1. The following table provides the quantity of fish and coconuts that each indi
ID: 1250426 • Letter: 1
Question
1. The following table provides the quantity of fish and coconuts that each individual can catch or gather in one hour.Coconuts Fish
Adam 6 2
Friday 6 4
a. Who has the absolute advantage in catching fish?
b. What is Friday’s opportunity cost of gathering one coconut?
c. Who has the comparative advantage in catching fish?
2. Classify each statement as either a normative economic statement or a positive economic statement.
a. As a person consumes more and more of a good, marginal utility declines.
b. The United States has the best health care system in the world.
3. Consider the market for the Apple iPod, a normal good, for the month of September. Record in the following table how the following event would affect the market for an iPod. Use the words increase, decrease, unchanged, and uncertain.
Event Supply Demand Equilibrium Price Equilibrium Quantity
There is a
technological
advance in the
manufacture
of an iPod
4. You own an electronics company that supplies to local businesses. In a typical month you sell 200 Dell laptops and 200 HP laptops. HP estimates the price elasticity of demand for their laptops to be -1.5. Dell estimates that the cross-price elasticity of demand between their laptop computers and HP laptops is 0.80 (Monday’s lecture will help you answer this part of the question). This month HP lowered the price of their computers by 5 percent. Based on this information, what would expect to happen to your sales of HP and Dell computers? (State whether this change is an increase or decrease and give the percentage change.)
HP _____________ of ______________%
Dell ______________ of ____________%
Given your answers above, estimate the number of HP and Dell computers you will sell this month.
HP:_______________ Dell:_____________________
Representative multiple choice questions. Circle the best response for the question. Make sure your answer is clearly indicated.
5. If there is a surplus of a product, its price:
a. is in equilibrium.
b. is below the equilibrium level.
c. will rise in the near future.
d. is above the equilibrium level.
6. Suppose that steak and potatoes are complements. Then, other things being equal, an increase in the supply of steak will lower its price and:
a. increase the demand for potatoes and increase the price of potatoes.
b. increase the demand for potatoes and decrease the price of potatoes.
c. decrease the demand for potatoes and increase the price of potatoes.
d. decrease the demand for potatoes and decrease the price of potatoes
Explanation / Answer
1.a) Absolute advantage refers to one individuals ability to produce more of a good or a service than another individual using the same amount of resources. In this question, the good or service would be catching fish, and the amount of resources would be the one hour of labor. Whichever individual Adam or Friday can catch the most fish in that one hour has the absolute advantage 1.b) Opportunity cost is the cost of a foregone activity, in this question it would be how many fish Friday gives up if s/he instead gathers one coconut. If Friday could get 4 fish for the same amount of labor as 6 coconuts, the ratio of 4:6 or 2:3 represents the opportunity cost of fish in terms of coconuts 1.c) Comparative advantage refers to the different opportunity costs of production between two parties. Using the same procedure described in 1.b (except for fish in terms of coconuts) find the opportunity cost for each individual's production of fish, whoever has the lower opportunity cost will have the comparative advantage. 2. A postive economic statement is merely descriptive of a phenomena focusing on cause and effect relationships where as a normative economic statement creates a value judgement. Is statement A describing a causal relationship between two variables? Is there a value judgement being made about whether or not this relationship is a good thing? Does statement B seem to describe a causal relationship, or is it imposing a set of values on something? 3. Technology is one of the determinants of supply. An advance in the production technology would cause the marginal cost of production to decrease. Since firms will produce additional output as long as the marginal cost is less than the price they will receive, how would a lower marginal cost than before be expected to affect supply? The determinants of demand include: income, tastes and preferences, prices of related goods and services, buyer expectations about future prices, and the number of buyers. Does the technological advance change any of these variables? (ceteris paribus the answer is probably no). If not draw a supply and demand curve with a stable demand and a shift in supply as developed above (increase or decrease). Use this diagram to see what happens to the price and equilibrium quantity 4. The price elasticity of demand relates a % change in price to a %change in quantity demanded: price elasticity of demand = %change in Q/%change in P. Set up the equation: -1.5 (ped for HP) = %change in Q/-5% (the % change in price). Solve for the % change in quantity, paying attention to the signs. Similarly cross-elasticity relates the change in price of one good to the change in demand for another: cross elasticity of demand(A,B) = %change in quantity of A/%change in price of B. Set up the equation: 0.8(Ced Dell,HP) = %change in quantity Dell/-5% (change in price of HP). Solve for the % change in quantity of Dell. After you have determined the %change in quantities for both Dell and HP, determining the number of computers sold is simple as multiplying that %change by the number sold last month. 5. A surplus means that the quantity supplied is greater than the quantity demanded. Remembering that at equilibrium price and quantities, the supply and demands will be equal, draw a S&D graph where the quantity supplied at a given price is above what is demanded. This should make the answer clear. 6. The demand for complementary goods move in the same direction. What happens to the demand for a good (steak) when the price decreases? The same thing will happen to the demand for the complementary good (potatoes). Since other things are equal, the supply of potatoes will not change, what happens to the price of potatoes when the demand increases at a given supply? Use S&D graph to help visualize this.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.