Economics 102 Assignment #1 - Palomar College - …€¦ · Web view · 2008-09-10Economics 102...

Economics 102 Assignment #1 (15 Points) Name__________________ (Chapters 1,2,4)Part 1: (5 points)

1. Consider Palomar College as a business. (If you are new to Palomar College, consider instead your high school or any other business with which you are familiar.)

1. For Palomar College, what would qualify as the natural resources?

2. For Palomar College, what would qualify as the labor?

3. For Palomar College, what would qualify as the capital?

2. We have defined opportunity cost as the value sacrificed whenever a decision is made. You have made a decision to attend Palomar College this semester. Make an estimate of the total opportunity cost of your decision. This will depend on how many units you are taking and how many days of the week you attend. Be sure to consider the value of time spent studying.

My Total Opportunity Cost is $_______________________.

Based on the following calculations:

3. According to Adam Smith, "He...neither intends to promote the publick (sic) interest, nor knows how much he is promoting it...He intends only his own gain, and he is in this, as in many other cases, led … to promote an end which was no part of his intention." In other words, in pursuing one’s self interest, one acts to promote the good of society.

In the movie Wall Street, Gordon Gekko (Michael Douglas) says the following: “Greed … is good. Greed is right. Greed works. Greed comes through and catches the essence of the evolutionary spirit. Greed in all its forms -- greed for life, for love, for knowledge, for money --- has marked the upward surge of mankind and greed will …. save that malfunctioning corporation called the USA.” Is there is difference between “acting in one’s self-interest” and “being greedy”? If so, what is the difference? Is greed good?

Part 2: (5 points)1. Private industrial timber companies own 15% of all timberland in the United States (9% in the West). At some point, the trees are cut, transported to a mill, processed into either paper or lumber products, and then sold. Assume that the trees are already planted. Two costs will be incurred before the trees are to be cut. First, in ten years, there must be a commercial thinning. This means that workers will be hired and machines purchased to reduce the amount of undergrowth so that nutrients can be concentrated in the trees. Second, in ten years and again in twenty years, the trees will be chemically fertilized through aerial spraying. The trees will grow very quickly for 50 to 60 years. After this, they grow slowly. The slow growth produces a wood that is free of knots and sap and therefore sells for a much higher price in the market. Use the principles of rational decision-making from Chapter 2 to explain how a timber company would go about making the decision as to the best time for it to cut the trees. (You do not have to make the decision. Just explain how one would go about making this decision.)Continued on Page 2

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Part 3: (5 points)1. In the chapter it was argued that the demand for airline travel was relatively elastic. Explain why this would be so using the three factors discussed in this section.

2. In 2007, Governor Schwartzeneggar lowered the fees at community colleges from $26 to $20 per unit. Is the demand for community college courses relatively elastic or relatively inelastic? Use the three factors to explain why. Based on your answer, what would happen to the revenues of the community colleges?

3. In each case, state whether you believe the demand for the product is relatively elastic or relatively inelastic? Then, provide reasons for your conclusion. a. A company buying advertising during the Super Bowl

b. Services of a dentist to bleach teeth to make them very white

c. Use of cigarettes when the state of California raised the cigarette tax by $1.10 (raising the price from $4 to $5 a pack)

d. Buying gasoline when the price rose from $2.50 to $4.50

4. In Chapter 4, you were given the following demand curve for homes: Price Quantity Demanded Total Revenue

$340,000 0 1 $320,000 1000 2 $300,000 2000 3 $280,000 3000 4 $260,000 4000 5 $240,000 5000 6 $220,000 6000 7 $200,000 7000

8 $180,000 8000 9 $160,000 9000 10 $140,000 10000

Fill in the table to calculate the total revenue. In doing so, ignore the three zeros on the price and the three zeros on the quantity demanded. Your result will be in millions of dollars.In what price range is the demand for homes relatively inelastic?_______________

In what price range is the demand for homes relatively elastic?_______________

In what price range is the demand for homes unit elastic?_______________End of Assignment 1

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Economics 102 Assignment #2 (20 Points) Name______________________ (Chapter 5, 6, 7, 8)Part 1: 5 points

1. State in your own words what each of the following phrases means. To do this, you must explain what the number 3 actually tells you.

1. The income elasticity of demand for automobiles is +3.

2. The cross elasticity of demand between automobiles and gasoline is -3.

2. In each of the following cases, state whether there is a movement along the demand curve for American automobiles, the demand curve for American automobiles will shift to the right, or the demand curve for American automobiles will shift to the left:

1. The price of gasoline rises to $5 ____________________

2. The prices of American automobiles rise ____________________

3. The prices of Japanese automobiles rise ____________________

4. Interest rates paid to borrow money to buy automobiles fall to zero ____________________

5. Buyers' incomes fall ____________________

6. Buyers find that American automobiles are of higher quality ____________________

7. Mexican automobile buyers are now able to buy American automobiles ____________________

8. Buyers expect that the price of American automobiles will rise next year ____________________

Continued on Page 4

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Part 2: 5 points1. Assume that the market for automobiles begins in equilibrium. Draw the demand and supply curves for automobiles in the graph below. Label all axes and curves. Show the equilibrium price and quantity. Then, the price of gasoline rises to $5 per gallon. Make the appropriate change on the graph. Show the new equilibrium. When the new equilibrium is reached, the price of automobiles will have ___________(risen or fallen?) and the quantity of automobiles will have ___________________(risen or fallen?) Price

