensive health insurance package.
(2) Individuals and families would receive coverage from a regional or corporate “health
alliance”. There would be only one regional alliance in each geographic area, which
would cover all people in that area not covered by corporate alliances (which could be
formed only by companies with more than 5,000 employees).
(3) Each regional alliance would provide several plans from which individuals and families
would choose. Doctors would be free to choose the plan or plans in wish they wish to
work. (This is similar to what employers provide their workers today.) All of the plans
would offer the same set of comprehensive benefits. They would differ in the amount
people would pay themselves. The plans would be provided by private insurance
companies or HMOs, as they are now. The Regional Alliance would only act as a broker
between the patient and the plan.
(4) The premiums would be set by law. For 1994, the average would have been $1,932 for a
single person, $3,865 for a couple with no children, and so forth. Employers must pay
80% of the average premium. Payments for part-time employees would be pro-rated --- if
one worked half time, the payment would be half that of a full-time worker. Selfemployed people must make their own payments. The individual or family would have to
pay the difference between the employer payment and the premium. If he or she chooses
a more comprehensive, and therefore expensive, plan, he or she must pay the difference.
If he or she chooses a cheaper plan, he or she can keep the difference. Low-income
people would receive discounts on their part of the premium. The government would
limit the amount the premium can grow each year.
13
Economics 102
Class #12 In Class Assignment
Name___________________
1. In the 19th century, there was major debate concerning the "diamond-water paradox".
It was noticed that water, which is absolutely essential to the existence of life, has a value
in the market that is very low (in fact, water is virtually free). On the other hand,
diamond, which has uses that are much less important (industrial use, jewelry), has a
value in the market which is very high. How do you explain this paradox?
How does your answer illustrate the law of diminishing marginal utility?
2. A progressive income tax is a tax such that the percent of one's income that one pays
in tax rises as one's income rises. Thus, a poor person may pay a very low percent of his
income in tax while a rich person may pay a very high percent of her income in tax.
Use the law of diminishing marginal utility to justify progressive income taxes,
assuming that the goal of tax policy is that everyone should suffer equally from paying
taxes.
14
Economics 102
Class #13 In Class Assignment
Janice decides to quit her $20,000 a year job and open a small store selling high fashion.
To start her store, she takes $100,000 out of her savings account. She had inherited this
money from her parents. During the first year, her expenses are as follows:
Rent for the Store
Four Hired Workers
Clothes
Accounting Firm
Electricity
Insurance
$15,000
$80,000
$100,000
$3,000
$2,000
$5,000
Janice also works in the store ordering the clothes and doing some selling. During the
first year, Janice’s store sold $250,000 worth of clothing.
Her Explicit Costs were
$___________________
Her Implicit Costs were
$___________________
Her Total Economic Costs were
$___________________
Her Fixed Costs were
$___________________
Her Variable Costs were
$___________________
Her Economic Profit was
$___________________
15
Economics 102
Name_______________________
Class #14: In Class Assignment #1
The following is a Production Function for sewing blue jeans per day.
Capital Input
1
2
0
0
0
Labor Input (Workers Per Day)
1
2
3
4
5
15
34
44
48
50
20
46
64
72
78
6
51
81
7
47
80
1. Calculate the Average Physical Product of Labor in Each Case:
Labor Average Physical Product (One Machine) Average Physical Product (Two
Machines)
1
2
3
4
5
6
7
2. Assume that there is only one sewing machine (short-run). Calculate the marginal
physical product of labor:
Labor
Marginal Physical Product
Marginal Cost
1
2
3
4
5
6
7
3. Assume that each worker is paid $80 per day ($10 per hour for an 8 hour day).
Assume also that there are no other variable costs of production. In the chart above,
calculate the marginal cost of production. (Hint: if one worker is paid $80 and
produces 15 pairs of blue jeans, the marginal cost of each pair myst be $80 divided by 15
= $5.33.)
