Unformatted text preview: Steven Singer Dr. Conlon AP Economics/Period 6 6 September 2016 Summer Assignment 1a. The marginal opportunity cost of producing the second unit of butter is 10 units of guns. 1b. The total opportunity cost of producing the second unit of butter is 18 units of guns. 1c. The marginal opportunity cost of producing the third unit of butter is 12 units of guns. 1d. The total opportunity cost of producing the third unit of butter is 30 units of guns. 2a. 2b. The opportunity cost of producing the first unit of airplanes is 2 units of grain. The marginal opportunity cost of producing the fourth unit of airplanes is 8 units of grain. 3. In the production possibilities curve, an increase in government spending on national defense will come at the expense of government spending on social programs. If the government feels that national defense spending is a better use of its money, then they will have to give up opportunities to use its budget on social programs. Conversely, if the government decides to spend money on social programs, then there will have to be cuts in national defense (assuming that there is a fixed budget). Moving in either direction on the production possibilities curve involves trading off one expenditure for another. 4. The law of increasing opportunity cost states that as the production of a good increases, the opportunity cost of producing an additional unit rises. The economic rationale behind this is that economic resources are not completely adaptable to alternative uses. Many resources or economies are better at producing one type of good than at producing others. 5. The production possibilities curve illustrates the concept of increasing opportunity costs through its changing slope which causes the curve to cave in toward the origin. When society produces more and more of one product, it must give up increasing amounts of alternative products (or the opportunity cost increases) as well as the fact that resources are specialized are the reasons why the shape occurs. If the opportunity costs were constant, or if resources were being used equally efficiently in production, then the production possibilities curve would cease to be a curve. It would be a straight line graph showing alternative production possibilities. 6. The most valued or “optimal point” on the production possibilities curve is where MB=MC or when the marginal benefit is equal to the marginal cost. Any economic activity is increased when the marginal benefit exceeds the marginal cost. Conversely, any economic activity is decreased when the marginal cost exceeds the marginal benefit. Thus, if resources are allocated properly, the optimal point can be reached where the marginal benefit is equal to the marginal cost. 7a. 7b. The marginal opportunity cost of producing the first unit of paper is 3 units of corn. The marginal opportunity cost of producing the fourth unit of paper is 12 units of corn. 8. Marginal cost is the cost added by producing by producing one extra item of a product. Marginal benefit is the additional satisfaction or utility that a person receives from consuming an additional unit of a good or service. In the given graph, 1 million units of computers represents a situation when the marginal benefit outweighs the marginal cost. In this situation, the marginal cost is $4 and the marginal benefit is $12. There is an underallocation of resources to computer production, thus it is the economy’s natural inclination to start to allocate more resources to computer production. If the economy produced 1 million more units (2 million units total), according to the graph, then the economy has reached its optimal point. The marginal cost and the marginal benefit both equal $8. The economy has the optimal allocation of resources for the production of computers, by allocating more resources, the economy can run into trouble. For example, if the economy produces 3 million units of computers total, then the marginal cost would outweigh the marginal benefit. In the graph given, the marginal cost would be $12 while the marginal benefit would only be $4. There is an overallocation of resources. The natural inclination of the economy would be to allocate less resources to computer production so that it could reach the optimal point. 9. Economists state that investment is spending on “goods for the future”. What this means is that consumption is spending on goods and services for the present. The resources that are not used for consumption can be devoted to goods or services that can be used in future production. For example, investment in education, machinery, factories, equipment, and tools are types of spending that will be used in expanding production of consumer goods and services in the future. Thus, there is a clear distinction between consumption, in which consumers spend on instant goods, and investment, in which consumers spend for goods or services that they will receive in the future. 10. The production possibilities curve suggests that a nation cannot live beyond its means or production potential. However, when international trade is introduced into this conversation, the above statement can be modified. An economy can circumvent the output limits imposed by its domestic production possibilities curve through international specialization, directing domestic resources to output that a nation is highly efficient at producing, and international trade, the exchange of these goods for goods produced by other countries. Specialization and trade allow a nation to get more of a desired good at less sacrifice of another good. Specialization and trade both have the same effects, an increase in capital and consumer goods in society, as having more and better resources or discovering improved production techniques. Thus, a nation can live beyond its means or production of potential when the international community and international trade come into play. 11. 12a. As the population becomes more educated over time,—the number of high school dropouts falls and the number of college graduates rises—the production possibilities curve will shift outward. More educated people will likely result in better work skills. Better work skills translates into a rise in productivity and thus a rise in total national output and in the amount of production possibilities. 12b. If the unemployment rate declined from 7.3 to 4.5 percent of the labor force, then the production possibilities curve would shift outward. Because there is now a larger workforce, we can assume that there will be a rise in total national output. If the total national output increases, then so do the amount of production possibilities. 