Chapter%203%20Practice%20A%20-%20Answers

Chapter%203%20Practice%20A%20-%20Answers - Chapter 3...

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Chapter 3 Practice A - Answers 1. We tend to overlook the fact that the price of a good is meaningless without the prices of other goods to which we can compare it. For example, if you hear that a jacket bought in Japan costs 10,000 yen, you may think that it’s a pretty expensive jacket. But it really only costs about $111 in U.S. dollars. Prices only have meaning when they can be compared to the prices of other available goods. The price you see on a price tag is really giving you information as to how many dollars worth of other stuff you have to forgo to purchase the good. This idea has real significance when we look at spending patterns across time or across economies. Americans spend different proportions of their income on food, shelter, entertainment, transportation, etc., largely because of relative price changes over time. Also, people in different countries have different spending patterns because the relative prices of goods are different in different countries. Now the question: The French produce both high and low quality wine. Shipping a bottle of wine to the U.S. costs, say, on average $3 per bottle. Assume the price of a high quality bottle of wine in France is 10 francs, while one of poor quality is 5 francs. A high quality bottle of French wine in the U.S. costs $12 plus $3 for shipping, while a poor quality bottle costs $6 plus $3 for shipping. In which country will people drink, on average, higher quality French wine? Due to the shipping costs ($3), the absolute price of both high and low quality wine will rise by the same amount (from $12 to $15 and from $6 to $9) in the U.S. However, the relative price of high quality wine to low quality wine will fall from 12/6 = 2 to 15/9 = 1.67. Since people in the U.S. have to give up less low quality wine for a bottle
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This note was uploaded on 03/14/2012 for the course ECON 2243 taught by Professor Henryfors during the Spring '12 term at Abant İzzet Baysal University.

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Chapter%203%20Practice%20A%20-%20Answers - Chapter 3...

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