____________________________________0 Quantity of Automobiles

2. Assume that the market for oranges begins in equilibrium. Draw the demand and supply curves for oranges in the graph below. Label all axes and curves. Show the equilibrium price and quantity. Then, there is an increase in the price of water growers must pay. Water, of course, is needed to grow oranges. Make the appropriate change on the graph. Show the new equilibrium. When the new equilibrium is reached, the price of oranges will have ___________(risen or fallen?) and the quantity of oranges will have ___________________(risen or fallen?) Price

____________________________________Quantity of Oranges

Continued on Page 5

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Part 3: 5 Points1. As we will see later, free markets commonly lead to excessive pollution. One way to reduce pollution (and carbon emissions that lead to global warming) is to force polluters to undertake activities that will reduce their pollutants. These activities are costly. The question concerning us is: who actually will pay for the costs of reducing pollutants? One example is the industry responsible for the production of electricity. The companies in this industry use coal to manufacture electricity. Both Barack Obama and John McCain had plans for “cap and trade”. Under this plans, these producers will be forced to either install pollution control equipment or to buy “rights to pollute” from other companies. Both of these would represent a cost of production. The companies in this industry would try to recover this money by raising the prices of electricity to consumers. Whom do you believe will bear the incidence of these costs: the consumer as higher prices or the company as lower profits? EXPLAIN WHY, using the graph.

Price

____________________________ Quantity of Electricity

2. A recent article estimated the following for restaurant meals:The price elasticity of demand = 0.188The price elasticity of supply – 6.47The equilibrium price averaged $10.47 per meal (in 1992 prices)The equilibrium quantity was 8.14 billion meals per year.

If there were a $1.00 per meal tax, the article estimated that the new equilibrium price would be $11.44 per meal and the new equilibrium quantity would be 8.01 billion meals. Show these facts in the graph below.Price

Quantity of Meals

Who bears most of the burden of the tax on restaurant meals? What percent of the tax do they bear? Using the analysis of the chapter, why do you think this is so?

Continued on Page 6

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Part 4: 5 points

1. According to the 2002 Farm Bill, cotton farmers are guaranteed a price of 72.24 cents per pound of cotton. They get a direct payment of 6.66 cents, a guarantee of 52 cents, and then counter-cyclical payments to raise the total to 72.24 cents (counter cyclical payments are made only if the market price is below 72.24 cents.). As of the middle of 2004, the world market price of cotton was about 38 cents per pound. Textile producers who buy the cotton are limited by the government in the amount they can import from other countries. Since they are forced to buy American produced cotton at higher prices, the government gives them a subsidy to cover the difference in cost. Analyze the results of these provisions of the 2002 Farm Bill, showing the results on the demand – supply graph. (Hint: this is a price floor, as described in Chapter 8)

Price

Quantity of Cotton

2. Because of the program explained in question 1, what happens to the amount of cotton grown in the United States? Since some of this is exported, what happens to the world price of cotton? What effect would this have for poor African cotton producers?

End of Assignment 2

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Economics 102 Name_________________

Extra Credit Homework Assignment (May Not be Assigned)

Pick out the stock of a particular company (any company). Find the value of the stock of that company in the most recent week. You will find this information either in a newspaper or on the Internet. Then, find the value of that stock one year ago (or as close to that date as you can).

The company is _____________________________________________

Value Now $_____________

Value Then $_____________ on ____________ (date)

You will need to do some research as to what has been happening concerning this company. You know that the price is affected by the demand for and the supply of that stock. Demanded are those who wish to buy the stock. Suppliers are those who own the stock and are considering selling. There are six possible determinants of the demand and four possible determinants of the supply. Based on your research, explain what might be responsible for the change in the price you have discovered. Show your reasoning on the graph below.

Price of the Stock

Supply

P1

Demand

0 Quantity of the Stock

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Economics 102 Assignment #3 (10 Points) Name_______________________ (Chapter 10)Part 1: 5 Points

The following are the shares of sales of tobacco for the main tobacco companies:

1980 1995

American Tobacco 11% *

Liggett and Myers 2% 2%

Lorillard 10% 8%

R.J. Reynolds 33% 26%

Philip Morris Co. 31% 46%

Brown and Williamson 14% 18%

Brown and Williamson acquired American Tobacco. The 1995 share for American is included in the Brown and Williamson share.

The concentration ratio is the percent of sales of the 4 largest companies.The Herfindahl Index is the sum of the percent of sales squared for each company.

Calculate the concentration ratio and the Herfindahl Index (HHI) for 1980.

Calculate the concentration ratio and the Herfindahl Index (HHI) for 1995.

Based on your answers to questions 1 and 2, plus a perusal of the data above, draw a conclusion as to what happened to the competitiveness of the tobacco industry between 1980 and 1995.

Use the Merger Guidelines explained in the class to analyze the merger of Brown and Williamson with American Tobacco. Based on our interpretation of the Guidelines, should the merger have been allowed? Why or why not? Show calculations.

