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Form into groups of three or four people. Since this is your first in-class assignment, take a few
minutes to introduce yourselves. Then, do the following two questions. Write your answers as a
group in the space provided.
1. We have described four factors of production: natural resources, labor, capital, and
entrepreneurship. Think of any restaurant you have ever been to: Dennys, MacDonalds, Taco
Bell, Pizza Hut, or any other.
Write a list of some of the things used by that restaurant that would qualify as
natural resources.
Write a list of some of the things used by that restaurant that would qualify as labor.
Write a list of some of the things used by that restaurant that would qualify as capital.
Who is the entrepreneur in this restaurant and what does the entrepreneur do?
2. We have defined opportunity cost as the value of everything that is sacrificed when one
decides to do something. You have decided to take Principles of Microeconomics this semester.
What is the opportunity cost of this decision? Try to consider all of the sacrifices you expect to
make. Then, try to put a dollar value on them so that you can determine exactly what you are
giving-up.
I estimate that the dollar value of the opportunity costs of taking Principles of Microeconomics is:
$_____________________________________ Show how you arrived at this number.
3. This class is concerned with rational decision-making. This involves considering the marginal
benefit and marginal opportunity cost for each unit. Form into groups. Discuss among
yourselves how you would use the procedure for rational decision making in each of the
following situations. Then write briefly in the space what you have concluded.
2. You have taken a quiz and received a grade of 3 out of a possible 10 points (F). You are
allowed to take a second version of the quiz. If you do so, you can raise your grade to a
maximum of 7 out of 10 (C) as long as your score on the second quiz is at least 7. Since you
scored poorly on the first version, you will need to study carefully. There are 570 maximum
possible points in the course. Will you take the second version of the quiz? Why?
3. You are driving home from Phoenix. You stop at a Dennys in a small town for dinner. You
have never been in this small town before and are not likely to ever be there again. Your dinner is
fine and so is the service. Your bill is $10. Use the procedures for rational decision-making to
determine whether or not you will leave a tip for the person who waited on your table.
2
1. In each case, state whether you believe the demand for the product is relatively elastic
or relatively inelastic? Then, provide reasons for your conclusion.
6. A burger at MacDonalds
7. Use of cigarettes
In Class 4, you were given a demand schedule for new homes. Earlier in this chapter,
you were given a supply schedule for new homes. These are repeated here.
Price Quantity Demanded Quantity Supplied
1 $340,000 0 14,000
2 $320,000 1000 13,000
3 $300,000 2000 12,000
4 $280,000 3000 11,000
5 $260,000 4000 10,000
6 $240,000 5000 9,000
7 $220,000 6000 8,000
8 $200,000 7000 7,000
9 $180,000 8000 6,000
10 $160,000 9000 5,000
11 $140,000 10000 4,000
12 $120,000 11000 3,000
13 $100,000 12000 2,000
Draw the demand curve and the supply curve on the graph paper on the back of the page.
Show the equilibrium price and the equilibrium quantity on the graph.
In Chapter 5, there was a shift in the demand for new homes to the right. The data are
given below.
Price The quantity demanded is: The quantity supplied is
Demand1 Demand2
1 $340,000 0 2000 14000
2 $320,000 1000 3000 13000
3 $300,000 2000 4000 12000
4 $280,000 3000 5000 11000
5 $260,000 4000 6000 10000
6 $240,000 5000 7000 9000
7 $220,000 6000 8000 8000
8 $200,000 7000 9000 7000
9 $180,000 8000 10000 6000
10 $160,000 9000 11000 5000
11 $140,000 10000 12000 4000
12 $120,000 11000 13000 3000
4
Page 2
Show the shift on the graph on the back of the page. Show the new equilibrium price and
quantity of new homes.
Because of the shift in the demand, there is now a _________(shortage or surplus?) equal
to _________ new homes. This will cause the price of new homes to ________(rise or
fall?). The change in the price will __________(increase or decrease?) the quantity
demanded for new homes and ___________(increase or decrease?) the quantity supplied
of new homes.
In Class 5, there was a shift in the supply of new homes to the right. The data are given
below:
Price quantity demanded quantity supplied new quantity supplied
1 $340,000 0 14000 16000
2 $320,000 1000 13000 15000
3 $300,000 2000 12000 14000
4 $280,000 3000 11000 13000
5 $260,000 4000 10000 12000
6 $240,000 5000 9000 11000
7 $220,000 6000 8000 10000
8 $200,000 7000 7000 9000
9 $180,000 8000 6000 8000
10 $160,000 9000 5000 7000
11 $140,000 10000 4000 6000
12 $120,000 11000 3000 5000
On a different graph on the next page, redraw the original demand and supply curves.