12c. If businesses and government are unable to solve a major computer problem,—which reduces economic efficiency and national output—then the production possibilities curve would shift inward. Since the national output decreased and there is no chance for there to be any technological innovation, the curve can only move inward and the amount of production possibilities can only decrease. 12d. Advances in telecommunications and new technology significantly contribute to economic growth over time. The result will be an outward shift in the production possibilities. New technology makes the economy more efficient and makes the economy grow. Economy growth and efficiency lead to an increase in the total national output. An increase in the total national output leads to the increase in production possibilities and, thus, a shift outward. 12e. If Congress and the President decide to allocate more resources to national defense, then the production possibilities will shift inward. Since more money is being allocated to national defense then more money is being taken away from economicallybenefitting areas like education and technology. With a lesser focus on education and technology, there will be a smaller national output and, thus, a smaller amount of production possibilities. 12f. If a nation participates in increased international trade with other nations of the world, then the production possibilities will shift outward. Typically, a country is limited to the combinations of output indicated by its production possibilities curve. However, because of international specialization and trade, there is an expansion of domestic production possibilities when international trade comes into play. 13a. The slope of the line (in simplest form) would be 3 dollars consumed for every 4 dollars received, or to give just a plain numerical value, it would be ¾ or 0.75. The slope is calculated by the vertical change (Y) divided by the horizontal change (X). From one point to another, the vertical change is $15,000 and the horizontal change is $20,000, so $15,000/$20,000=0.75. 13b. The slope of this line reflects marginal changes because it shows that for every $15,000 consumed, there is a marginal or extra gain of $20,000. So a change of $1 in income correlates to a marginal change of $0.75 in consumption. 14. If Product A lies on the vertical axis, Product B lies on the horizontal axis, and a vertical line parallel to the vertical axis represents their relationship, then it shows that the two products are unrelated. The slope of the line would be undefined because there is no clear relationship between the quantities of Product A and Product B. 15. The five fundamental questions an economy must answer are (1) What goods and services will be produced? (2) How will the goods and services be produced? (3) Who will get the goods and services? (4) How will the system accommodate change? (5) How will the system promote progress? 16a. Output Product A Product B Product C Profit A Profit B Profit C 5 $3.00 $15.00 $35.00 (+)$5.00 ()$55.00 ()$25.00 10 2.00 12.00 20.00 +10.00 10.00 0.00 15 1.25 9.00 10.00 +8.75 +5.00 50.00 16b. The firm will choose Product A because it maximizes profit and production at $10 for 10 units. 17a. The most efficient method is Method #1. All of the methods will result in a loss of money, so the goal now is to minimize the firm’s losses. Method #1 costs $31 to produce and when it yields $30 worth of X, the loss will onlybe $1. In Method #2, the loss will be $2 and in Method #3, the loss would be $7. Therefore, Method #1 would be the best option because it minimizes the firm’s losses. 17b. Yes, the overall cost of this new method is $30. The net result after production will result in a $0 loss. 17c. The firm would choose Method #3. This is the new best option because it results in the largest net gain. If the price of capital falls to $1, then the cost of production for Method #3 would be $20. After production and the yielding of X, the overall result would be a net gain of $10. Method #1 has a net gain of $5 and Method #2 has a net gain of $1. Therefore, Method #3 would be the new best option because it maximizes the firm’s gains. 18. Consumer sovereignty is the consumer’s direction of production through their dollar votes. At many big companies, such as McDonald’s, you will see it in play through their constant adding and removing of products. For example, McDonald’s 1962 Hulaburger was a huge miss when it came to appealing to McDonald’s consumers. As a result, it was taken off the menu. This shows how influential consumer sovereignty can be in that because the product didn’t sell, it was taken off the menu. On the other hand, when McDonald’s introduced their Big Mac in 1968, it was a huge success. Consumers responded well to it and you can still get a Big Mac if you go to a McDonald’s today. This shows consumer sovereignty at work in that, when the Big Mac was introduced, people responded well to it and the company kept the product in their restaurants accordingly. 19. The demand for a resource is “derived” from the goods and services that the resource is used to produce. One example of this is if there is a demand for lumber because there is a demand for furniture or houses. Another possible example of this is if there is a demand for wheat because there is a demand for bread. A third possible example of this is if there is a demand for sheep because there is a demand for wool clothing. 20. Competition forces firms to use the leastcost, most efficient, productive techniques because each firm wants to maximize profits as much as it can. If an individual firm decides not to use the leastcost production technique, then it will be forced to raise its own prices for the sake of profitability. When production costs less, firms can lower their prices so that more consumers will buy their product and, as a result, make more of a profit. 21. The guiding function of prices is the ability of price changes to alter the quantities of products and resources demanded and supplied. Prices guide almost everything in an economics system. In general, prices guide supply, demand, and the whole market. Prices guide demand in that lower prices usually increase the consumer demands. Prices guide supply in that higher prices will cause producers to be more willing to produce large numbers of the good. Overall, prices are one of the main guiding forces of our economy. 