Continued on Page 9

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Part 2: 5 Points

In the class, there were several functions of government noted under laissez faire. For each of the following, state whether the particular function is acceptable under laissez faire. If so, under which of the functions is it acceptable? Then, state why the government should provide this function.

1. Government provides public health – an agency that tries to prevent outbreaks of

communicable diseases _____________________(function) Because ______________________________________________________

2. Government imposes tariffs (taxes) on steel productsmade in certain other countries _____________________(function)

Because______________________________________________________

3. Government pays welfare (TANF) for single mothers with small children. _____________________(function)

Because_______________________________________________________

4. Government owns and controls Yosemite National Park _____________________ (function)

Because______________________________________________________

5. Government now requires that all food packages statethe amount of protein, calories, cholesterol, etc . _____________________(function)

Because______________________________________________________

6. Government builds superhighways and makes accessto them available without charge ____________________(function)

Because_______________________________________________________

7. Government provides low-interest loans to victims ofhurricanes, earthquakes, and other natural disasters __________________(function)

Because_______________________________________________________

8. Government requires that I do not have a commercialbusiness in my home __________________(function)

Because________________________________________________________

End of Assignment 3

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Economics 102 Assignment #4 (20 Points) Name_______________ (Chapter 11, 12, 13, 14)Part 1: 5 points

Choose One Only of the Following (Answer on the Back of the Page)

1. Chapter 11 describes the U.S. Forest Service. A similar bureaucracy, the National Park Service, is part of the Department of the Interior. It manages some 400 national parks and 87 million acres. The most famous are Yellowstone and Yosemite. Others you may be familiar with are the Grand Canyon, Sequoia - Kings Canyon, Death Valley, and Cabrillo Monument on Point Loma. The National Park Service has a budget of about $1.5 billion, funded by Congress. Below are some of the criteria by which the National Park Service is run. What do you believe will result from these criteria? WHY? (1) The total amount of money appropriated by Congress is divided among the parks according to the number of visitors in each park. (2) Congress specified that charges to users of the park be low. The average park charges users about $0.60 per visitor day. It has been estimated that the market value is actually $14 per visitor day. The Park Service is only allowed to keep a small part of the fees collected by the parks. (3) There are about 500 businesses that have concessions in the national parks. They run hotels, stores, restaurants, tour guides, etc. At present, they pay about 2.5% of their sales receipts to the Park Service for the right to operate in the parks. Payments of 10% to 15% are commonly charged in other activities. The Park Service is not allowed to keep any of the concession receipts.

2. Many of the national parks are facing severe ecological damage. In addition, maintenance has been deferred in many parks, leading to roads, sewage, and buildings in disrepair. (In Yellowstone, 90% of trails and 80% of roads are in need of repair.) Yet, while this has been occurring, 33 new areas were added to the national park system. And hundreds of millions of dollars were spent on visitors' centers (each about the size of three large homes and costing about $8 million). Use the principles of Public Choice in Chapter 11 to explain what would seem to be inefficient spending occurring while other, more important, spending is not done.

3. Consider grazing range land of the West. Since the 1930s, this land has been government property. The agencies that manage these lands (over 20% of all land in California) are the Bureau of Land Management (BLM) and the Forest Service. Nationally, nearly 7 million cattle, sheep, and horses authorized to graze on public lands. To be able to do so, the owner must get a grazing permit or lease from the government agency. There are only 27,000 individuals, partnerships, or corporations in the United States that have such permits.(A) It has been estimated that ranchers pay the government a fee to graze their animals that is about 1/10 of the fee that would be charged in a free market. The government loses an estimated $120 million per year (spending $150 million but receiving only $30 million in fees). Use the principles of Public Choice in Chapter 11 to explain why this subsidy to ranchers would occur? (B) About half of the fees that the ranchers do pay are used by the government agencies for range improvements. Use of these monies is under the discretion of the agencies and is not closely monitored by Congress. Most of these improvements end up costing far more than they are worth either to the ranchers or to the government. Use the Principles of Public Choice in Chapter 11 to explain why this overspending would occur.

Continued on Page 11

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Part 2: 5 Points

1. The purpose of chapter 12 is to examine what the health care industry can teach us about markets. We need to understand under what conditions markets should be left free to function and under what conditions government needs to become involved. First, explain why government might need to be involved in the provision of health care when it is not involved in the provision of food. Second, using the justifications for government involvement given in this chapter, describe what you think government ought to be doing to make the health care market work better for society.

2. Suppose that a British National Health Service type of system were proposed for the United States. What would be the benefits? What would be the problems? Why would this type of system have difficulty being enacted in the United States, even if people wanted it (review Public Choice from Chapter 11.)

Part 3: 5 points

1. Assume that the only purpose of earning income is to buy and enjoy goods and services. Some people have claimed "the total utility of the people in the society would be increased if income were taken away from very rich people and given to very poor people". Use the law of diminishing marginal utility to explain how one might argue that this statement is true.

