Gallaway

Homework # 1

Type or write your answers neatly on a separate piece of paper. Do not use paper from a spiral notebook!

1. Correctly label each of the following statements as normative or positive.

• The price of chicken is too high. Normative – This is a statement of opinion that the price of chicken ought to be lower.
• The inflation rate is 2%. Positive
• Unemployment ought to be lower. Normative
• Capitalism exploits workers. Normative
• Capitalism is more desirable than socialism. Normative

1. List the Three Economic questions and describe their corresponding efficiency criteria.

• What: Allocative Efficiency – use resources to produce the most desirable, most highly valued bundle of goods.
• How: Technical or Productive Efficiency – minimize opportunity costs by using resources where they are most productive & useful.
• For Whom: Distributive Efficiency – Get goods into the hands who value them relatively the most.

1. The rock group Asteroid Lust believes allocation is an old-fashioned concept that doesn’t belong in the post-industrial world. Consequently, they refuse to sell, or allocate in any way, tickets for their next concert. Instead, the band plans to have a show where, according to the band’s leader, "everyone just shows up."

• Can Asteroid Lust avoid the allocation of their concert tickets? No, allocation will take place one way or another.
• What do you expect will happen at the concert? With a large crowd, seats could be allocated through queuing or even violence.

1. Imagine a PPF where the two goods being produced are Karl Marx’s Das Kapital (x axis) and Adam Smith’s The Wealth of Nations (y axis). Assume that the opportunity cost of one more Das Kapital is always two The Wealth of Nations. Also assume the economy can produce a maximum of 100 copies of Das Kapital.

• Draw this PPF The PPF is a straight line with a slope of –2, an x-intercept of 100, and a y-intercept of 200.
• What is the slope of the PPF? –2 (I know this because the opportunity cost of 1 more x is 2.)
• What is the opportunity cost of a copy of The Wealth of Nations? ½ (the reciprocal of 2)
• How many copies of The Wealth of Nations can the economy produce? 200
• Can the economy produce 100 copies of both books in the same time period? No, that point lies outside the PPF.
• Are resources specialized in this example? How do you know? No. Bowed PPFs are caused by specialized resources which lead to increasing opportunity costs. This PPF is straight & the opportunity cost is constant.

1. If macaroni and cheese is an inferior good, what would you expect to happen to the price and quantity of this product as people’s salaries rose?

Higher incomes reduce the demand for inferior goods. Price and quantity would both decrease (draw graph & see for yourself!)

• Assume corn chips are complementary to macaroni and cheese. Given your previous answer, how will this affect the market for corn chips?

Since we buy less mac & cheese, we’ll need fewer chips to go with it. Our demand for this good will decrease.

Note: We usually focus on a lower price increasing the quantity demanded for a good and increasing the demand for its complement. This was not the case here because the lower price was caused by a reduction in the demand for the original good. Less of both goods will end up being consumed.

Give an example of something that causes an increase in supply. Give an example of something that causes an increase quantity in supplied.

Better technology or cheaper resources can increase supply thereby shifting the supply curve to the right. (You should know the other shifters too!) A change in quantity supplied is always caused by a change in that good’s own price. This shows up as movement along the supply curve.