If the marginal physical product is rising (falling), the marginal cost must be
_____________ (__________).
16
Economics 102
Name______________________
Chapter 14:
In-Class Assignment #2
1. Fill in the following table:
Total
Variable
Quantity Cost
Total
Fixed
Cost
Total
Cost
0
0
1
$160,000
180,000
340,000
2
300,000
180,000
480,000
3
420,000
180,000
600,000
4
560,000
180,000
740,000
5
720,000
180,000
900,000
6
900,000
180,000 1,080,000
7
1,100,000
180,000 1,280,000
8
1,320,000
180,000 1,500,000
9
1,560,000
180,000 1,740,000
10
1,820,000
180,000 2,000,000
11
2,100,000
180,000 2,280,000
12
2,400,000
180,000 2,580,000
Average
Variable
Cost
Average Average
Fixed
Total
Cost
Cost
Marginal
Cost
$180,000 $180,000
1. Go back to the earlier assignment. What two costs comprise the total fixed cost of
$180,000?
2. Go back to the earlier assignment. Notice that the total variable cost is the same as
the one you were given earlier. How much of the total variable cost is the cost of
natural resources and how much is the cost of labor?
3. Plot the average variable cost, average fixed cost, average total cost, and marginal
cost on the graph paper on the next page. Connect the points to form the four graphs.
17
4. Describe in general terms the shape of the average variable cost curve.
5. Go back to the description of the reasons for increasing marginal returns and for
diminishing marginal returns. Describe why, for a home builder, the average
variable cost would fall as the quantity rises (that is, why the cost of labor and
natural resources to build each home would fall as more homes are built).
6. Then, describe why the average variable cost would rise as the quantity increases
beyond some point (that is, why the cost of labor and natural resources to build each
home would rise as more homes are built).
7. Describe in general terms the shape of the average fixed cost curve.
8. Describe in general terms the shape of the average total cost curve.
9. Go back to your answers to questions 6 and 8. Describe why, for a home builder,
the average total cost would fall as the quantity rises (that is, why the cost of
building each home would fall as more homes are built).
10. Then, go back to your answers to questions 7 and 8. Describe why, for a home
builder, the average total cost would rise as the quantity rises beyond some point
(that is, why the cost of building each home would rise as more homes are built).
11. On an earlier assignment, you drew the marginal cost curve and related it to the
marginal physical product. Here, you are to relate it to the average total cost (and
also to the average variable cost). Examine the numbers you calculated. For those
quantities for which the average total cost (or average variable cost) is falling, the
marginal cost is ________(above, below, or equal to) the average total cost (or
average variable cost). For those quantities for which the average total cost (or
average variable cost) is rising, the marginal cost is ________(above, below, or equal
to) the average total cost (or average variable cost).
12. On your graph, the marginal cost crosses the average total cost (and also the average
variable cost) at which point on the average total cost (or average variable cost)
________________________________________.
13. If you produce 5 homes, the average total cost is $180,000. This means that it costs
you $180,000 to build each of the homes. Go back to the earlier assignment.
How much of this $180,000 of cost represents the costs of natural resources (wood,
plasterboard, and so forth)? ________________
How much of this $180,000 of cost represents the cost of labor?_________________
How much of this $180,000 of cost represents the cost of capital goods?___________
How much of this $180,000 of cost represents the implicit costs? ________________
18
Economics 102
Name____________________________
Chapter 15:
In-Class Assignment
1. In Chapter 14, you calculated the costs as follows:
Total
Variable
Quantity Cost
0
0
1 $160,000
2
300,000
3
420,000
4
560,000
5
720,000
6
900,000
7 1,100,000
8 1,320,000
9 1,560,000
10 1,820,000
11 2,100,000
12 2,400,000
Total
Average Average
Fixed
Total Variable Fixed
Cost
Cost
Cost
Cost
$180,000 $180,000
180,000 340,000 $160,000 $180,000
180,000 480,000 $150,000 $ 90,000
180,000 600,000 $140.000 $ 60,000
180,000 740,000 $140,000 $ 45,000
180,000 900,000 $144,000 $ 36,600
180,000 1,080,000 $150,000 $ 30,000
180,000 1,280,000 $157.143 $ 25,714
180,000 1,500,000 $165,000 $ 22,500
180,000 1,740,000 $173,333 $ 20,000
180,000 2,000,000 $182,000 $ 18,000
180,000 2,280,000 $190,909 $ 16,364
180,000 2,580,000 $200,000 $ 15,000
Average
Total
Cost
$340,000
$240,000
$200,000
$185,000
$180,000
$180,000
$182,857
$187,500
$193,333
$200,000
$207,273
$215,000
Marginal
Cost
$160,000
$140,000
$120,000
$140,000
$160,000
$180,000
$200,000
$220,000
$240,000
$260,000
$280,000
$300,000
On graph paper, draw the average total cost once again. Label this Average Total Cost1.
