Download principles of microeconomics

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?
B.
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.
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.
20pts./100pts.
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.