Microeconomics final
What effect would a rule stating that university students must live in university dormitories have on the price elasticity of demand for dormitory space? What impact might this in turn have on room rates?
A rule stating that university students must live in university dorms would cause dormitory space and room rates to have a relatively inelastic demand. This is because consumers will not be highly responsive to price changes, since they will be obligated to pay for the rooms in order to attend the university.
Agree or disagree: A country's currency will appreciate if its inflation rate is less than that of the rest of the world.
Agree. If a country's inflation rate is lower than rates in other countries, then the purchasing of foreign goods will increase exports and the supply of foreign currency. This will cause the country's currency to appreciate.
Agree or disagree: A nation whose interest rate is rising more rapidly than interest rates in other nations can expect the international value of its currency to appreciate.
Agree. If a country's interest rates are increasing more quickly than those in other countries, foreign financial investment will also increase, causing a rise in the supply of foreign currency and appreciation in the country's currency.
Agree or disagree: A country that grows faster than its major trading partners can expect the international value of its currency to depreciate.
Agree. If a nation is growing economically faster than its trading partners, then its imports will rise more than its exports. Therefore, the demand for foreign currency by its citizens will increase more than the supply of foreign currency. This will cause the value of foreign currency to appreciate and the nation's currency to depreciate.
Explain why the choice between 1, 2, 3, 4, 5, 6, 7, and 8 "units," or 1,000, 2,000, 3,000, 4,000, 5,000, 6,000, 7,000 and 8,000 movie tickets, makes no difference in determining elasticity
Either choice makes no difference in determining elasticity because they both represent perfectly inelastic demand. This means that a price change will result in no change in the quantity demanded.
"No firm is completely sheltered from rivals; all firms compete for consumer dollars. If that is so, then pure monopoly does not exist." Do you agree? Explain. How might you use Chapter 6's concept of cross elasticity of demand to judge whether a monopoly exists?
I do not agree because I believe that pure monopoly does exist. An example of a pure monopoly would be Jersey Central Power and Light because they are the only electrical utility company that caters to this part of the state, and therefore, is a single seller with no competitors. A monopoly would be considered to have a zero cross elasticity because they sell independent goods that cannot be substituted and can rarely be affected by complementary goods.
Quantitatively, how important is international trade to the United States relative to the importance of trade to other nations? What country is the United States' most important trading partner, quantitatively? With what country does the United States have the largest trade deficit?
International trade is important because our economy, like all other foreign economies, need foreign resources that our own country does not produce. However, international trade in the United States is especially important because we lead the world in the combined volume of exports and imports, as measured in dollars. Quantitively, Canada is the United States' most important trading partner. The United States also has the largest trade deficit with China.
Distinguish among land, labor, and capital-intensive goods, citing an example of each without resorting to book examples. How do these distinctions relate to international trade?
Land intensive goods are those that require a vast amount of land and can be inexpensively produced. An example of a land intensive good would be wheat because it requires much open land to produce, it is very cost effective. Labor intensive goods are those that require abundant and inexpensive labor. An example of this would be textile factories in China because they produce a lot of product for a limited amount of money. Capital intensive goods are those that much capital in order to be produced. An example of a capital intensive good is the production of automobiles because they require much machinery and equipment to produce. These relate to international trade because other foreign nations may have the resources to produce certain products that others do not have access to and can only gain them through trade.
How does monopolistic competition differ from pure competition in its basic characteristics? From pure monopoly? Explain fully what product differentiation may involve. Explain how the entry of firms into its industry affects the demand curve facing a monopolistic competitor and how that, in turn, affects its economic profit.
Monopolistic competition is characterized by a relatively large number of sellers, differentiated products, and easy entry and exit of the industry. Meanwhile, pure competition is when there is a standardized product instead of differentiated products. Lastly, pure monopoly is when there is one sole producer in the industry with no competitors. Product differentiation is when monopolistically competitive firms turn out variations of a particular product. Entry in monopolistically competitive industries shows that the demand curve is highly, but not perfectly, elastic. A monopolistic competitive firm's individual price of elasticity of demand depends on the number of rivals and degree of product differentiation and will therefore, affect their economic profit.