2. Now assume that a larger company would mean that the total fixed cost would increase to
$210,000. But the extra capital would reduce the need for workers, lowering the average variable
cost by $5,000 per house. Calculate the new average total cost. Draw the new average total cost
on the same graph and label it Average Total Cost2. On the graph, show the parts of the two
average total cost curves that would be used to derive the long-run average total cost curve.
Total
Total
Average
Variable Fixed
Total Variable
Quantity Cost
Cost
Cost
Cost
0
0
$210,000 $210,000
1
2
3
4
5
6
7
8
9
10
11
12
$155,000
290,000
405,000
540,000
695,000
870,000
1,065,000
1,280,000
1,515,000
1,770,000
2,045,000
2,350,000
210,000 365,000
210,000 500,000
210,000 615,000
210,000 750,000
210,000 905,000
210,000 1,080,000
210,000 1,275,000
210,000 1,490,000
210,000 1,725,000
210,000 1,980,000
210,000 2,255,000
210,000 2,560,000
Average Average
Fixed
Total
Cost
Cost
$155,000
$145,000
$135.000
$135,000
$139,000
$145,000
$152,143
$160,000
$168,333
$178,000
$185,909
$195,000
At what quantity of homes will the company decide to have the larger company?_________
19
3. Now consider a third choice --- a company that is even larger. Assume that the total fixed cost
rises by another $30,000, to $240,000. Again assume that the additional capital reduces the need
for workers, lowering the average variable cost by another $5,000 per house. Calculate the new
average total cost for the larger company. Then, draw the average total cost curve on the same
graph. Label this Average Total Cost3. Show the parts of the three average total cost curves that
will be used to derive the long-run average total cost.
Total
Total
Variable
Quantity Cost
0
0
Fixed
Cost
Average Average Average
Total Variable Fixed
Total
Cost
Cost
Cost
Cost
$240,000 $240,000
1
$150,000 240,000 390,000 $150,000
2
280,000 240,000 520,000 $140,000
3
390,000 240,000 630,000 $130,000
4
520,000 240,000 760,000 $130,000
5
670,000 240,000 910,000 $134,000
6
840,000 240,000 1,080,000 $145,000
7
1,030,000 240,000 1,270,000 $147,143
8
1,240,000 240,000 1,480,000 $155,000
9
1,470,000 240,000 1,710,000 $163,333
10
1,720,000 240,000 1,960,000 $173,000
11
1,990,000 240,000 2,230,000 $180,909
12
2,290,000 240,000 2,530,000 $190,000
At what quantity of homes will one buy the third sized company? __________________
4. San Marcos Market is a grocery store of about 5,000 square feet. Stater Brothers is a grocery
store of about 20,000 square feet. Stater Brothers can sell groceries at a lower price than San
Marcos Market because its costs of production are lower. Explain why Stater Brothers’ costs of
production are lower. That is, what cost advantages does Stater Brothers (or Vons or Albertsons)
have just because it is a larger company? Name as many as you can.
20
Economics 102
Name____________________________
Class 16:
In-Class Assignment
1. In each case, state whether you believe the industry should be characterized as perfect
competition, pure monopoly, monopolistic competition, or oligopoly. STATE YOUR
REASONS.
1. Growers of avocados
_____________________________
2. Fast-food restaurants
_____________________________
3. Automobile Producers
_____________________________
4. Television stations
_____________________________
5. Computer manufacturers
_____________________________
2. Go back to the in-class assignment for Chapter 14. Assume now that all homes are the
same and that each home produced will sell for a price of $200,000. Use the principles of
rational decision-making to determine how many homes this builder will build.
(To do this, you need to calculate the marginal revenue.)
3. Plot the marginal revenue curve on the graph you drew for the in-class assignment to
Chapter 14. Show on the graph the quantity that will maximize the company's profits and
the economic profits earned.
