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  Introduction to Microeconomics ECON 101 Online ECON 101 Online Assignment Answers This document articulates answers to questions in the Assignment. Problem 1: ANSWER a) The person with a comparative advantage in producing wakeboards is the person who has the lower opportunity cost of producing a wakeboard. Roland ’s production possibilities show that to produce 5 more wakeboards he must produce 10 fewer water skis. So Roland ’s oppo rtunity cost of producing a wakeboard is 2 water skis. Amy ’s production possibilities s how that to produce 10 more wakeboards, she must produce 5 fewer water skis. So Amy ’s oppo rtunity cost of producing a wakeboard is 1/2 a water ski.  Amy has a comparative advantage in producing wakeboards because her opportunity cost of  producing a wakeboard is less than Roland  ’s.   The person with a comparative advantage in producing water skis is the person who has the lower opportunity cost of producing a water ski. Roland ’s production possibilities show that to produce 10 more water skis he must produce 5 fewer wakeboards. So Roland ’s oppo rtunity cost of producing a water ski is 1/2 wakeboards. Amy ’s production possibilities s how that to produce 5 more water skis, she must produce 10 fewer wakeboards. So Amy ’s oppo rtunity cost of producing a water ski is 2 wakeboards. Roland has a comparative advantage in producing water skis because his opportunity cost of  producing a water ski is less than Amy  ’s.   b) Amy has a comparative advantage in producing wakeboards, so she specializes in wakeboards. Roland has a comparative advantage in producing water skis, so he specializes in producing water skis. Amy produces 20 wakeboards and Roland produces 50 water skis. Before specializing, th ey produced 15 wakeboards (Amy’s 10 plus Roland’s 5) and 45 water skis (Roland’s 40 plus Amy’s 5). By specializing, they increase their total output by 5 wakeboards and 5 water skis. They can share this gain by trading 1 water ski for 1 wakeboard. Amy can get water skis from Roland for less than it costs her to produce them. Roland can buy wakeboards from Amy for less than it costs him to produce them. Both Amy and Roland achieve gains from specialization and trade.  Introduction to Microeconomics ECON 101 Online Problem 2: ANSWER a) The Law of Supply states that “other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied. Any example can be given, as long as the explanation shows the relationship between quantity supplied and price. b) i.   This is an example of a change in supply. The weather is a factor that has changed for the worse and caused the supply curve to shift to the left. ii.   This is an example of a change in supply. The price of leather, which is an input to the production of leather shoes (hence, a factor of production) has changed, which resulted in change in supply. Normally, if the price of a factor of production rises, the supply curve would shift left and result in a decrease of production. Problem 3: ANSWER a) Good F becomes more fashionable and popular The demand curve will shift RIGHTWARD. Equilibrium price increases Equilibrium quantity increases. b) The price of good G, a substitute for good F, goes down The demand curve will shift LEFTWARD. Equilibrium price decreases Equilibrium quantity decreases. c) Consumers anticipate declining prices for good F The demand curve will shift LEFTWARD. Equilibrium price decreases Equilibrium quantity decreases. d) There is a surge in the population that uses good F The demand curve will shift RIGHTWARD. Equilibrium price increases Equilibrium quantity increases.  Introduction to Microeconomics ECON 101 Online e) Income falls for a large subset of consumers who buy good F. The demand curve will shift LEFTWARD. Equilibrium price decreases Equilibrium quantity decreases. f) The cost of widgets (an input used to produce good F) increases. The supply curve will shift LEFTWARD. Equilibrium price increases Equilibrium quantity decreases. Problem 4: ANSWER Equilibrium occurs when supply equals demand. We set the given demand and supply equation equal to each other and solve for Q. (demand) 200  –  5Q = 110 + 10Q (supply). Add 5Q to both sides and subtract 110 from both sides to get: 90 = 15Q Divide both sides by 15 to get: Q = 90/15 = 6 Therefore, the equilibrium quantity is 6. To find the equilibrium price, substitute Q into either the supply or demand equation and solve for P. P = 200  –  5(6) = 200 - 30 = 170 (using the demand equation). P = 110 + 10(6) = 110 + 60 = 170 (using the supply equation). Therefore, the equilibrium price is $170.   Problem 5: ANSWER a) The price elasticity of demand for pancakes is -1.83 . The price elasticity of demand is the percentage change in the quantity demanded of the good divided by the percentage change in the price of the good. So the price elasticity of demand equals -22 percent divided by 12 percent, which is -1.83 ( demand elastic ). b) The cross elasticity of demand between pancakes and waffles is 1.17 . The cross elasticity of demand is the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. So the cross elasticity of demand is the percentage change in the quantity demanded of waffles divided by the percentage change in the price of pancakes. The cross elasticity equals 14 percent divided by 12 percent, which is 1.17 ( substitutes ).  Introduction to Microeconomics ECON 101 Online Problem 6: ANSWER a) False. As the prices of apples fall, the quantity demanded for apples increases. This is a movement along a given demand curv e. When we say “demand for apples increases”, that means a rightward shift of the demand curve occurred, caused by anything other than the price of apples. b) True. If apples are considered a normal good, then demand will fall. If apples are considered an inferior good, then demand will increase. c) False. On a given demand curve, the number of buyers is fixed. d) True. When more suppliers enter into a market, the supply curve shifts rightward. Problem 7: ANSWER At 30 cents apiece, Mrs. Brown sells 100 candies per week. If she drops her price by 5 cents, her weekly sales will increase to 110 candies per week. Is the demand for candies elastic or inelastic? Prove your answer by calculating the elasticity of demand and confirm the result by using the total revenue test  –  show all your work. First, use the formula for elasticity of demand, which equates to: Ed = (Δ in quantity demanded)/(average quantity demanded)   (Δ  in price)/(average price) Let’s look at the numerator of the formula first The change in quantity demanded was 100 to 110 candies per week 110-100= 10 But, we need to look at the change in quantity as a change in the average quantity, so we need to calculate the average change in quantity equals (100+110)/2=105. So, the resulting value for the numerator equates to (Δ in quantity demanded)/(average quantity demanded) = (110-100)/((100+110)/2) = 10/105 = 0.0952 Now let’s look at denominator of the formula The change in price was 30 to 25 cents per candy -> 25-30= -5 But, we need to look at the change in price as a change in the average price, so we need to calculate the average change in price equals (30+25)/2=27.5 So, the resulting value equates to (Δ  in price)/(average price) = (25-30)/((30+25)/2) = -5/27.5 = -0.1818
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