2. San Diego County has 17 coastal wetlands. Some you may be familiar with include the Batiquitos Lagoon, the San Elijo Lagoon, and Mission Bay. These coastal wetlands provide flood protection, habitat for wildlife (especially migratory birds and marine life), protection of the shoreline, protection against water erosion, recreation activities, and many other benefits. Many of these wetlands have been degraded. In order to manage them properly, it is necessary to evaluate the both marginal benefits and the marginal opportunity costs. The reading in Chapter 13 discussed methods for evaluating the marginal benefits of a beautiful view, peace and quiet, a national park, and biological diversity. Based on your reading, explain how you would go-about trying to evaluate the marginal benefits of each of San Diego County's coastal wetlands. Continued on Page 12

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Part 4: 5 Points

1. Let us consider an orange grove. When the grove began in the 1950s, the orange trees were planted. Today, you have purchased the grove. The trees must be watered and fertilized. You have drip irrigation on timers to take care of the watering. You hire workers to do the fertilizing. Workers also keep the area clear of competing vegetation, using a small tractor. Workers also remove trees that have died and plant new ones from seedlings. The main chore for the workers is the picking of the oranges and the hauling of them to the processor. There are some buildings needed to keep the tractor and other equipment. This is a description of an orange grove. Let us examine the costs. Let us assume that we hire six full-time workers (or the equivalent). Each is paid $12,000 per year ($1,000 per month), making the labor cost equal $72,000. The company has buildings. It has machinery, such as the tractor, the trucks, saws, shovels, and so forth. Our measure of cost here is the part of the building and machines used up during the year (called depreciation). Let us assume that the cost of all of this capital for the year is $16,000. Let us assume that the owner paid $400,000 for the grove and the capital; this money could have been earning 5% interest. We will assume here that owner does not work in this business.

The explicit costs of owning the orange grove are $_______________________.

The implicit costs of owning the orange grove are $_______________________.

The variable costs of owning the orange grove are $_______________________.

The fixed costs of owning the orange grove are $_______________________.

The total economic cost of owning the orange grove is $___________________.

If we assume that we sell 180,000 pounds of oranges during the year at a price of $0.60 per pound, the grove would receive a total revenue of $108,000. We would say that the economic profit is equal to $___________. What does this mean?

Be sure to show calculations.

End of Assignment 4

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Economics 102 Assignment #5 (20 Points) Name________________________ (Chapter 14, 15)Part 1: 5 Points

1. Assume again that you are the owner of an orange grove. The orange grove has its land, buildings, and machinery. These are the fixed factors of production. Let us focus on only one of the variable factors of production: labor. The following table describes the relation between the number of pounds of oranges sold per year and the number of workers hired. Assume that all oranges are the same. This relation is known as a production function. Number of Workers Number of Pounds Per Year 0 0 1 10,000 2 40,000 3 90,000 4 130,000 5 160,000 6 180,000 7 192,000 8 198,000 9 200,000 10 200,000 11 190,000

In the table below, calculate the average physical product and the marginal physical product. The average physical product is the production per worker. The marginal physical product is the change in total production from hiring and additional worker. Number of Workers Average Physical Product Marginal Physical Product 1 2 3 4 5 6 7 8 9 10 11

2. Ignore the cost of the capital, the cost of the natural resources, and the opportunity costs of the owner and focus only on the cost of the hired labor. As noted in Assignment 4, each worker is paid $12,000 per year ($1,000 per month). What is the marginal cost for the first 10,000 pounds of oranges per year? Ignoring the other costs for now, the first 10,000 pounds require the hiring of one worker. That worker is paid $12,000. Thus, each pound costs $1.20 worth of labor to produce ($12,000 divided by 10,000). The total variable cost is calculated as $12,000 times the number of workers. The marginal cost was the change in the total cost from producing one additional pound of oranges. What is the marginal cost of the next 30,000 pounds of oranges? And so on. Use this to fill in the table on Page 14. Draw the marginal cost curve on the graph.


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Workers Quantity of Oranges Total Variable Cost Marginal Cost 1 10,000 $12,000 $1.20 2 40,000 24,000 3 90,000 36,000 4 130,000 48,000 5 160,000 60,000 6 180,000 72,000 7 192,000 84,000 8 198,000 96,000 9 200,000 108,000 10 200,000 120,000

3. Using the production function, up to how many pounds of oranges are there increasing marginal returns? Think of the example of an orange grove. Give some reasons why there might be increasing marginal returns.

4. Using the production function, show where there are diminishing marginal returns. Think of the example of an orange grove. Give some reasons why there might be diminishing marginal returns.

5. Examine your two tables. When the marginal physical product is rising, the marginal cost is ________________. And when the marginal physical product is falling, the marginal cost is ___________________.

Part 2: 5 Points

1. Use the numbers from Part 1 to calculate the average variable cost. Then, plot the numbers on the graph. The Total Variable Cost is repeated here.

Quantity of Oranges Total Variable Cost Average Variable Cost 10,000 $12,000 40,000 24,000 90,000 36,000 130,000 48,000 160,000 60,000 180,000 72,000 192,000 84,000 198,000 96,000 200,000 108,000

2. Explain why the average variable cost first decreases in the case of the orange grove.

Then, explain why the average variable cost increases in the case of the orange grove.