21
Quantity
Price Total Revenue
Marginal Revenue Total Cost Marginal Cost
0
$200,000
$180,000
1
$200,000
$340,000
$160,000
2
$200,000
$480,000
$140,000
3
$200,000
$600,000
$120,000
4
$200,000
$740,000
$140,000
5
$200,000
$900,000
$160,000
6
$200,000
$1,080,000
$180,000
7
$200,000
$1,280,000
$200,000
8
$200,000
$1,500,000
$220,000
9
$200,000
$1,740,000
$240,000
10
$200,000
$2,000,000
$260,000
11
$200,000
$2,280,000
$280,000
12
$200,000
$2,580,000
$300,000
22
Economics 102
Name_____________________
Class 17:
In-Class Assignment
1. Go back to the number set for Chapter 14. Assume now that the market price falls to
$160,000 per house. At this price, the profit-maximizing quantity is
_________________. The economic profits equal $________________________.
Since the maximum profit is negative (loss), should the company continue to produce
in the short-run at the loss? Or should the company shut-down in the short-run?
________________________
EXPLAIN WHY.
2. Go back again to the number set for Chapter 14. Assume now that the market price
falls to $120,000. At this price, the profit-maximizing quantity is
________________. The economic profits equal $_________________________.
Since the maximum profit is negative (loss), should the company continue to produce
in the short-run at the loss? Or should the company shut-down in the short-run?
________________________
EXPLAIN WHY.
23
Page 2
Quantity
Price Total Revenue Marginal Revenue Total Cost Marginal Cost
0
$160,000
$180,000
1
$160,000
$340,000
$160,000
2
$160,000
$480,000
$140,000
3
$160,000
$600,000
$120,000
4
$160,000
$740,000
$140,000
5
$160,000
$900,000
$160,000
6
$160,000
$1,080,000
$180,000
7
$160,000
$1,280,000
$200,000
8
$160,000
$1,500,000
$220,000
9
$160,000
$1,740,000
$240,000
10
$160,000
$2,000,000
$260,000
11
$160,000
$2,280,000
$280,000
12
$160,000
$2,580,000
$300,000
24
Page 3
Quantity
Price Total Revenue Marginal Revenue Total Cost Marginal Cost
0
$120,000
$180,000
1
$120,000
$340,000
$160,000
2
$120,000
$480,000
$140,000
3
$120,000
$600,000
$120,000
4
$120,000
$740,000
$140,000
5
$120,000
$900,000
$160,000
6
$120,000
$1,080,000
$180,000
7
$120,000
$1,280,000
$200,000
8
$120,000
$1,500,000
$220,000
9
$120,000
$1,740,000
$240,000
10
$120,000
$2,000,000
$260,000
11
$120,000
$2,280,000
$280,000
12
$120,000
$2,580,000
$300,000
25
Page 4
3. Fill-in the following table. Assume there are 1,000 companies in this industry.
Price
Supply of One Company
Market Supply
Market Demand
$140,000
10,000
160,000
9,000
180,000
8,000
200,000
7
7,000
7,000
220,000
6,000
240,000
5,000
260,000
4,000
280,000
3,000
300,000
2,000
320,000
1,000
340,000
0
Compare the market supply and the market demand to those of Chapter 4. Notice that
they are the same. We have now derived the market supply that was given in Chapter 4.
The equilibrium price is $________________and the equilibrium quantity is
__________.
26
Economics 102
Name______________________
Class 19
In-Class Assignment #2
1. Go back to the calculations and graph you did for the In-Class Assignment to Chapter
16. Now, assume that the fixed cost rises from $180,000 to $360,000. There is no
change in a variable cost or in the price of homes ($200,000). Fill-in the following table
with the new fixed cost replacing the original one:
Quantity
1
Total
Total
Total
Variable
Fixed
Cost
Cost
Cost
$160,000 $360,000 $520,000
2
300,000
360,000
660,000
3
420,000
360,000
780,000
4
560,000
360,000
920,000
5
720,000
360,000 1,080,000
6
900,000
360,000 1,260,000
7
1,100,000
360,000 1,460,000
8
1,320,000
360,000 1,680,000
9
1,560,000
360,000 1,920,000
10
1,820,000
360,000 2,180,000
11
2,100,000
360,000 2,460,000
12
2,400,000
360,000 2,760,000
Average
Total
Cost2
Marginal
Cost
Marginal
Revenue
The quantity of houses that now maximizes economic profits is _________________.