22. In the circular flow model, we see that businesses and households (people) interact on a constant basis through two markets: the resource market and the product market. In the resource market, households sell resources while businesses buy them. Households own all economic resources either directly or indirectly through the ownership of business corporations. As a result, they sell their resources to businesses which buy them because they are necessary for producing goods and services. In the product market, goods and services are produced by businesses are bought and sold by households. Households use the limited income they have received from the sale of resources to buy goods and services created by the businesses. The relationship between businesses and households is circular because they constantly buy and sell to each other. Businesses buy resources and sell products while households buy products and sell resources. 23a. Goods and services 23b. Consumption expenditures 23c. Revenue 23d. Costs 23e. Money income (i.e. wages, rents, interest, profits) 23f. Resources (i.e. Labor, land, capital, entrepreneurial ability) 23g. Resource markets 23h. Product markets 24a. iPods are considered a luxury good and the income for an 1825 year old increased. There is a direct correlation between income and demand, thus, there will be an increase in demand with the increase of income. The demand curve will shift to the right from the original. 24b. More protection of copyrights and the shutting down of illegal sites will result in a decreased demand for iPods because the consumer will be expected to buy songs in addition to the cost of the iPod. The demand curve will shift to the left. 24c. If Apple decided to raise its iPod prices, even if they think they have the control of the market, the demand will decrease. If they raised their prices, then people would either buy an offbrand MP3 player or just find another way to listen to music. The demand curve will shift to the left. 24d. The price of movie tickets decreasing will have no effect on the demand curve for iPods because movie tickets are an independent good in relation to iPods. The demand curve will not shift. 25. The law of supply is the principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for a price decrease. One reason why this occurs is because of profit motive. Businesses are looking to make money. If a good a certain business produces is successful, they will increase the price of the product and with it the amount of goods produced. On the other hand, if a certain business launches a good that does poorly, then the price of that good will decrease and with it the amount of goods produced. Similarly, the law of demand is the principle that, other things equal, an increase in the price of a product will decrease the quantity of it demanded, and conversely for a decrease in price. One reason why this occurs is because of the income effect. When the price of a good falls, the consumer’s purchasing power increases. This increase in real income induces the consumer to buy more of that good. Thus, the laws of supply and demand are effective in showing the trends of people and businesses in a market economy. 26. (1) Resource prices, (2) technology, (3) taxes and subsidies, (4) prices of other goods, (5) producer expectations, and (6) the number of sellers in the market. 27. If the U.S. Congress enacted an excise tax of $1 on cigarettes, the demand of cigarettes would decrease and the supply would decrease. There would be more people that are not willing and able to buy the newly priced cigarettes, and a result, the amount of people wanting cigarettes decrease. In the meantime, cigarette companies, anticipating the decreased demand, would produce less so that they can minimize their losses and not overproduce. And if the tax bill was enacted, it would be likely that the price of cigarettes would increase beyond the $1 excise tax to make up for any revenue losses and, at the same time, the quantity consumed would decrease because of smaller group of willing and able consumers. 28. The change in supply means that there is a change in the schedule or shifting of the curve as a whole. The change in quantity supplied means that there is a change in movement from one point on the curve to another. 29. Title: Quantity vs. Price 29a. 25,000 bushels of oats at $1.20 29b. See graph. Peq represents the equilibrium price and Qeq represents the equilibrium quantity. 29c. There would be a surplus of 20,000 bushels of oats. 29d. See graph. 30. P Q (a) Increase in demand, supply constant Increase (+) Decrease () (b) Increase in supply, demand constant Decrease () Increase (+) (c) Decrease in demand, supply constant Decrease () Increase (+) (d) Decrease in supply, demand constant Increase (+) Decrease () 31a. Demand for blue jeans has decreased, therefore, the equilibrium price and equilibrium quantity have decreased. The determinant of demand was consumer taste. 31b. Supply for computers has increased, therefore, the equilibrium price has decreased and the equilibrium quantity has increased. The determinant of supply was technology. 31c. Supply of lettuce has decreased, therefore, the equilibrium price has increased and the equilibrium quantity has decreased. The determinant of supply was the number of sellers (there were less after El Niño). 31d. Demand of chicken has increased due to the rising of beef prices from the decrease in beef supply. Therefore, the equilibrium price and the equilibrium quantity have increased. The determinant of supply was the prices of other goods (in this case it was beef). 32. P Q (a) Increase in demand, increase in supply Indeterminate (?) Increase (+) (b) Increase in demand, decrease in supply Increase (+) Indeterminate (?) (c) Decrease in demand, decrease in supply Indeterminate (?) Decrease () (d) Decrease in demand, increase in supply Decrease () Indeterminate (?) 33. A price ceiling is a government imposed price limit that sets the maximum legal price a seller may charge for a certain product or service. They are meant to make a product more affordable and more attainable for lower income people. Price ceilings, because they essentially lowers prices for that good across all markets, cause an increase in demand and decrease in supply. Because of this, it usually gets to a point where supplies are scarce and there are shortages so the government needs to do something about it. What the government usually does is set a ration so that each person gets the same amount of the product. However, rationing leads to several problems in that it can create black markets, cause counterfeiting of gov...
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