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3. Up to now, we have considered only the variable cost. But we must also consider the fixed cost. The fixed costs are generally the costs of the capital and the implicit costs. They do NOT change as a result of producing more of the product. In this orange grove, as you answered in Assignment 4, the total fixed cost was $36,000 per year. The capital cost $16,000 and the implicit costs were $20,000 (5% of $400,000). Calculate the average fixed cost in the following table and plot the numbers on the graph.

Quantity of Oranges Total Fixed Cost Average Fixed Cost 10,000 $36,000 40,000 36,000 90,000 36,000 130,000 36,000 160,000 36,000 180,000 36,000 192,000 36,000 198,000 36,000 200,000 36,000 4. Now we are ready to examine the average total cost --- the cost of producing each pound of oranges. Calculate the average total cost from the following table and then plot the points on the graph. The total cost is the sum of the total variable cost and the total fixed cost.

Quantity of Oranges Total Cost Average Total Cost 10,000 $48,000 40,000 60,000 90,000 72,000 130,000 84,000 160,000 96,000 180,000 108,000 192,000 120,000 198,000 132,000 200,000 144,000

5. Notice that average cost has a U - shape. First, explain why it declines up to 180,000 pounds per year.

Then, explain why it rises after 180,000 pounds per year.

6. Compare the calculations you have made. When the average variable cost is falling, the marginal cost is _________ the average variable cost. When the average variable cost is rising, the marginal cost is __________ the average variable cost. (Answer “below” or “above”)

When the average total cost is falling, the marginal cost is _________ the average total cost. When the average total cost is rising, the marginal cost is __________ the average total cost. (Answer “below” or “above”)


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7. Explain why there is no relation between the marginal cost and the average fixed cost.

Graph of Marginal Cost, Average Variable Cost, Average Fixed Cost, Average Total Cost

Price of Oranges

0 Quantity of Oranges

Part 3: 5 Points (Chapter 15)

Go back Parts 1 and 2 on the orange grove.

Quantity of Oranges Total Variable Cost Original Average Variable Cost 10,000 $12,000 $1.20 40,000 24,000 .60 90,000 36,000 .40 130,000 48,000 .37 160,000 60,000 .375 180,000 72,000 .40 192,000 84,000 .43 198,000 96,000 .48 200,000 108,000 .54Continued on Page 17

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Quantity of Oranges Per Year Total Cost Original Average Total Cost 10,000 $48,000 $4.80 40,000 60,000 1.50 90,000 72,000 .80 130,000 84,000 .65 160,000 96,000 .60 180,000 108,000 .60 192,000 120,000 .625 198,000 132,000 .667 200,000 144,000 .72

1. Now, let us consider two choices in the amount of capital. One is the choice we have used above. To help, the old Average Variable Cost and Average Total Cost are repeated above. The other is a larger grove with more machinery; the total cost of capital, and implicit cost is now $54,000, instead of $36,000. The larger amount of capital means that we do not need as many workers. The machinery can do some of the work that people were previously doing. And the additional machinery makes the remaining workers more productive. To simplify, let us assume that the reduced need for workers lowers the average variable cost by $0.15 per pound for each pound of oranges produced. Calculate the new average fixed cost, the new average variable cost, and the new average total cost for the larger grove.

Quantity Average Fixed Cost Average Variable Cost Average Total Cost 10,000 40,000 90,000 130,000 160,000 180,000 192,000 198,000 200,000

Show on the graph on the next page, the original average total cost curve and the new average total cost curve. Up to ____________pounds per year, it is cheaper to produce with the smaller orange grove (Fixed Cost = $36,000). Above this quantity, it is cheaper to produce with the larger orange grove (Fixed Cost = $54,000). Show the relevant portions of the two average total cost curves in the graph on the next page. The portion you have shown is called the ______________.

Notice also that the larger orange grove, if utilized sufficiently, will allow us to produce at a lower possible cost than the smaller one. That is, with the larger orange grove, if we produce and sell 180,000 pounds per year, we can produce each pound at a cost $0.55. There is no way we can produce a pound of oranges at a cost this low with the smaller orange grove. This phenomenon is called ____________________________.


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$

0 Quantity


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1. It has been argued that stores like Costco or Wal-Mart have an advantage over other stores. The advantage is NOT due to economies of scale but IS due to economies of scope. First, what does this statement mean? Second, why might this statement be true? (That is, why would Costco or Wal-Mart have economies of scope?)

2. When new products first are introduced, they are very expensive. So, for example, the first color television sets sold more over $2,000 in today’s money, the first VCRs sold for over $3,000 in today’s money, the first pocket calculators sold for over $300 in today’s money, and so forth. After the products are on the market for awhile, their prices tend to fall greatly. Use the principles of economies of scale and dynamic increasing returns to scale to explain why this phenomenon occurs.

End of Assignment #5

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Economics 102 Name__________________________

Assignment #6 (15 Points) (Chapter 16)

Part 1: 5 Points

1. In each of the following cases, state whether you believe the industry fits as perfect competition, pure monopoly, monopolistic competition, or oligopoly. In the space below, state your reason: 1. Orange Growers in San Diego County ______________ because

2. Colleges in San Diego County _____________ because

3. Bookstores for Students of Palomar College _____________ because

Part 2: 10 Points

1. Go back to the Homework #5 concerning the orange grove. Assume that the company sells its product in perfect competition at a market price of $0.60 per pound. Using the principles described in the reading, the profit-maximizing quantity is __________________ and the economic profit is $________________________. The marginal cost and average total cost calculations from the earlier assignment are repeated here.

