Ch 2 homework

Suppose Cho is currently using combination D, producing one tea towel per day. Her opportunity cost of producing a second tea towel per day is _______ per day.

2 cutting boards

Suppose Ginny earns $500 per week working as a cook for Wingies. She uses $9 to take a spin class at Silver's Gym. Silver's Gym pays Eric $325 per week to work as a trainer. Eric uses $225 to purchase chicken wings from Wingies. Identify whether each of the following events in this scenario occurs in the factor market or the product market. Event 1. Ginny spends $9 to take a spin class 2. Eric earns $325 per week working for Silver's Gym 3. Eric spends $225 to purchase chicken wings from Wingies

1. product market 2. factor market 3. product market Explanation: In this scenario, households sell factors of production in factor markets when Ginny supplies her labor to Wingies and when Eric supplies his labor to Silver's Gym. Moreover, a firm sells goods and services to a household in product markets when Silver's Gym provides the spin class to Ginny and Wingies provides the chicken wings to Eric.

Now, suppose Cho is currently using combination C, producing two tea towels per day. Her opportunity cost of producing a third tea towel per day is_______ per day.

5 cutting boards

3. Efficiency in the production possibilities model Suppose the fictional country of Patagonia produces only two goods: rye and axles. The following graph plots Patagonia's current production possibilities frontier, and includes six different output combinations given by black points (plus symbols) labeled A to F. Complete the following table by indicating whether each point represents output combinations that are inefficient, efficient, or unattainable. Check all that apply.

A & B are unattainable C & D are inefficient E& F are efficient Explanation: Every output combination on the production possibilities frontier shows an efficient output combination for Patagonia. The points on the production possibilities frontier represent all combinations of output produced using all of the nation's available resources and its current technology, such that the nation cannot produce more of one good without producing less of the other. Points located inside the production possibilities frontier, such as D and C, represent inefficient output combinations. At these points, it is possible to increase the production of both goods because some resources are unemployed. For example, point D is inefficient because it is possible for Patagonia to produce at point E instead, where the economy is producing both more rye and more axles. Points located on the production possibilities frontier, such as F and E, represent efficient output combinations. At these points, it is impossible to increase the production of one good without producing less of the other. For instance, if Patagonia is currently producing at point E and decides that it wants to produce more rye, it must produce fewer axles. Points located outside the production possibilities frontier, such as B and A, represent output combinations that are unattainable, given current resources and technology. Recall that each point on the production possibilities frontier shows the maximum quantity of rye Patagonia can produce if it also wants to produce the given quantity of axles. For example, compare point E (41 million axles and 41 million bushels of rye) with point A (41 million axles and 75 million bushels of rye). Because point E is on Patagonia's production possibilities frontier, you can see that if Patagonia is producing 41 million axles, it can produce at most 41 million bushels of rye. Therefore, point A must be unattainable, given current resources and technology.

4. Shifts in production possibilities Suppose the fictional country of Katmai produces two types of goods: agricultural and capital. The following diagram shows its current production possibilities frontier for rice, an agricultural good, and axles, a capital good. Drag the production possibilities frontier (PPF) on the graph to show the effects of a breakout of avian flu that sickens millions of workers. Note: Select either end of the curve on the graph to make the endpoints appear. Then drag one or both endpoints to the desired position. Points will snap into position, so if you try to move a point and it snaps back to its original position, just drag it a little farther.

Because of the flu epidemic, less labor is available for the production of both rice and axles. For instance, when you look at the vertical axis, you see that if Katmai produces zero bushels of rice, it can initially produce a maximum of 210,000 axles per year. Because the flu epidemic decreases the number of axles Katmai can produce, you should have moved the point to 140,000 axles per year. Similarly, when you look at the horizontal axis, you see that if Katmai produces zero axles, it can initially produce a maximum of 120 million bushels of rice per year. Because the flu epidemic decreases the amount of rice Katmai can produce, you should have moved the point to 80 million bushels of rice per year.

