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CHAPTER 1 2 3 CHAPTER 1 1 In each of the following situations, identify which of the twelve principles is at work a You choose to shop at the local discount store rather than paying a higher price for.

CHAPTER 1-2-3

CHAPTER 1

1) In each of the following situations, identify which of the twelve principles is at work

a You choose to shop at the local discount store rather than paying a higher price for the

same merchandise at the local department store – principle number 4 and 2: because there are 2 options, hence, it would be principle number 2 In addition, because of the

“incentives – discount”

b On your spring break trip, your budget is limited to $35 a day - Principle number 1,

because tight budget creates choices for you in your trip

c The student union provides a website on which departing students can sell items such

as used books, appliances, and furniture rather than giving them away to their roommates

as they formerly did - Principle number 2 and 5, because selling items instead of giving

is opportunity cost, and reselling used items will help former students recover their capital and new students can buy items at a cheap price

d After a hurricane did extensive damage to homes on the island of St Crispin,

homeowners wanted to purchase many more building materials and hire many more workers than were available on the island As a result, prices for goods and services rose dramatically across the board - Principle number 1, 3 and 6 Firstly, Storm damage will cause a shortage of supplies On the other hand, homeowners wanting to hire more workers than on the island is considered a marginal decision Besides, an increase in demand after the storm will put pressure on supply and cause prices to increase

e You buy a used textbook from your roommate Your roommate uses the money to buy

songs from iTunes - Principle number 2 because you spend money to buy books, and your roommate uses the money from book sales to buy music instead of using that money for something else

f You decide how many cups of coffee to have when studying the night before an exam

by considering how much more work you can do by having another cup versus how jittery it will make you feel - Principle number 2 and 3, because drinking a cup of coffee

is the opportunity cost of staying awake, rather than feeling restless Besides, the number

of cups of coffee to drink is a marginal decision after considering the post-drinking benefits and costs

g There is limited lab space available to do the project required in Chemistry 101 The

lab supervisor assigns lab time to each student based on when that student is able to come - Principle number 1 and 7, because limited Lab space has created a scarcity compared to the needs of students Allocating reasonable time to students will make effective use of resources

h You realize that you can graduate a semester early by forgoing a semester of study

abroad - Principle number 2 because forgoing a semester of study abroad will be the opportunity cost for graduation early

i At the student union, there is a bulletin board on which people advertise used items for

sale, such as bicycles Once you have adjusted for differences in quality, all the bikes sell for about the same price - Principle number 4 and 6, because selling second hand makes

it cheaper and makes people feel like incentives Besides, selling bicycles at the same

price will help the market achieve equilibrium.

j You are better at performing lab experiments, and your lab partner is better at writing

lab reports So the two of you agree that you will do all the experiments, and she will write up all the reports - Principle number 5, because you can exchange on a mutually beneficial basis with your partner

k State governments mandate that it is illegal to drive without passing a driving exam –

Principle number 7, because the intervention of the main rights will help balance

society’s goals and economic

l Your parents’ after-tax income has increased because of a tax cut passed by Congress

They therefore increase your allowance, which you spend on a spring break vacation – Principle number 7, because parliamentary intervention has helped to solve income problems and increase social welfare, thereby leading to a balance between economic and social goals

2) Describe some of the opportunity costs when you decide to do the following

a Attend college instead of taking a job.

- The first opportunity cost of studying instead of working is the monthly income from work Next is the tuition fee, the cost of learning tools such as books, notebooks,

stationery

b Watch a movie instead of studying for an exam

- The opportunity cost in the situation of watching a movie instead of preparing for the exam is the amount of time you spend watching the movie, even the exam results

c Ride the bus instead of driving your car

- The opportunity cost of taking the bus instead of driving your own car is the time you spend waiting for the bus Besides, you may have to walk further to find a bus stop instead of parking at the parking lot

1) Liza needs to buy a textbook for the next economics class The price at the college bookstore is $65 One online site offers it for $55 and another site, for $57 All prices include sales tax The accompanying table indicates the typical shipping and handling charges for the textbook ordered online

a What is the opportunity cost of buying online instead of at the bookstore? Note that if

you buy the book online, you must wait to get it

- The opportunity cost of buying the book online instead of buying the book in the first place includes the cost of shipping the book and the time to wait for it Besides, buying books online will make customers lose the opportunity to experience the book in advance

(see carefully the content, table of contents, necessary information, )

b Show the relevant choices for this student What determines which of these options the

student will choose?