SHOW ALL CALCULATIONS

Quantity Total Revenue Marginal Revenue Marginal Cost Average Total Cost 10,000 $1.20 $4.80 40,000 .40 1.50 90,000 .24 .80130,000 .30 .65160,000 .40 .60180,000 .60 .60 192,000 1.00 .625198,000 2.00 .667200,000 6.00 .72

Compare your answer to this question to the answer to Part 4 of Assignment 4.


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2. On a graph below, re-draw the average total cost and the marginal cost as they were drawn for Assignment #5 (or you can use the numbers from Question 1 above). Then, draw the marginal revenue. Show on the graph the profit-maximizing quantity as well as the economic profits or losses. Show the actual numbers from question 1.

$

0 Quantity of Oranges

3. Now assume that the price of oranges falls to $0.40 per pound. Using the principles described in Chapter 16, the profit-maximizing quantity is __________________ and the economic profit is $________________________


4. Use the principles of Chapter 16 to answer the following question: since the company is making an economic loss, should it continue to produce in the short-run or should it shut down? Explain why.


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5. Now assume that the company sells its product in perfect competition at a market price of $0.30 per pound. Using the principles described in the reading, the profit-maximizing quantity is __________________ and the economic profit is $________________________


6. Use the principles of Chapter 16 to answer the following question: since the company is making an economic loss, should it continue to produce in the short-run or should it shut down?

7. Fill in the following table. Assume there are 1,000 orange groves and that they are identical. Remember that at some point, the seller will shut-down in the short-run.

Price Supply of One Grove Industry Supply Quantity Demanded $0.30 200,000,000 $0.40 190,000,000 $0.60 180,000,000 $1.00 170,000,000 $2.00 120,000,000 $6.00 80,000,000

The equilibrium price of oranges is $__________________ and the equilibrium quantity of oranges is _________________. Compare your answer here to your answer to Part 4 of Assignment 4.

End of Homework Assignment #6.

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Economics 102 Assignment #7 (20 Points) Name___________________ (Chapter 18, 19, 20)Part 1: 5 Points (Chapter 18)

1. Return to the case of the orange grove from the homework to previous chapters. Assume now that all groves sell their oranges through one cooperative. This cooperative acts as a pure monopoly. Assume that, at a price of $1.50 per pound, the monopoly cooperative will sell 10,000 pounds of oranges. Every time the price is lowered by 5 cents per pound, another 10,000 pounds will be sold. This is shown below. Fill in the table. The average total cost and the marginal cost are repeated from the previous homework assignments. (Remember that the marginal revenue is calculated as the change in total revenue divided by the change in quantity. Don’t forget to divide by the change in quantity.)

Quantity Price Total Revenue Marginal Revenue Average Total Cost Marginal Cost

10,000 $1.50 $4.80 $1.20 20,000 1.45 30,000 1.40 40,000 1.35 1.50 0.40 50,000 1.30 60,000 1.25 70,000 1.20 80,000 1.15 90,000 1.10 0.80 0.24100,000 1.05110,000 1.00120,000 0.95130,000 0.90 0.65 0.30140,000 0.85150,000 0.80160,000 0.75 0.60 0.40170,000 0.70180,000 0.65 0.60 0.60190,000 0.60200,000 0.55 0.72 6.00

The quantity that the monopolist will choose in order to maximize profits is _______.Explain the reason that this quantity will be produced.

The price that this monopolist will charge is $______________________.

The economic profits that this monopolist will earn will equal $_________________.

Compare your answers to the quantity, price, and economic profits that would occur under perfect competition (see Assignment 6).

Show calculations.


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2. You were given the following demand curve facing a monopolist in Chapter 18.

Price Quantity Total Revenue Marginal Revenue Marginal Cost Average Total Cost

$340,000 0

320,000 1,000 $160,000 $340,000

300,000 2,000 140,000 240,000

280,000 3,000 120,000 200,000

260,000 4,000 140,000 185,000

240,000 5,000 160,000 180,000

220,000 6,000 180,000 180,000

200,000 7,000 200,000 182,857

180,000 8,000 220,000 187,500

160,000 9,000 240,000 193,333

140,000 10,000 260,000 200,000

You calculated that the quantity the monopolist will produce is 5,000. The price that will be charged is $240,000. And the economic profits that will be earned are $300,000,000.

Now assume that the government puts a price ceiling on makers of houses. The price cannot be higher than $200,000. Recalculate the decision of the monopolist under these conditions. Hint: every time there is a number above $200,000 under Price, change the number to $200,000. Every number below $200,000, do not change. Recalculate the total revenue and the marginal revenue. In calculating the marginal revenue, remember to divide by the change in quantity (1,000). The quantity produced will occur where the new marginal revenue equals the marginal cost.

The new quantity produced is ______________.

The new price charged is $_________________.

The new economic profits earned are equal to $__________________.

What can you conclude about price ceilings if there is monopoly?


