Answers to Study Review Guide

Answers to front page:

No response because $700 is above the equilibrium price.

Quantity demanded will rise to 55, quantity supplied will fall to 40, and the result is a shortage of 15 bicycles.

No, some are worse off because of the shortage (unable to purchase a bicycle at the lower price).

Quantity demanded will fall to 40, quantity supplied will rise to 70, and the result is a surplus of 30 bicycles.

No impact because the equilibrium price is already obeying the law.

Shortage, price falls, quantity demanded rises, quantity supplied falls.

Shortage, sellers are worse off because of the price fall, some buyers are worse off due to the shortage.

No impact because the equilibrium price is already obeying the law.

Surplus, price rises, quantity demanded falls, quantity supplied rises.

Answers to True/False

False (a price ceiling set above the market equilibrium price has no impact on the market)

False (shortage)

True

False (some teenagers cannot find a job due to unemployment caused by the price floor)

False (only if effective Pf > Pe)

Answers to Multiple Choice

1. B

2. A

3. D

4. B

5. C

6. C

7. E

8. A

9. C

10. E

11. D

12. A

Answers to Comparative Advantage and Absolute Advantage Practice Problems

1. A

 

2, Typo in the answers.  Absolute advantage for both goods is Country A.  Comparative advantage for manufacturing goods is B, and comparative advantage for service goods is A.

 

3. C (This is an output problem.)

 

4. D (You must rotate the information, so the two countries are on the side, and the outputs are across the top!)

 

5.

a. Create the table with only one country, Canada.

b. 1/15th of a car.

c. Straight line PPF.  Make sure everything is labeled (axes, title, all numbers provided).  You must multiple everything by 10 million, since there are 10 million workers.

d. 150 million bushels of wheat

e. 200 million bushels of wheat (Assume Canada specializes in car production and can produce 20 million cars.  If it trades 10 million cars to the United States, then it is left with 10 million cars.  For each car that it traded, it received 20 bushels of wheat. 20*10 million = 200 million bushels of wheat) Canada should accept the deal because they are now consuming at a point outside of its PPF.

 

6. 

a. Absolute advantage for scones is England.  Absolute advantage for sweaters is Scotland.

b. Draw the table, calculating opportunity costs of producing each good in each country.

c. England (lower opportunity cost, 1/50 < 1/40)

d. Scotland (lower opportunity cost, 20 < 50)

e. Scotland will trade sweaters since it has the comparative advantage in sweater production.

f. Yes.  Scotland would still have the comparative advantage in sweater production, and England would still have the comparative advantage in scone production.  More importantly, however, is that both countries would gain from trade by being able to consume outside of their respective production possibilities frontiers (PPFs).

AP Microeconomics Summer Assignment 2013

Congratulations, and welcome to the wonderful world of economics!!  As a student in this year’s class, you are also the lucky recipient of an assignment giving you a preview of the topics we will focus on in this school year.  Below, you will find the details of this assignment. My email address is rstern2@boston.k12.ma.us should you need to contact me.

 

Your tasks: 

  • Read the assigned chapters from the book, Naked Economics: Undressing the Dismal Science by Charles Wheelan.  Acquire the fully revised and updated 2010 version of the book.
  • Answer the accompanying questions using specific evidence from the reading.  Your answers should be written in complete sentences and typed.  Please double space, and write in 12 point Times New Roman font with standard margins.
  • For each section (foreward and chapters 1, 2, 3, and 12), write one question related to the reading that you would like answered.

 

Due Date: Monday, September 9th, 2013.

 

Foreword by Burton G. Malkiel

 

  1. Why has the study of economics often been criticized?

 

  1. The influence of economics is present in many business, financial, and government communities.  What are three institutions and agencies that rely on economics in some significant way?  Include at least one business, one financial, and one government organization in your response.

 

Chapter 1: The Power of Markets

 

  1. Define barrier to entry.  What are some “barriers to entry” that make it so only one seller can provide a good or service?

 

  1. What is meant by “price discrimination?”  Why are airlines able to price discriminate?

 

  1. What does Wheelan mean when he says the market economy operates as an “amoral force?”

 

Chapter 2: Incentives Matter

 

  1. What are incentives?  Can you think of an incentive that has worked in your own life?

 

  1. “Capitalism can be a brutal, cruel process…But ‘creative destruction’ (Joseph Schumpeter) is a tremendous positive force.  Competition means losers, which goes a long way to explain why we embrace it in theory and fight it bitterly in practice.”  Explain this statement, and give an example.