- Here are Liza's choices and the cost she has to pay:

o Buying books at bookstore will cost 65$

o Buying a book online at the site has a book price of $55 with standard shipping costing $55 + $3.99 = $58.99

o Buying books online at the website has a book price of $55 with a 2-day delivery time will cost $55 + $8.98 = $63.98

o Buying books online at the site has a book price of $55 with 1 day delivery will cost $55 + $13.98 = $68.98

o Buying a book online at the site has a book price of $58 with standard shipping costing $58 + $3.99 = $61.99

o Buying books online at the website has a book price of $58 with a 2-day delivery time will cost $58 + $8.98 = $66.98

o Buying books online at the site has a book price of $58 with 1 day delivery will cost $58 + $13.98 = $71.98

- The factors that influence Liza's decision to buy a book are first the price of the book, then the delivery cost (this doesn't exist if Liza buys the book at the store) and finally the time she spent waiting to own the book So, if Liza doesn't need the book urgently, she can choose to buy the book online at the website for $55 with standard delivery time, and vice versa, if she wants to receive the book immediately the wise choice is to buy the book at the store

CHAPTER 2

In the ancient country of Roma, only two goods, spaghetti and meatballs, are produced There are two tribes in Roma, the Tivoli and the Frivoli By

themselves, the Tivoli each month can produce either 30 pounds of spaghetti and no meatballs, or 50 pounds of meatballs and no spaghetti, or any

combination in between The Frivoli, by themselves, each month can produce

40 pounds of spaghetti and no meatballs, or 30 pounds of meatballs and no spaghetti, or any combination in between

a Assume that all production possibility frontiers are straight lines Draw one

diagram showing the monthly production possibility frontier for the Tivoli and another showing the monthly production possibility frontier for the Frivoli Show how you calculated them

The monthly production possibility frontier for the Tivoli Quantity of

spaghetti

30

0 50 Quantity of meatballs

By the way, Tivoli produces 30 pounds of spaghetti and 0 pounds of

meatballs, and if it produces 50 pounds of meatballs it will produce 0 pounds

of spaghetti Thus, the cost for Tivoli to produce 1 pound of spaghetti is 3/5

The monthly production possibility frontier for the Frivoli

Quantity of

spaghetti

40

0 30 Quantity of meatballs

By the way, Frivoli produces 40 pounds of spaghetti and 0 pounds of

meatballs, and if it produces 30 pounds of meatballs it will produce 0 pounds

of spaghetti Thus, the cost for Frivoli to produce 1 pound of spaghetti is 4/3

b Which tribe has the comparative advantage in spaghetti production? In

meatball production? In A.D 100 the Frivoli discover a new technique for making meatballs that doubles the quantity of meatballs they can produce each month

As we see from sentence A, Trivoli's opportunity cost of producing 1 pound of spaghetti is 3/5 pounds of meatballs Besides, Frivoli's opportunity cost of producing 1 pound of spaghetti is 4/3 of a pound of meatballs Thus, Trivoli should produce spaghetti because the opportunity cost is lower than Frivoli Likewise, Trivoli's opportunity cost of producing 1 pound of meatballs is 5/3 pounds of spaghetti, and Trivoli's opportunity cost of producing 1 pound of spaghetti is 3/4 of a pound of meatballs As such, Frivoli should produce meatballs because the opportunity cost is lower than Trivoli

c.Draw the new monthly production possibility frontier for the Frivoli.

The new monthly production possibility frontier for the Frivoli

Quantity of

spaghetti

40

0 30 60 Quantity of

meatballs

d.After the innovation, which tribe now has an absolute advantage in

producing meatballs? In producing spaghetti? Which has the comparative advantage in meatball production? In spaghetti production?