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2. In the graph below, draw the situation for the monopolist as you did originally. Show the profit-maximizing quantity and price as well as the economic profits. Then, there is an increase in the demand for the product. Show the results of this change on the graph. Show the new profit-maximizing quantity, price, and economic profits. See the graph in Chapter 18.$

___________________________________________ 0 Quantity

As a result of the rise in the demand for the product, the quantity has ___________,the price has ______________, and the economic profits have ________________ .(Answer “risen”, “fallen”, or “remained unchanged”)


1. The following is taken from an article in the San Diego Union Tribune on October 21, 2003.“Richard Sarkis and David Kinsley were juniors at Williams College, surfing the Internet for a cheap source for their Economics textbook, when they discovered a little known economic fact: The very same college textbooks used in the United States sell for half price in England.Like prescription drugs, textbooks cost far less overseas than in the United States. The publishing industry defends its pricing policies, saying that foreign sales would be impossible if book prices were not pegged to local market conditions. …..Thanks to the Internet, more students and college bookstores are starting to order textbooks from abroad – and a few entrepreneurs have begun what is essentially an arbitrage business to exploit the price differentials. … Kinsley and a classmate spent three years building a web-based company, BookCentral.com, selling textbooks from abroad to American students. … A 1998 Supreme Court ruling (allows this practice). .. At one campus, a student imported 30 Biology textbooks this fall and sold then outside his classroom for less than the campus bookstore price, netting a $1,200 profit. None of the major textbook publishers would discuss why overseas prices are so much lower than domestic ones.

Use the principles of price discrimination to explain why the prices of the same textbooks are lower overseas.

Then, explain what effect Internet sales are likely to have on the ability of the publishers to price discriminate.


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2. Write a short essay explaining why companies in high technology industries tend to have the characteristics of natural monopolies. In your answer, give as many reasons as you can. (Be sure to define the following terms in your answer: network externalities, path dependence, lock-in.)


In the chapter, the history of the personal computer industry is developed through 2000 as an example of monopolistic competition. In the graph below, depict the history of IBM as related in the chapter. Assume that the personal computer industry is in monopolistic competition. The graph below shows the situation as of 1980. It assumes that the company is in long-run equilibrium, with economic profits of zero. Go through the chapter and show on the graph all of the events that relate to IBM. Consider the decision to enter the personal computer industry, the entry of the “clones”, the development of the OS/2, the development of Microsoft Windows, and the alliances with Apple. In each case, explain why you made the changes that you did and also what resulted for the company. (You need to redraw the graph for each case). So several graphs are given below.)

1. Decision to Enter the Personal Computer Industry

Marginal Cost

$ Average Total Cost

P80 a

Demand1980

Marginal Revenue1980

0 Q1980 Quantity of IBM

Explanation:


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2. Entry of the “Clones” Marginal Cost


P80 a

Demand1980



Explanation:

3. Development of the OS/2 Marginal Cost


P80 a

Demand1980



Explanation:

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4. Development of Microsoft Windows Marginal Cost


P80 a

Demand1980


0 Q1980 Quantity of IBMExplanation:

5. Alliance With Apple Marginal Cost


P80 a

Demand1980


0 Q1980 Quantity of IBMExplanation:

End of Assignment 7

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Economics 102 Assignment #8 (20 Points) Name________________________ (Chapter 22 + Appendix, 23, 25)


1. In Chapter 14, you were given homework concerning an orange grove. The following table described the relation between the number of pounds of oranges sold per year and the number of workers hired. This was the production function. You were asked to calculate the marginal physical product (MPP). The table is repeated here. Refer back to that homework. Number of Workers Number of Pounds Per Year Marginal Physical Product 0 0 1 10,000 2 40,000 3 90,000 4 130,000 5 160,000 6 180,000 7 192,000 8 198,000 9 200,000 10 200,000 11 190,000

You were also given that the price of oranges was $0.60 per pound and that the wage paid to each worker was $12,000 per year. Assume that oranges are sold in a perfectly competitive product market and that the workers are hired in a perfectly competitive labor market.

In the table below, calculate the marginal revenue product & the marginal resource cost.

Workers MPP Price Marginal Revenue Product Wage Marginal Resource Cost 1 $0.60 $12,000 2 $0.60 $12,000 3 $0.60 $12,000 4 $0.60 $12,000 5 $0.60 $12,000 6 $0.60 $12,000 7 $0.60 $12,000 8 $0.60 $12,000 9 $0.60 $12,000 10 $0.60 $12,000 11 $0.60 $12,000

MPP stands for Marginal Physical Product

This company will hire _________ workers because_____________________________.(Compare this to the number hired in the Homework Assignment 4.)


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2. In the early 1990s, comparable worth was an important political issue. This meant that workers should not only be paid the same wage for doing the same job, they should be paid the same wage if they did comparable jobs. The courts found that jobs done by men and women were often comparable (as they measured this) but that the wages were commonly higher for jobs done by men. Had comparable worth become national law, the effect would have been to significantly raise the wages paid to women who work. Analyze this case. What would be the results of passing comparable worth laws? In doing your analysis, notice that this case is similar to the case of the increase in the minimum wage.