5. Opportunity cost and production possibilities Cho is a talented artist who sells hand-crafted goods on her website. Cho currently crafts and sells both tea towels and cutting boards. She spends 8 hours a day working on crafts. The following table gives different daily output scenarios depending on how much of her time is spent on each good. On the following graph, use the blue points (circle symbol) to plot Cho's initial production possibilities frontier (PPF). Suppose Cho buys a new tool that enables her to produce twice as many tea towels per hour as before, but it doesn't affect her ability to produce cutting boards. Use the green points (triangle symbol) to plot her new PPF on the previous graph.

Blue graph points (0,16), (1,15),(2,13),(3,8),(4,0) Green graph points (0,16),(2,15),(4,13),(6,8),(8,0) The new tool causes Cho's PPF to pivot to the right. In other words, for each point on her PPF, the vertical coordinate is the same as before, but the horizontal coordinate is twice its initial value. For example, under combination D, Cho spends 2 hours producing tea towels and 6 hours producing cutting boards. Before she bought the new tool, she could have produced one tea towel and 15 cutting boards, so (1, 15) was a point on her initial PPF. With the new tool, the same allocation of time results in two tea towels and 15 cutting boards, so (2, 15) is a point on her new PPF. Notice that one point is the same on the initial PPF and the new PPF. Because the new tool helps Cho make only tea towels, the tool does not change her output when she spends all of her time making cutting boards. This occurs at output combination E.

7. Normative and positive statements The following table presents statements analyzing policies regarding taxes.

Classify each of the listed statements as either positive or normative.

positive statement

one that seeks to describe the world as it is. statements can always be supported or refuted by data

6. Microeconomics and macroeconomics

Determine whether each of the following topics would more likely be studied in microeconomics or macroeconomics.

Which of the elements of this scenario represent a flow from a household to a firm? This could be a flow of dollars, inputs, or outputs. Check all that apply. Ginny's labor The $225 Eric spends to purchase chicken wings from Wingies The $325 per week Eric earns working for Silver's Gym The spin class Ginny receives

Ginny's labor The $225 Eric spends to purchase chicken wings from Wingies explanation: When Ginny (a household) supplies her labor to any firm, labor is an input (a factor of production) that flows from a household to a firm. When the spin class is provided to Ginny (a household), the spin class is an output that flows from a firm to a household. Silver's Gym (a firm) pays Eric (a household) $325 for his labor. Therefore, the $325 is a payment that flows from a firm to a household. Eric (a household) pays Wingies (a firm) $225 for chicken wings. Therefore, the $225 is a payment that flows from a household to a firm.

From the previous analysis, you can determine that as Cho increases her production of tea towels, her opportunity cost of producing one more tea towel______

Increases

The effects of government tax policy on long-term economic growth

Macroeconomics

The effect of government regulation on a monopolist's production decisions

Microeconomics

The effects of advertising on the pricing of used cars

Microeconomics

Companies that outsource jobs are acting immorally.

Normative

The U.S. government should institute higher tariffs on imports.

Normative

In some circumstances, if taxes are lowered, government revenues actually increase.

Normative statement

It is immoral for a government to redistribute money from one person to another.

Normative statement

If the U.S. government were to institute higher tariffs on imports, companies would stop outsourcing jobs.

Positive

In the past decade, U.S. companies have outsourced millions of jobs overseas.

Positive

Taxes are too high.

Positive statement

When the government increases taxes, rates of tax evasion increase.

Positive statement

Despite their differences, with which proposition are two economists chosen at random most likely to agree? Rent ceilings reduce the quantity and quality of available housing. Immigrants receive more in government benefits than they contribute in taxes. Having a single income tax rate would improve economic performance.

Rent ceilings reduce the quantity and quality of available housing. Explanation: While many economic questions are open to debate, the field is largely in agreement on some points. For example, two economists chosen at random are most likely to agree that rent ceilings reduce the quantity and quality of available housing. Indeed, one survey that 93% of economists agree with this proposition. It would be harder to find two randomly chosen economists who both agree with either of the other propositions.

