Econ HW1

3) Economists use the word equality to describe a situation in which a. each member of society has the same income. b. each member of society has access to abundant quantities of goods and services, regardless of his or her income. c. society is getting the maximum benefits from its scarce resources. d. society's resources are used efficiently.

a. each member of society has the same income.

8) The price of diamonds is high, in part because the majority of the world's diamonds are controlled by a single firm. This is an example of a. a market failure caused by an externality. b. a market failure caused by market power. c. a market failure caused by equality. d. There is no market failure in this case.

b. a market failure caused by market power.

10) Suppose a typical worker in India can produce 32 units of product in an eight-hour day, while a typical worker in Bangladesh can produce 30 units of product in a 10-hour day. We can conclude that a. worker productivity in Bangladesh is higher than in India. b. the standard of living will likely be higher in India than in Bangladesh. c. productivity is 4 units per hour for the worker in Bangladesh and 3 units per hour for the worker in India. d. there will be no difference between the standard of living in India and Bangladesh.

b. the standard of living will likely be higher in India than in Bangladesh.

13) A firm can hire any number L of workers at a wage w per worker. To start hiring there is a lump sum cost F no matter how many workers the firm hires. Output is given by L0.5 and the price of output is one. What relation should w and F satisfy to make production worthy? (Hint: First obtain optimal hiring as in slide 31 lecture 1 assuming the firm decides to produce, then consider the decision of producing). a. 4w - F < 0. b. 4w - F > 0. c. 1/(4w) - F > 0. d. w < 1. F is irrelevant for the production decision since it is a sunk cost.

c. 1/(4w) - F > 0 Use the hint and suppose for the moment that the firm decides to hire (produce). The cost F is irrelevant for the hiring decision since, conditional on the decision of producing, it has to be paid regardless of how many workers are hired, that is, the cost F is sunk. Now we have marginal value of extra labor = 0.5 L 0.5 - 1 marginal cost of extra labor = w If marginal value of extra labor > marginal cost of extra labor then it is optimal for the firm to increase labor marginally (the value from a extra unit of labor is greater than the cost of the extra unit of labor); if marginal value of extra labor < marginal cost of extra labor then it is optimal for the firm to decrease labor marginally. Therefore, the optimal hiring L is given by marginal value of extra labor = marginal cost of extra labor solving for labor we have L = 1 / (4 w2 ). Now that we have the optimal hiring decision we can analyze the decision to start hiring. Notice that F should be taken into account here. We compare the profits from producing versus not doing so, that is profits from producing = L0.5 - wL - F = (1 / (4 w2 ))0.5 - w / (4 w2 ) - F = 1/(4w) - F profits from not producing = 0 Therefore, the condition to produce is 1/(4w) - F > 0.

12) A worker in Vietnam can earn $6 per day making cotton cloth on a hand loom. A worker in the United States can earn $85 per day making cotton cloth with a mechanical loom. What is the likely explanation for the difference in wages? a. U.S. textile workers belong to a union, whereas Vietnamese textile workers do not belong to a union. b. There is little demand for cotton cloth in Vietnam and great demand in the U.S. c. Labor is more productive making cotton cloth with a mechanical loom than with a hand loom. d. Vietnam has a low-wage policy to make its textile industry more competitive in world markets.

c. Labor is more productive making cotton cloth with a mechanical loom than with a hand loom.

6) When the "invisible hand" guides economic activity, prices of products reflect a. only the values that society places on those products. b. only the costs to society of producing those products. c. both the values that society places on those products and the costs to society of producing those products. d. none of the above; when the "invisible hand" guides economic activity, prices of products are set by the government in a manner that is thought to be "fair."

c. both the values that society places on those products and the costs to society of producing those products

7) To say that government intervenes in the economy to promote efficiency is to say that government is attempting to a. create a more fair distribution of income. b. change the way in which the economic pie is divided. c. enlarge the economic pie. d. All of the above are correct.

c. enlarge the economic pie.

2) While pollution regulations yield the benefit of a cleaner environment and the improved health that comes with it, the regulations come at the cost of reducing the incomes of the regulated firm's owners, workers, and customers. This statement illustrates the principle that a. trade can make everyone better off. b. rational people think at the margin. c. people face tradeoffs. d. people respond to incentives.

c. people face tradeoffs.

4) Melody decides to spend three hours working overtime rather than going to the park with her friends. She earns $20 per hour for overtime work. Her opportunity cost of working is a. the $60 she earns working. b. the $60 minus the enjoyment she would have received from going to the park. c. the enjoyment she would have received had she gone to the park. d. nothing, since she would have received less than $60 worth of enjoyment from going to the park.

c. the enjoyment she would have received had she gone to the park.

Which of the following statements best represents the principle represented by the adage. "There is no such a thing as free lunch"? a. Michelle can attend the concert only if she takes her sister with her. b. Michael is hungry and homeless. c. Andrea must repair the tire on her bike before she can ride it to class. d. Dani must decide between going to Florida or Brazil for spring break

d. Dani must decide between going to Florida or Brazil for spring break

5) Which of the following statements best characterizes a basic difference between market economies and centrally- planned economies? a. Society relies more upon prices to allocate resources when the economy is centrally-planned than when it is market-based. b. The self-interest of households is reflected more fully in the outcome of a centrally-planned economy than in the outcome of a market economy. c. Government plays a larger role in the economic affairs of a market economy than in the economic affairs of a centrally-planned economy. d. None of the above are correct.

d. None of the above are correct.

11) In a particular country in 1998, the average worker needed to work 25 hours to produce 40 units of output. In that same country in 2008, the average worker needed to work 40 hours to produce 68 units of output. In that country, the productivity of the average worker a. decreased by 1.7 percent between 1998 and 2008. b. remained unchanged between 1998 and 2008. c. increased by 4.75 percent between 1998 and 2008. d. increased by 6.25 percent between 1998 and 2008.

d. increased by 6.25 percent between 1998 and 2008. 1998- 1.6 --> 2008- 1.7

9) The historical rise in living standards of American workers is primarily a result of a. the influence of labor unions in America. b. tariff protection imposed by the American government. c. the enactment of minimum-wage laws in America. d. the rise in American productivity

d. the rise in American productivity.