Part 2: 5 Points (Appendix to Chapter 22)

1. In the section on perfect competition, you analyzed the case of an increase in demand for the product. Now, assume that these companies hire labor in a perfectly competitive labor market. Show the demand for labor (marginal revenue product) and the supply of labor (marginal resource cost) for one employer and then for all employers. Assume that the industry is a constant-cost industry. This means that you will assume that the supply of labor to all sellers is perfectly elastic. Show on the graph first the results in the short-run (that is, what results in the labor market as a result of the changes in the product market in the short-run). Then, show the results in the long-run. Explain your answer.$ $

____________________________ _________________________________0 Labor 0 Labor One Employer All Employers

Short-run:

Long-run:


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Part 3: 5 Points (Chapters 22 and 23)

1. In the reading for this section, the rising labor force participation rate for married women was explained. There has also been a significant increase in the labor force participation rate of young people --- ages 16 to 22 --- especially those still attending school. Use the explanations developed in Chapter 22 to provide some explanations of this increase. In your answer, be sure to consider both the substitution effect and the income effect ( and to define each of these terms)

2. In the 1950s, African-American males earned only about 60% on average of what white males earned. African-American females earned only about 50% on average of what white females earned. Today, African-American males earn almost 80% of what white males earn and African-American females earn the same as white females. So the wage gap between African-Americans and whites has closed (but is not eliminated). Based on the material presented in Chapter 23, what hypotheses can you suggest to explain these trends? Name as many as you can.


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1. Using the data provided in Chapter 25, draw the Lorenz Curves for the years 2000, the year 1990, the year 1980, and the year 1970. Did the United States become more equal or unequal in the decade of the 1970s? Did the United States become more equal or unequal in the decade of the 1980s? Did the United States become more equal or unequal in the decade of the 1990s?

Cumulative PercentOf Income

Percent of Households

End of Assignment 8

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Economics 102 Name_________________________

Assignment #9 (10 Points) This May Not Be Assigned (Chapter 26)Part 1: 5 Points:

In Chapter 26, it was assumed that there were only two countries and two products. The cost of making a product in each country (that is, the amount of labor time) was given by the following:

In Vineland In Cheeseheadland Labor Hours Required: 1 Bottle of Wine 15 hours 10 hours 1 Kilogram of Cheese 10 hours 4 hours

1. First, in the space below, draw the production possibilities curve for Vineland, assuming that there are 30 million hours of labor time available per year. Remember that the production possibilities curve shows all possible combinations of goods that can be produced. If all of the hours are devoted to wine, Vineland can produce _____ bottles of wine. If all of the hours are devoted to cheese, Vineland can produce _____ kilograms of cheese. If 15 million hours were devoted to wine and 15 million hours to cheese, Vineland can produce ____ bottles of wine and ____ kilograms of cheese. Show these on the graph below. Show the production possibilities curve as a solid line.Quantity of Wine

Quantity of Cheese

2. Second, in Vineland, each hour devoted to producing wine requires the sacrifice of ___ kilograms of cheese. This is the opportunity cost. In Cheeseheadland, each hour devoted to wine requires the sacrifice of ___ kilograms of cheese. This is the opportunity cost.

Vineland has the absolute advantage in ______________. Cheeseheadland has the absolute advantage in _______________. (Choose wine, cheese, both, or neither).

Vineland has the comparative advantage in ______________. Cheeseheadland has the comparative advantage in _______________. (Choose wine, cheese, both, or neither).

Vineland should export _____________ goods and it should import _______________


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Third, imagine that Vineland specializes completely in wine. All 30 million hours were used to produce wine. Vineland then trades 1 million bottles of wine to Cheeseheadland. In return, it gets back _____ kilograms of cheese from Cheeseheadland.

Are the 2 countries better-off with trade? Why? _____________________________

_____________________________________________________________________

Finally, show the production possibilities curve with trade on the graph on Page 33. Show the new production possibilities curve as a dashed line. You can see that the new production possibilities curve is outside the old one.

Part 2: 5 Points:

1. In Chapter 26, the text refers to a paradox. On the one hand, since the end of World War II, the government of the United States has been the leading proponent of free trade around the world. Many actions have been taken by the American government to promote free trade. Yet, on the other hand, the American government has imposed trade restrictions on Japanese steel, Japanese automobiles, textiles, agricultural products, and so forth The American government has also subsidized certain companies, such as Boeing, to aid them in international competition. How do you explain this paradox? (You may want to review the section on Public Choice before answering.)

Ethics Question:

2. a. In November, 1999, the World Trade Organization (WTO) met in Seattle. There were about 50,000 protesters there. There was destruction and some arrests. What exactly does the World Trade Organization (WTO) do? Give some examples of some cases it has been involved with. (Look up the World Trade Organization on the Internet in order to answer.) b. You may choose one of the following groups who oppose the World Trade Organization (WTO). Explain the reasons that the group opposes the WTO. How does it want the WTO to change? You will get the information you need from the Internet or from newspaper accounts.

The AFL – CIO or any particular labor union ORAny Environmental group who opposed the WTO, such as the Sierra Club ORAny other political group who opposed the WTO.

c. Present arguments made by people in support of the World Trade Organization (WTO). Who are the people supporting the WTO? What arguments do they make that it has been good for the world economy? You will get the information you need from the Internet or from newspaper accounts.

End of Assignment 9

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