PS1_Sol - ECO1011B Basic Microeconomics 2008 Fall by Travis...

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ECO1011B - Basic Microeconomics 2008 Fall by Travis Ng Problem Set 1 Suggested Solution Due Date: Sep 25, 2008 before 1pm General Instruction: If your answer involves drawing graphs, you have to clearly label the curves and the variables involved. Clearly specify their units of measure. Total: 85 points 1. [5 points] The video, The power of market, illustrates ways how the market impersonally and indirectly coordinates people who may not know one another even though they are all pursuing their own self-interest. The result, as Milton Friedman argues, is that the whole society benefits. Given that market is so powerful, why are most transactions we do daily not market exchange? Ans: We do not attach prices to most transactions we make each day. For example, if you work for your boss, you are selling him a bundle of rights, enabling him to assign you to do certain tasks in a certain period of time with a certain level of quality in return for a pay. The tasks that he assigns you do not usually come with prices. What I want you to remember is that the market is powerful yet it is often not costless to use it. If there are other forms of transacting that is less costly, these forms of transaction tend to substitute the use of market. You may name a few costs concerning the use of market. 2. [6 points] Name two examples of each of the following? a. Goods provided by firms in decentralized markets. b. Goods provided centrally by the Hong Kong government. c. Goods provided by both the Hong Kong government and decentralized firms. Ans: (a) computer mouse, or watches, (b) a local university full-time degree program, hiking trails, etc, and (c) cross-harbour tunnels, a night of enjoyment at the Disneyland, bridges, a high school education for your brothers and sisters, health care, swimming pools, etc. 3. [4 points] Which of the following statements involves positive economic analysis and which normative? a. The Hong Kong government should stop narrowing the Victoria harbor. b. Sales and service tax will impede the growth of Hong Kong. c. Biking lowers the risk of chronic bronchitis. 1
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d. Biking is bad for George W. Bush. Ans: You need to explain why. (a) normative, (b) positive, (c) positive, (d) normative. 4. [8 points] Draw 2 diagrams to show that: a. the more inelastic the demand curve, the larger the change in price and the smaller the change in the transacted amount when the supply curve shifts down. b.
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PS1_Sol - ECO1011B Basic Microeconomics 2008 Fall by Travis...

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