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HW01-EC11-Solution

HW01-EC11-Solution - Economics11 CaltechSpring2010...

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Economics 11 Caltech Spring 2010 Problem Set 1 Answer Key Prepared by Esther Wang
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Definitions Please explain each term in three lines or less! Opportunity cost The value of the best forgone alternative Ceteris paribus Other things equal Homo economicus Entirely selfish Demand Demand is the relationship between the quantity of a good and the price at which the consumer is willing to pay to obtain it. Supply Supply is the relationship between the quantity of a good and the price at which the producer is willing to pay to manufacture it. Equilibrium Equilibrium is the price and quantity of a good at which the exchange between producers and consumers can persist. Demand elasticity The percentage decrease in quantity that result from a small percentage increase in price Supply elasticity The percentage increase in quantity that result from a small percentage increase in price Word problems Please explain each question in a few sentences. Answers may vary. Opportunity cost o What is the U.S. government’s opportunity cost of providing universal health care? The 940 billion can be spent on perhaps an alternative way of improving the current health care system without providing universal health care, maybe an entirely different way of spending the money—increased funding at higher education institutions, cancer research… o What is your opportunity cost of attending Ec 11 lectures? Taking a nap, watching TV, doing physics homework… o What is the opportunity cost of getting a puppy? The cost of getting a puppy not only includes the price you pay for the puppy but also includes the vet, food costs and the time you spend on the puppy. Instead, you could spend your time and money on buying new games, leveling up your characters… Complements & substitutes o What happens to the demand for 1% milk when the price of 2% milk increases?
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