Explain: "The United States can make certain toys with greater productive efficiency than can China. Yet we import these toys from China." Relate your answer to the ideas of Adam Smith and David Ricardo.
The United States imports toys from China because Adam Smith used the concept of absolute advantage to state that nations would be better off if each specialized in a product in which it was the most efficient producer. David Ricardo took this a step further by stating that comparative advantage if more efficient because then the product can be produced at the lowest possible opportunity cost and nations can then trade with each other for these products.
Research has found that an increase in the price of beer would reduce the amount of marijuana consumed. Is cross elasticity of demand between the two products positive or negative? Are these products substitutes or complements? What might be the logic behind this relationship?
The cross elasticity between the two products is negative and they are complementary goods. Since beer and marijuana go together, or complement each other, an increase in the price of one decreases the demand for the other.
How does the demand curve faced by a purely monopolistic seller differ from that confronting a purely competitive firm? Why does it differ? Of what significance is the difference? Why is the pure monopolist's demand curve not perfectly inelastic?
The demand curve faced by a purely monopolistic seller is elastic and downward sloping because it shows the demand of the overall industry since they are the sole producer. The demand curve of a purely competitive firm is perfectly elastic because it shows that the firm is a price taker since there are no barriers to entry. The pure monopolist's demand curve is not perfectly inelastic because they can sell all that they wish, but only at an equilibrium price.
Explain the law of demand. Why does a demand curve slope downward? How is a market demand curve derived from individual demand curves?
The law of demand states that as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. The demand curve slopes downward because it depicts the inverse relationship between price and quantity demanded. By adding the quantities demanded by all consumers at each of the various possible prices, then a market demand curve can be derived from individual demand curves.
Explain the law of supply. Why does the supply curve slope upward? How is the market supply curve derived from the supply curves of individual producers?
The law of supply states that as price rises, the quantity supplied rises, and as price falls, the quantity supplied falls. The supply curve slopes upward because it is depicting the positive or direct relationship between price and quantity supplied. The market supply curve is derived from the supply curves of individual producers by summing the quantities supplied by each producer at each price.
Discuss the major barriers to entry into an industry. Explain how each barrier can foster either monopoly or oligopoly. Which barriers, if any, do you feel give rise to monopoly that is socially justifiable?
The major barriers to entry include economies of scale, patents and licenses, control of essential resources, and pricing and other strategic barriers. Economies of scale happens when only a single, large firm can achieve low average total costs due to their wide range of outputs. Patents and licenses are legal barriers to entry that are awarded by the government. Control of essential resources can foster a monopoly because then they can prohibit the entry of other firms since they own the resources needed to profit. Lastly, monopolies can use strategies such as pricing and advertising to make their firm more appealing to customers and therefore, block others from entering. I believe that all these barriers are socially justifiable because the monopoly earned their right to be the sole producer of the product.
For each stock in the stock market, the number of shares sold daily equals the number of shares purchased. That is, the quantity of each firm's shares demanded equals the quantity supplied. So, if this equality always occurs, why do the prices of stock shares ever change?
The stock market is an example of equilibrium price and quantity. The prices of stocks change because competition among buyers and sellers will disturb the equilibrium and cause a shift in the demand or supply curves.
Suppose that a Swiss watchmaker imports watch components from Sweden and exports watches to the United States. Also suppose the dollar depreciates, and the Swedish krona appreciates, relative to the Swiss franc. Speculate as to how each would hurt the Swiss watchmaker.
The watchmaker will be hurt by the appreciation of the Swedish krona because that means he will now get less krona for his francs. The watchmaker must now pay more franc just to get the same amount of krona as before. Thus, this hurts the watchmaker because it increases the cost he has to spend to get parts. The depreciation of the dollar will also hurt the watchmaker because now when he converts his dollars to francs, he will be receiving less money since the dollar is now worth less than it was before.
"Monopolistic competition is monopolistic up to the point at which consumers become willing to buy close-substitute products and competitive beyond that point." Explain.
This statement recognizes that products of monopolistically competitive firms may be preferred by consumers, which gives them monopoly power. However, consumers will also seek substitutes if the price is too high, which also makes them competitive.
