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Unformatted text preview: Econ 1014 Principles of Microeconomics Summer 2012 Homework 1 (10 points) 6‘ 5, 7L Due on Jun 13 in class I Name: Olivia Ma Student #: 14098299 Instructions: Any late homework after the class will not be accepted. The pages must be stapled together. 1 extra credit may be rewarded to students who clearly type their homework. I point may be deducted for poor handwriting. Illegible answers will earn no points. Part A: Multiple Choice Questions. (0.5 point each) 4 5 Circle the correct the answer. If you type your response, then type the answer before each question. For example, C 1. . Which of the following phrases best captures the notion of efficiency? a. absolute fairness b. equal distribution c. minimum waste (1. equitable outcome A filrniture maker currently produces 100 tables per week and sells them for a profit. She is considering expanding her operation in order to make more tables. Should she expand? a. Yes, because making tables is profitable. b. No, because she may not be able to sell the additional tables. 0. It depends on the marginal cost of producing more tables and the marginal revenue she will earn from selling more tables. d. It depends on the average cost of producing more tables and the average revenue she will earn from selling more tables. . One reason we need government, even in a market economy, is that a. there is insufficient market power in the absence of government. b. property rights are too strong in the absence of government. c. the invisible hand is not perfect (1. Both a and b are correct. . Economists make use of assumptions, some of which are unrealistic, for the purpose of a. teaching economics to people who have never before studied economics. b. advancing their political agendas. c. developing models when the scientific method cannot be used. d. focusing their thinking. Econ 1014 Principles of Microeconomics Summer 2012 Just like models constructed in other areas of science, economic models a. incorporate assumptions that contradict reality. b. incorporate all details of the real world. c. complicate reality. (1 avoid the use of diagrams and equations. In the markets for the factors of production in the circular-flow diagram, at households are sellers and firms are buyers. b. households are buyers and firms are sellers. c. households and firms are both buyers. (1. households and firms are both sellers. In the circular-flow diagram, which of the following items flows from firms to households through the markets for the factors of production? a. goods and services b. land, labor, and capital c. dollars spent on goods and services d. wages, rent, and profit Which of the following statements best captures the relationship between microeconomics and macroeconomics? a. For the most part, microeeonomists are unconcerned with macroeconomics, and macroeconomists are unconcerned with microeconomics. b. Microeconomists study markets for small products, whereas macroeconomists study markets for large products. c. Microeconomics and macroeconomics are distinct from one another, yet they are closely related. (1 Microeconomics is oriented toward policy studies, whereas macroeconomics is oriented toward theoretical studies. One way to characterize the difference between positive statements and normative statements is as follows: a. Positive statements tend to reflect optimism about the economy and its flit-arc, whereas normative statements tend to reflect pessimism about the economy and its future. b. Positive statements ofi'er descriptions of the way things are, whereas normative statements offer opinions on how things ought to be. c. Positive statements involve advice on policy matters, whereas normative statements are supported by scientific theory and observation. (1. Economists outside of government tend to make normative statements, whereas Government-employed economists tend to make positive 3 atemonts. i4 Econ 1014 Principles of Microeconomics Summer 2012 10. Which of the following is an example of a normative statement? 10 a. If the price of a product decreases, people’s willingness to buy that product will increase. b. Reducing tax rates on the wealthy would benefit the nation. c. Ifthc national saving rate were to increase, so would the rate of economic growth. d. All of the above are correct. Part B: Short Answers. (5 points total) 2 Please write your answer clearly in the spaces provided below You are thinking accepting an unpaid summer internship in New York City. Another alternative for you is to work during the summer in your hometown. For you decision-making analysis you have come up with the following information: Summer job in your hometown pays $8,000 for the entire summer. If you work in summer you can eat with you parents for free. Unpaid internship in New York will increase your lifetime earnings by $9,000. You expect to derive an enjoyment worth of $2,000 while living in New York. It will cost you $400 in airfare to get to New York from your hometown. V‘VVVVV You will need to spend $900 on food while in New York the entire summer. a. In a table below please summarize all the relevant private expected marginal costs and benefits of the unpaid summer internship. Hint: Every term in the following table should have a specific monetary value. For example, you may want to write “Airfare $400” under Private expected marginal costs. Frigate expected marginal costs . Private expected marginal benefits Enjoyment $2,000 Summer Job Income $8,000 Airfare $400 Unpaid lnternship $9,000 Food $900 Total: 5%0 1 Total: 517% b. Based on the table above, what would be a rational decision? Please briefly explain how you derived this conclusion. The rational decision would be to go to the unpaid internship in New York rather than staying home and working at the summer job because the estimated surplus was $13,700. Econ 1014 Principles of Microeconomics Summer 2012 c. Now suppose it’s the end of the summer and you evaluate your decision. It turned out that surmner job in your hometown was paying $10,000 for the summer and you didn’t enjoy your time in New York that much; you derived only $1,000 worth of enjoyment. Did you make a good decision? Why? Use the similar cost-benefit analysis as in part a). If you didn’t, then was it rational? Why? Again, please label all the monetary values. Enjoyment $1,000 Summer Job Income $10,000 - Airfare $4.00 . Unpaid internship $9,000 Food $900 Total: $2,30>< Total: $19,00C>< I I think I made a good decision to travel to New York to do the unpaid internship since the estimated surplus was $16,700. Since the surplus was positive it turned out to be a good decision after all. (1. Now suppose that participating in summer unpaid internship makes you more educated, productive and active member of society. Because of this, society will benefit $2,000 over your lifetime. Use the table below to summarize social marginal benefit and costs of your decision. Based on the table below, what is the best decision for society and why? Again, please label all the monetary values in the table. Social actual marginal costs Social actual marginal benefits ' Enjoyment $1,000 i SummerJob Income $10,000 Airfare $400 Unpaid Internship $9,000 Food $900 More educated $2,000 Total: $2,300 Total: $21,%) The best decision for the society is to benefit you the $2,000 because of the estimated surplus that turned out to be $18,700. Since this was a positive number, therefore the tern ont wontd have a pesitive effect instead “-f a negative. Econ 1014 Principles of Microeconomics Summer 2012 6. Suppose you knew in advance at the beginning of the summer actual marginal costs and benefits of your decision. In this case, you would have not accepted the internship in New York. What should the government do so that your private and social interests align, ‘ u.- n A L 1‘ ..¢£ . ' , n '5 an ‘1. re. 6fi€Gm are you to we Wuat s best ier socrety? Be as preeise ab possrbje. The government should compensate the $2,000 difference between the social and private marginal cost and benefit. This should be done by offering the private marginal and cost the benefit of being mere educate-d if were to align ‘ -e secial and private interest. ...
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