 

Chapter 3: Government and the Economy

 

  1. What are externalities?  What externalities are associated with cigarette smoking?

 

  1. What are five ways in which the government is essential for a market economy to operate successfully?

 

Chapter 12: Trade and Globalization

 

  1. Why do nations trade?

 

  1. Should we (the rich and industrialized nations of the world) hold the poorest developing nations to the same environmental standards as we hold ourselves?  Why or why not?

Answers to Homework, January 10th, 2013

1. Marty’s Frozen Yogurt

a Fixed inputs: machines, refrigerators

b. Mix, cups, sprinkles, workers

c. Output on y-axis, input on x-axis, upward sloping curve showing increasingly flat at larger levels of input

d. 110, 90, 70, 30, 20, 10

e. Each additional worker added adds less to total production (output) than the previous worker added, causing diminishing marginal returns.

2. 

Q of labor column: 0 1 2 3 4 5 6

Q of cups column: 0 110 200 279 300 320 330

VC column: 0 135 260 375 470 560 645 (need to add cost of workers + cost of cups)

FC column: $100

TC column: 100 235 360 475 570 660 745

ATC column: – 2.14 1.80 1.76 1.90 2.06 2.26

MC column: 1.23 1.39 1.64 3.17 4.50 8.50

Efficient scale = minimum ATC, which is when ATC = 1.76.  Efficient scale is the quantity at that level, which equals 3 workers, 270 cups.

3. AFC decreases as quantity increases due to the spreading effect: FC is getting spread out over greater and greater quantities of output

AVC increases as quantity increases (to larger levels of output) due to the diminishing returns effect: each additional variable input (worker) adds less to total production than the previous variable input (worker) added, making each additional worker increasingly costly to hire (because they don’t add to production as much as earlier workers added).

Answers to Study Guide and Price Controls Handout

Study Guide Answers:

1. None because above the equilibrium price.

2. QD increases to 55, QS decreases to 40, resulting in a shortage of 15 bikes.

3. No because of the shortage.

4. QD falls to 40, QS rises to 70, resulting in a surplus of 30 bikes.

5. No impact because equilibrium price is already obeying the law.

6. Shortage, price falls, QD rises, QS falls.

7. Shortage, sellers worse off because the price is lower, some buyers are worse off because they can’t buy the good due to the shortage.

8. No impact because equilibrium price is already obeying the law.

9. Surplus, price rises, QD falls, QS rises.

True/False.

1. False, no impact.

2. False, a shortage.

3. True

4. False, some teens won’t be able to find a job due to the surplus of available workers.

5. False, only if the price floor is set above the equilibrium price.

Multiple Choice

1. B

2. A

3. D

4. B

5. C

6. C

7. E

8. A

9. C

10. E

11. D

12. A

Answers to Price Controls Handout

1. Market for cheese:

a. Binding price floor: set above equilibrium price.  Price rises, quantity of cheese sold falls.  Surplus.

b. Yes because they lost customers, so even though price is higher, they’ve lost too many buyers to sustain their revenue.

c. Farmers benefit.  Government loses.

2. Market for Frisbees:

a. $8, 6 million Frisbees

b. $10, 2 million Frisbees sold

c. Price ceiling of $9 is above the market equilibrium price of $8; therefore, we return to equilibrium because the new price ceiling is ineffective/non-binding.  6 million Frisbees will be sold at $8 each.

3. Market for labor and minimum wage:

a. Employment will decrease, wages of employed workers will increase.

b. Unemployment will increase (surplus of labor).

Argentina and Peru problem

1.

Argentina: opp cost of beef is 1/2 fruit, opp cost of fruit is 2 beef

Peru: opp cost of beef is 1 fruit, opp cost of fruit is 1 beef

Argentina has comparative advantage in beef.

2. Peru will export fruit because it exports the item in which it has a comparative advantage.

3. Between 1 and 2 metric tons of beef/month

4. Argentina because it can produce more beef with the same resources as Peru.

Answers to Comparative & Absolute Advantage Problems

Thursday, Sept 27th, 2012:

1. Canada wheat and cars problem: 

a. Draw table.

b. 1/15 of a car

c. PPF w/ straight line.  20 million cars, 300 million bushels of wheat

d. 150 million bushels of wheat, halfway point on the frontier/line

e. 200 bushels of wheat, outside the frontier

2. England and Scotland scones and sweaters problem:

a. England: scones, Scotland: sweaters

b. Draw table.

c. Scones: England

d. Sweaters: Scotland

e. Scotland trades sweaters because it has a comparative advantage in sweater production.

f. Yes, because Scotland still has a comparative advantage in sweaters, and England would still produce scones.  Both would still end up consuming outside of their frontier.