The economic profit now equals $______________________.
Show the changes on the graphs on the following pages. Make any changes to Marginal
Revenue, Marginal Cost, or Average Total Cost. Show the new profit-maximizing
quantity and the new economic profits.
27
Page 2
1. Given the amount of economic profit that is earned now, in the long-run, sellers will
____________ (enter or leave?) the industry. As a result, the supply in the market
will ____________ (increase or decrease?), which is a shift in the supply curve to the
____________ (right or left?).
Show this shift on your graph.
As a result of this shift in supply, the price of the product will _________(rise or
fall?). This will continue until the economic profits are equal to $_________.
Show the long-run changes on your graph.
In long-run equilibrium, the new equilibrium price is $___________ and the new
equilibrium quantity is ____________.
$
Marginal Cost
Average Total Cost
Price1 = Marginal Revenue1
0
7
One Representative Company
Quantity of Homes
28
$
Supply1
A
200 (Price1)
Demand1
0
7000
Quantity of Homes
All Sellers Together (The Industry)
29
Economics 102
Name__________________
Class 19
In Class Assignment #1
In Chapter 5, we had an increase in the demand for new homes. The data are repeated:
Price
Supply of One Company
$140,000
4
160,000
5
180,000
6
200,000
7
220,000
8
240,000
9
260,000
10
280,000
11
300,000
12
320,000
13
340,000
14
Market Supply Market Demand New Demand
4,000
10,000
12,000
5,000
9,000
11,000
6,000
8,000
10,000
7,000
7,000
9,000
8,000
6,000
8,000
9,000
5,000
7,000
10,000
4,000
6,000
11,000
3,000
5,000
12,000
2,000
4,000
13,000
1,000
3,000
14,000
0
2,000
Using the New Demand, the new equilibrium price is $___________________. Use this
new price to fill in the table below.
Quantity
0
Price Total Revenue Marginal Revenue Total Cost Marginal Cost
$180,000
1
$340,000
$160,000
2
$480,000
$140,000
3
$600,000
$120,000
4
$740,000
$140,000
5
$900,000
$160,000
6
$1,080,000
$180,000
7
$1,280,000
$200,000
8
$1,500,000
$220,000
9
$1,740,000
$240,000
10
$2,000,000
$260,000
11
$2,280,000
$280,000
12
$2,580,000
$300,000
30
To maximize profits, the individual company will now produce _______ houses.
The total equilibrium market supply for all 1,000 companies is now ______ houses.
Each individual seller is now earning an economic profit equal to $______________.
Show the changes on the graphs. Make any changes to Marginal Revenue, Marginal Cost,
or Average Total Cost. Show the new profit-maximizing quantity and the new economic
profits.
2. Given the amount of economic profit that is earned now, in the long-run, sellers will
____________ (enter or leave?) the industry. As a result, the supply in the market
will ____________ (increase or decrease?), which is a shift in the supply curve to the
____________ (right or left?). Show this shift on your graph.
As a result of this shift in supply, the price of the product will _________(rise or
fall?). This will continue until the economic profits are equal to $_________.
Show the long-run changes on your graph.
In long-run equilibrium, the new equilibrium price is $___________ and the new
equilibrium quantity is ____________.
$
Marginal Cost
Average Total Cost
Price1 = Marginal Revenue1
1
7
Quantity of Homes
31
One Representative Company
$
Supply1
A
200 (Price1)
Demand1
1
7000
Quantity of Homes
All Sellers Together (The Industry)
32
Economics 102
Class #20 In Class Assignment
Name__________________
Let us consider a decrease in a variable cost of production. The variable costs are the costs
of the natural resources and the labor. Let us assume that the productivity of the workers
increases so that fewer workers are now needed to build houses. Our calculations become as
follows (with all costs in thousands). Each worker is still paid $20,000. The natural resources
cost is $20,000 per house. The fixed cost remains at the original $180,000.
