Principles
Economics Macroeconomic 1101
Spring 2010
Homework Set 1: Solutions
Name: TUiD:
Section 1: Denition type questions. Each denition is worth 2 points. Section 2: Short answer questions. Each question is worth 20 points. Section 3: Graphical questions. Each question is worth 8 points. Plot by hand using pencil.
1
Denitions
The denition questions are straight from the text. The only thing you will be graded over is whether you have put in the main point(s) across. In case you have any specic questions about this section let me know. 1. Economics: 2. Scarcity: 3. Microeconomics: 4. Macroeconomics: 5. Positive Economics: 6. Normative Economics: 7. Marginal Cost: 8. Marginal Benet: 9. Opportunity Cost: 10. Equilibrium:
2
Short Answer Questions
1. Social Security: The Social Security Administration (SSA) imposes a penalty on early withdrawl. This forces a lot of people to postpone their retirement. Why does the SSA impose a penalty on early withdrwal and why do people respond by postponing retirement? There is no right answer to this: give me your best guess based on what you know about economics! The Social Security Administration was set up in the wake of the Great Depression in the 1930s, with the hope of providing a safety net for people when they got older. The government promised a certain minimum level of payment once the person retired. Everything was ne till we saw the prospects of a major problem: the amount of funds falling short of the promised payouts. It has not happened yet, but we are getting close unless something is done about it. There are multiple reasons for this happening, the most important one being the size of the population. The number of people entitled to social security benets has been rising, and will rise exponentially in the near future as the baby-boomers start retiring, but the size of work force supporting this size of retiries has not been rising in the same proportion. People are also living longer, and are therefore entitled to a larger net amount of payouts. The only ways to deal with the problem are: lower benets, or raise taxes! Neither of these moves will be popular, and hence SSA has been trying to coerce people into delaying their retirements.
1
2. Markets: Lady Luck smiles on you one ne day and you end up getting $10 million to spend the way you want to. You decide to invest the money in such a way as to get a steady stream of income in the future. You do some research and come up with the following options on what can be done with the money: (a) Set up an ice-skating rink in Dubai: This will be a risky investment. One, the weather of Dubai will not permit an external rink, and maintaining an internal rink is a costly proposition. Two, not many people are familiar with the game, and hence it will be dicult to get a sustained ow of customers. Given these two reasons it will be dicult, if not impossible, to the sustain business with nothing else to back it up with. (b) Buy a plot on the moon: Sounds fun! But, what will you do with that plot? Humans are not moving to the moon in the foreseeable future, and in such a case the plot will be worthless, unless you are a philanthrop, and the only thing you are concerned with is helping some scientic body get some much needed funds. From a purely business perspective, it is not a good investment. (c) Buy a small airplane and run taxi service using the plane: This might work if you can nd a pair of small airports that serve some major business metros. You can buy a used Cessna Citation for about $3 million and can start operating the business with that: risky but possible. If you can nd the right place the business might pay o. (d) Set up a bus service between Philadelphia and Washington: This is probably the most lucrative business. If you go to any bus service provider you will probably end up nding a bus to New York every 20-30 minutes, but there are very few services to Washington DC. A shuttle service between the two can be started with lower costs, and can end up capturing a market that is currently dominated by Amtrak. (e) Set up an endowed chair in a subject of your choice at Temple: Philanthropic, but not productive in business terms. You might become known if you name the Chair with your own name, but beyond that it will not provide you with anything else!
3
Graphical Problems
Consider the following table: Y A B C D E 0 10 20 30 40 X1 40 30 20 10 0 X2 0 10 20 30 40
Table 1: Hypothetical Market
2
1. Plot the two series, X1 and X2, and nd the equilibrium. This will involve two lines, one for X1 and the other for X2. The values of X along the horizontal axis, and Y on the vertical. The equilibrium will be the point where the two intersect and is given by X1 = X2 = 20 for Y = 20. We will talk about the graph in the class. 2. Suppose X1 goes up by 10 for each value of Y. Plot the new graph for X1 and nd the new equilibrium. The new table will be:
Y A B C D E 0 10 20 30 40
X1 50 40 30 20 10
X2 0 10 20 30 40
The new equilibrium will be X1 = X2 = 25 for Y = 25. 3. Suppose X2 goes up by 10 for each value of Y. Plot the new graph for X2 and nd the new equilibrium. The new table is given by:
Y A B C D E 0 10 20 30 40
X1 40 30 20 10 0
X2 10 20 30 40 50
The new equilibrium is X1 = X2 = 25, for Y = 15. 4. Suppose X1 and X2 both go up by 10 for each value of Y. Plot the new graphs for X1 and X2 and nd the new equilibrium. The new table is:
3
Y A B C D E 0 10 20 30 40
X1 50 40 30 20 10
X2 10 20 30 40 50
The new equilibrium is X1 = X2 = 30, for Y = 20. 5. Suppose X1 goes up by 10 and X2 falls by 10 for each value of Y. Plot the new graphs for X1 and X2 and nd the new equilibrium. The new table is:
Y A B C D E 0 10 20 30 40
X1 50 40 30 20 10
X2 -10 0 10 20 30
The new equilibrium is X1 = X2 = 20, for Y = 30.
4