After the innovation, Frivoli had an absolute advantage in both meatball and spaghetti production because the tribe's opportunity costs of producing spaghetti and meatballs were 2/3 and 3/2 respectively

However, the opportunity cost for Trivoli to produce meatballs (3/5) is still lower than the opportunity cost for Frivoli to produce meatballs (3/5) and the opportunity cost for Frivoli to produce spaghetti (2/) 3) lower opportunity cost for Trivoli to produce spaghetti (5/3) Thus, Trivoli has a comparative

advantage in meatball production and Frivoli has a comparative advantage in spaghetti production

Drawing all the graphs to illustrate your answer

2) An economist might say that colleges and universities “produce”

education, using faculty members and students as inputs According to this line of reasoning, education is then “consumed” by households Construct a circular-flow diagram to represent the sector of the economy devoted to college education: colleges and universities represent firms, and households both consume education and provide faculty and students to universities What are the relevant markets in this diagram? What is being bought and sold in each direction? What would happen in the diagram if the government decided to subsidize 50% of all college students’ tuition?

Universities and colleges hire lecturers in the job market and sell knowledge

to students in the education market education market that provides

knowledge to households in return for tuition fees Finally, households will provide human resources (maybe good students, lecturers) for the job

market

If the government supports 50% of tuition fees for all students, it will lead to more students wanting to study, universities and colleges will attract more students From there, human resources in the education industry will receive higher salaries and more funding for scholarships for students

Household

Salaries Tuition

Student Knowledge

Education market

Jobs market

Teacher Knowledge

Salaries Tuition

Colleges and universities

Price of hamburgers

Quantity of hamburger

P1 P2

D1

D2

CHAPTER 3

Drawing all the graphs to illustrate your answer

1) In a supply and demand diagram, draw the shift of the demand curve for hamburgers in your hometown due to the following events In each case show the effect on equilibrium price and quantity

a The price of tacos increases.

The increase in the price of tacos (substitutes) has led to an increase in hamburger production This causes the demand curve to shift from left to right (D1 to D2)

b All hamburger sellers raise the price of their french fries.

An increase in the price of french fries (complementary product) causes the output of hamburgers to decrease This causes the demand curve to shift from right to left (D1 to D2)

Price of hamburgers

Quantity of hamburger

P2 P1

D1 D2

Price of hamburgers

Quantity of hamburger

P2 P1

D1 D2

c Income falls in town Assume that hamburgers are a normal good for most people.

The decrease in people's income causes the demand for burgers (normal goods) to decrease This causes the demand curve to shift from right to left (D1 to D2)

d Income falls in town Assume that hamburgers are an inferior good for most people.

The decrease in people's wages makes the demand for low-quality but cheap dishes (hamburgers) increase This causes the demand curve to shift from left to right (D1 to D2)

Price of hamburgers

Quantity of hamburger

P1 P2

D1

D2

Price of hamburgers

Quantity of hamburger

P2 P1

D1 D2

e Hot dog stands cut the price of hot dogs.

The reduction in prices helped increase the production of hot dogs (substitute food) which in turn reduced the output of hamburgers This causes the demand curve to shift from right to left (D1 to D2)

2) The market for many goods changes in predictable ways according to the time of year, in response to events such as holidays, vacation times, seasonal changes in production, and

so on Using supply and demand, explain the change in price in each of the following cases Note that supply and demand may shift simultaneously

a Lobster prices usually fall during the summer peak lobster harvest season, despite the

fact that people like to eat lobster during the summer more than at any other time of year Lobster harvest season will usually increase the quantity of lobster supplied (increase in supply) causing the price of lobster to decrease At the same time, the increased demand for lobsters (increased demand) causes the price of lobsters to increase Changing supply and demand causes the equilibrium to shift to a new level

b The price of a Christmas tree is lower after Christmas than before but fewer trees are

sold

After Christmas, the demand for pine trees decreased (demand decreased), but the supply

of pine trees remained the same (supply remained unchanged) Thereby causing the price

of pine trees to decrease and consumption volume to decrease, creating a new

equilibrium

c The price of a round-trip ticket to Paris on Air France falls by more than $200 after the

end of school vacation in September This happens despite the fact that generally

worsening weather increases the cost of operating flights to Paris, and Air France

therefore reduces the number of flights to Paris at any given price

After the end of the semester, the demand to Paris decreases (demand decreases) causing the price of air tickets to decrease At the same time, the increase in flight operating costs causes the number of flights to be cut (decreased supply) which is the cause of the

increase in airfares Changing supply and demand causes the equilibrium to shift to a new level