Natural
Total Total
Average
Labor Resource Variable Fixed Total Total Marginal Marginal
Quant Labor Cost
Cost
Cost Cost Cost Cost
Cost
Revenue
1
2
3
4
5
6
7
8
9
10
11
12
13
14
6
11
15
20
26
33
41
50
60
71
83
96
110
125
$120
220
300
400
520
660
820
1,000
1,200
1,420
1,660
1,920
2,200
2,500
$20
40
60
80
100
120
140
160
180
200
220
240
260
280
$140
260
360
480
620
780
960
1,160
1,380
1,620
1,880
2,160
2,460
2,780
$180
180
180
180
180
180
180
180
180
180
180
180
180
180
$320
440
540
660
800
960
1,140
1,340
1,560
1,800
2,060
2,340
2,640
2,960
$200
200
200
200
200
200
200
200
200
200
200
200
200
200
Fill in the table and compare your calculations to the original calculations in you made. Notice
that a change in a variable cost of production affects both the average cost and the marginal
cost. The average total cost and the marginal cost are both __________ (higher or lower?) than
before.
Draw the graph for the representative company in perfect competition and for the industry,
beginning with a positive economic profit. Then, make the appropriate changes in average total
cost and marginal cost on the graph.
The company will maximize profits at that quantity for which the marginal revenue equals the
marginal cost. This is now _____ houses. Show this as point b on the graph and label this
number of houses q2. At the price of $200,000 per house, the company would earn an economic
profit of $____________.
One company increasing quantity will have no effect on the market price. But if all companies
increase quantity (from 7,000 houses to _______ houses) , the result is to create a surplus in the
market. (Remember that there are 1,000 companies in this industry.) On your graph of the
situation for the industry (all companies together), the supply has ____________(increased or
decreased?) because of the decrease in the variable cost (label the quantity desired to be produced
by the industry as Q2 ). The surplus causes the price to fall to P2 ($180,000). Show this on the
graph.
33
The individual company must now respond to the lower price. The price = marginal revenue
line has shifted down. The individual company will now maximize profits at quantity _____ (q3)
where the new marginal revenue equals the new marginal cost (point c). The total industry
equilibrium is shown by point C with an industry quantity of ______ (Q3). The individual
company is earning an economic profit equal to the $__________. Show the new economic
profits on the graph.
The analysis thus far has been confined to the short-run. In the long-run, there will be a
response to the economic profits that are now being earned. Companies will ____________
(enter or leave?) the industry. The supply in the industry will shift ________ (right or left?) from
Supply 2 to Supply 3). The price will ___________(rise or fall?) and the economic profits will
__________ (rise or fall?). This process will continue until the economic profits once again equal
______. This occurs at a price of $160,000 (price 3). Point D shows the equilibrium quantity for
the entire industry (Q4); point d shows the equilibrium quantity for the individual company(q4)
which is __________ houses.
When the new long-run equilibrium is reached, all of the benefit of the increase in workers'
productivity will have gone to _____________.
34
Economics 102
Class 20
Name______________________
In Class Assignment
1. You are given the following demand curve facing a monopolist. Fill-in the table.
Price
Quantity Total
Revenue
$340,000
0
Marginal
Revenue
Average
Total Cost
Marginal
Cost
320,000
1,000
$340,000
$160,000
300,000
2,000
240,000
140,000
280,000
3,000
200,000
120,000
260,000
4,000
185,000
140,000
240,000
5,000
180,000
160,000
220,000
6,000
180,000
180,000
200,000
7,000
182,857
200,000
180,000
8,000
187,500
220,000
160,000
9,000
193,333
240,000
140,000
10,000
200,000
260,000
120,000
11,000
207,273
280,000
The quantity the monopolist will produce is ________________.
The price that will be charged is $_______________________.
The economic profits that will be earned are $______________.
2. Draw the demand curve, the marginal revenue, the average total cost, and the marginal
cost for the monopolist using the graph paper on the back of the page. For the demand
and marginal revenue, you may use the data you calculated in question 1. Show on the
graph the quantity that will be produced, the price that will be charged, and the economic
profits.
3. Notice that, for the monopolist, the price of the product is greater than the
marginal revenue. Use the numbers in the table to explain why this is so.