8. Agreement and disagreement among economists

Suppose that Yakov, an economist from a college in Pennsylvania, and Ana, another economist from a graduate program in the Northeast, are both guests on a popular science podcast. The host of the podcast is facilitating their debate over health insurance. The following dialogue represents a portion of the transcript of their discussion:

Explanation for the above three questions

When using combination D, Cho is producing one tea towel and 15 cutting boards per day. Producing a second tea towel per day would require her to move to combination C, reducing her production of cutting boards to 13 per day. Since this change involves producing 2 fewer cutting boards per day (15−13=215−13=2), the opportunity cost of producing the second tea towel per day is 2 cutting boards per day. Similarly, using combination C, Cho is producing two tea towels and 13 cutting boards per day. Producing a third tea towel per day would require her to move to combination B, reducing her production of cutting boards to 8 per day. Since this change involves producing 5 fewer cutting boards per day (13−8=513−8=5), the opportunity cost of producing the third tea towel per day is 5 cutting boards per day. Cho's opportunity cost of producing the second tea towel per day is 2 cutting boards per day while the opportunity cost of producing the third tea towel per day is 5 cutting boards per day. Hence, as Cho increases her production of tea towels, her opportunity cost of producing more tea towels increases. This change is an example of the law of increasing opportunity costs.

1. Economic models The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the associated flow of inputs and outputs. Which of the following statements regarding this economic model are true?

While simple, the circular-flow diagram can still be useful for the purposes of modeling how dollars and resources move throughout an economy. Explanation: Scientists of all types make assumptions in their models to simplify the complex world they are trying to describe. These simplifying assumptions allow scientists to focus on only the most important and generalizable components of the topic of study. Economists also make simplifying assumptions to focus on only the most important and generalizable aspects of the economy. Economies typically consist of millions of individuals interacting in many different ways, and no model can include every detail of a system as complex as an economy. To make sense of all of the different aspects of an economy, economists must make simplifying assumptions and generalizations in order to focus on only the most important economic ideas. By grouping all individuals into households and firms and all markets into markets for goods and services and markets for factors of production, economists can model how dollars and resources flow back and forth among agents in the economy. The simplicity of the model allows those without formal backgrounds in economics to understand, at a high level, the economic activities that take place in an economy.`

Ana: A popular topic for debate among politicians as well as economists is the idea of providing government assistance for health benefits. Yakov: I think it is oppressive for the government to tax people who take care of themselves in order to pay for health insurance for those who are obese. Ana: I disagree. I think government funding of health insurance is useful to ensure basic fairness. The disagreement between these economists is most likely due to

differences in values explanation: There are two main reasons that economists tend to disagree: differences in values and differences in scientific judgments. In this case, the economists disagree due to differences in values because they disagree about a normative issue: the extent of the moral obligation that one human or citizen has to another. In contrast, differences in scientific judgments are due to differing opinions about factual matters, e.g., the relative merits of competing theories or the values of economic parameters.

2. The circular-flow model The following diagram presents a circular-flow model of a simple economy. The outer set of arrows (shown in green) shows the flow of dollars, and the inner set of arrows (shown in red) shows the corresponding flow of inputs and outputs. Based on this model, households earn income when______ purchase _______ in factor markets.

firms, factors explanation: In the circular-flow model of an economy, households own all the factors of production. Households earn their income when firms purchase or rent these factors of production to use them to produce goods and services. Firms, in turn, earn revenue when households buy goods and services.

Because she can now make more tea towels per hour, Cho's opportunity cost of producing cutting boards is______ than it was previously.

higher

Macroeconomics

is the study of factors that affect the entire economy. Therefore, macroeconomists tend to create models to analyze how aggregate phenomena such as growth, inflation, and unemployment respond to policy decisions of governments and central banks, changes in aggregate spending or savings, and supply or demand shocks.

Microeconomics

is the study of how prices and quantities are determined through interactions between buyers and sellers (individuals and firms) in individual markets. Therefore, microeconomists are more likely to create models to analyze the decisions of firms (such as pricing) and those of consumers (such as shopping choices), as well as how government policies affect those decisions.

normative statement

one that offers an opinion as to the way the world should be. statements require a larger philosophical framework to evaluate.