35
Economics 102
Name___________________________
Class #21 --- In-Class Assignment
1. Use the principles of price discrimination to explain the following:
1. Why do students and the elderly pay a lower price for movies than others?
2. Why does SDG&E charge a lower price to business users than to household users?
3. Why do long-distance companies charge a higher price to business users than to
household users?
4. Other than cost savings, why do gasoline stations charge a lower price to people
who pump their own gasoline than to people who have an attendant do it for them?
2. In this section, the reasons for the phenomenon of natural monopolies were described.
The bus system in North County is a natural monopoly while the airline industry is
not. Using the reasons discussed in this section, explain why this is so.
36
Economics 102
Name_________________________
Class 22--- In Class Assignment
1. In the graph below, draw the demand, marginal revenue, average total cost, and
marginal cost for a movie theater in the 1970s. Assume the theater is in a
monopolistically competitive industry in long-run equilibrium.
$
____________________________________
Quantity
2. Now show on the graph the result of the decrease in demand for movie theaters
that resulted from the invention, and subsequent popularity, of the VCR. Show
what would occur in the short-run. Then, show what would occur in the long-run.
Explain the changes you made. In each case, what happens to the quantity produced,
the price, and the economic profits?
3. The movie theaters responded to the VCR by moving into large multi-plex theaters.
At first, six or eight theaters would be found in one structure. Now, twenty or thirty
theaters may be found in one structure. The purpose of doing this is to lower costs so
as to regain profitability. The building is used more efficiently if many parts of it
are showing different movies. The workers, ticket takers, ushers, cleaners, etc. can
also be used more efficiently. In each case, is the reduction in the cost a reduction
in a fixed cost or in a variable cost? Show the results of these cost reductions on the
graph --- in both the short-run and the long-run. Again, explain the changes you
made. In each case, what happens to the quantity produced, the price, and the
economic profits?
37
Economics 102
Assignment for Class #23 Name___________________
Fill in the table below. Assume that all workers are hired in a perfectly competitive labor market
at a wage of $9.
Labor Total Product MPP
1
10
Price
$1
2
21
1
3
33
1
4
44
1
5
54
1
6
63
1
7
71
1
8
78
1
MRP
MRC
How many workers will a profit maximizing employer hire? ______________
If the wage were to fall to $8, how many workers would be hired? ______
If the wage were to rise to $10, how many workers would be hired?______
In the graph below, draw the MRP curve and the MRC curve (assuming a wage of $9). Show
the profit-maximizing number of workers hired.
$
___________________________________
0
Number of Workers
38
2. Would the demand for the following workers be relatively elastic or relatively inelastic? In
each case, explain why.
1. Free agent football players try to raise their salaries by switching teams.
Elastic or Inelastic? __________________________________
Why?____________________________________________________
2. The Presidents (CEOs) of corporations try to get raises in their own salaries.
Elastic or Inelastic?___________________________________
Why?____________________________________________________
3. Those who run cash registers at grocery stores try to get increases in their wages.
Elastic or Inelastic?___________________________________
Why?____________________________________________________
39
Economics 102
Name______________________
Class #24: In Class Assignment
One of the most significant social changes of the past 25 years has been the large increase
in the labor force participation rate of married women aged 25 to 25 with small children
(at least one child under six years old). Another significant social change has been the
large increase in the labor force participation rate of students, age 14 to 22.
Form into groups of three or four people. Review the concepts of "substitution effect"
and "income effect". Then, as a group, use these concepts to try to think of as many
reasons as you can for these changes in labor force participation rates. Try to think of at
least three reasons:
1.
2.
3.
4.
5.
40
Economics 102
Name_________________________
Class 26 In Class Assignment
1. Now that the main points concerning the determination of wages have been discussed, you
will be put into groups. One set of groups will discuss the following question: on average, why
are male workers paid higher wages than female workers? The second set of groups will discuss
the following question: why has the wage gap between male workers and female workers
narrowed considerable over the past 20 years?
2. Discuss the following: If a household had an annual income of each of the following, would
you consider the household “rich”?
$1,000,000
_____
$ 500,000
_____
$ 250,000
_____
$ 125,000
_____
$ 100,000
_____
$ 75,000
_____
$ 50,000
_____
3. If you have not examined the data in the chapter, consider the following questions:
1. How much income did a household need in 2005 to be in the 80th percentile (80% of
American households would have less income while 20% would have more income)?
___________________
2. How much income did a household need in 2005 to be in the 95th percentile (95% of
American households would have less income while 5% would have more income)?
___________________
3. Using your answer to question 1, what percent of American households would
your group consider “rich”? _______________
4. Based on your best guess as to your own family’s income in 2005, approximately what
percentile in the income distribution did your family fall? Do this for each person in the group.
___________________
41
Economics 102
Name_________________________
Class 26 In Class Assignment
Form into groups of 3 or 4 people. Consider the following proposition: taxes should be raised on
the richer people, with the money given as transfers to the poorer people, so as to make the
distribution of income as equal as it was in 1967.
Your group will be assigned to argue either for or against this proposition. Name as many
arguments as you can for the position you are assigned.
1.
2.
3.
4.
2. In 1997, the poverty rate for the United States was 13.3%. But the poverty rate for
California was 16.8%. Based on what you know about the causes of poverty and the
type of people likely to be poor, what hypotheses can your group develop to explain
why the poverty rate is higher in California?
3. Assume that you are a major policy maker in the United States. Your goal is to devise
policies to greatly reduce the incidence of poverty in the United States. What policies would
you recommend? Why?
42
Economics 102
Name_________________________
Chapter 29
In Class Assignment
In Chapter 29, it was assumed that there were only two countries and two products. The cost of
making a product in each country (that is, the amount of labor time) was given by the following:
In Vineland
Labor Hours Required:
1 Bottle of Wine
1 Kilogram of Cheese
In Cheeseheadland
15 hours
10 hours
10 hours
4 hours
1. First, in the space below, draw the production possibilities curve for Vineland, assuming that
there are 30 million hours of labor time available per year. Remember that the production
possibilities curve shows all possible combinations of goods that can be produced. If all of the
hours are devoted to wine, Vineland can produce _____ bottles of wine. If all of the hours are
devoted to cheese, Vineland can produce _____ kilograms of cheese. If 15 million hours were
devoted to wine and 15 million hours to cheese, Vineland can produce ____ bottles of wine and
____ kilograms of cheese. Show these on the graph below. Show the production possibilities
curve as a solid line.
Quantity of Wine
0
Quantity of Cheese
2. Second, in Vineland, each hour devoted to producing wine requires the sacrifice of ___
kilograms of cheese. This is the opportunity cost.
In Cheeseheadland, each hour devoted to wine requires the sacrifice of ___ kilograms of
cheese. This is the opportunity cost.
Vineland has the absolute advantage in ______________. Cheeseheadland has the absolute
advantage in _______________. (Choose wine, cheese, both, or neither).
Page 2
Vineland has the comparative advantage in ______________. Cheeseheadland has the
comparative advantage in _______________. (Choose wine, cheese, both, or neither).
43
Vineland should export __________________ goods and it should import ________________
goods.
1. Third, imagine that Vineland specializes completely in wine. All 30 million hours were used
to produce wine. Vineland then trades 1 million bottles of wine to Cheeseheadland. In return,
it gets back _____ kilograms of cheese from Cheeseheadland.
Is Rest of the World better-off with trade? Why? _____________________________
_____________________________________________________________________
2. Finally, show the production possibilities curve with trade on the graph on page 1. Show
the new production possibilities curve as a dashed line.
3. The North American Free Trade Agreement (NAFTA) was described in the chapter. It created
a Free Trade Area between the United States, Canada, and Mexico. Assume now, that there is a
proposal to extend the Agreement to become the American Free Trade Agreement (AFTA). This
means that there would be a Free Trade Area covering all of the Americas --- North America,
Central America, and South America.
Form into groups of four people. You are to debate whether the American Free Trade Agreement
should be passed. Half of the groups will be assigned to debate in favor of an American Free
Trade Agreement. The other half of the groups will be assigned to debate against an American
Free Trade Agreement.
Write down your arguments in the space below. Come up with as many as your group can. After
you have discussed this in your group, the entire class will debate the proposition that an
American Free Trade Agreement should be passed.