Then, show the shift in supply. Show the new equilibrium price and quantity of new
homes.
Because of the shift in the supply, there is now a _________(shortage or surplus?) equal
to _________ new homes. This will cause the price of new homes to ________(rise or
fall?). The change in the price will __________(increase or decrease?) the quantity
demanded for new homes and ___________(increase or decrease?) the quantity supplied
of new homes.
5
(1) Would the demand for apartments in this area be relatively inelastic or relatively
elastic? State why.
(2) Would the supply of apartments in this area be relatively inelastic or relatively
elastic? State why.
(3) Draw the demand and supply curves as you have described them, showing the initial
equilibrium price and quantity. Label carefully.
Price
0 Quantity
(4) Now assume the government creates a rent supplement program. Under this
program, the renter is required to pay 30% of income in rent. Any additional rent is paid
by the government --- up to a limit. For example, a low-income person with an income
of $500 a month would be required to pay $150 in rent (30%). If the rent is $350, the
other $200 would be paid by the government. Analyze the results of this program. Show
the changes on the graph and explain what will result. Who gains and who loses from
this program?
(5) Instead, now assume that the government decides to provide a building subsidy to
people who build apartments in this low-income area. A certain percent of their costs will
be paid by the government. Analyze the results of this program. Show the results on the
graph and explain what will result.
6
Under the Immigration Act of 1990. the United States grants permits for legal
immigration to approximately 800,000 people each year (not considering refugees).
While there is a great opportunity cost for people migrating to the United States, the
charge for the permit is virtually zero.
(1) Draw the demand for immigration rights into the United States on the graph.
Draw the supply as perfectly inelastic (at 800,000 permits). Show that, at a price of zero,
there is a large shortage.
Price
0 Quantity
(2) Since there is a price ceiling on entry permits, name some ways that the shortage
might be resolved. That is, how might it be decided who will be allowed to enter?
(4) How might the market be used to resolve the shortage problem? What would be the
advantages and the disadvantages of a market solution?
7
Assume there are two products: gas-guzzling cars and small fuel-efficient cars. Show the
demand and supply curves for each on the graphs as well as the equilibrium prices and quantities.
Then, the price of gasoline rises to over $2.00 per gallon as a result of a decrease in the
production of oil (oil is used to produce gasoline). Show the changes on the two graphs as well
as the new equilibrium prices and equilibrium quantities.
Price Price
0 Quantity 0 Quantity
When oil becomes scarce, it is desired that people will conserve on oil and oil products. Based
on your graphs, does the market lead people to do so? WHY or WHY NOT? What is the
function of the price in the case of each type of car?
8
Janice decides to quit her $20,000 a year job and open a small store selling high fashion.
To start her store, she takes $100,000 out of her savings account. She had inherited this
money from her parents. During the first year, her expenses are as follows:
Janice also works in the store ordering the clothes and doing some selling. During the
first year, Janice’s store sold $250,000 worth of clothing.
Capital
(Sewing Machines) Labor (Workers Per Day)
0 1 2 3 4 5 6 7
1 0 15 34 44 48 50 51 47
2 0 20 46 64 72 78 81 80
1. Assume that there is only one sewing machine (this is the short-run). Calculate the
marginal physical product of each worker:
2. Assume that each worker is paid $80 per day ($10 per hour for an 8-hour shift). Assume also
that there are no other variable costs of production besides labor. In the table above, calculate
the marginal cost. (Hint: if one worker is paid $80 and produces 15 pairs of blue jeans, the
marginal cost of each pair of blue jeans must be $80 divided by 15 = $5.33.)
3. If the marginal physical product is rising (falling), the marginal cost must be ____________
1. San Marcos Market is a grocery store of about 5,000 square feet. Albertsons is a
grocery store of about 20,000 square feet. Albertsons can sell groceries at a lower
price than San Marcos Market because its costs of production are lower. Explain why
Albertson’s costs of production are lower. That is, what cost advantages does
Albertsons (or Vons or Ralphs) have just because it is a larger company?
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, the
prices tend to fall greatly. Use the principles of economies of scale and dynamic
increasing returns to scale to explain why this phenomenon occurs.
3. Recently, there have been many mergers. Large banks have merged with other large
banks. Computer companies have merged with other computer companies. These
mergers are justified by the cost savings that occur if the two competing companies
become one. In this question, let us consider gas stations. Exxon and Mobil, have
merged together into one company, as have Chevron and Texaco. Use the principle of
economies of scale to explain why there might be a reduction in the cost of
production of selling gasoline if these companies merge into one.
4. In each case, state whether you believe the industry should be characterized as perfect
competition, pure monopoly, monopolistic competition, or oligopoly. STATE
YOUR REASONS.
1. Growers of avocados _____________________________
2. Fast-food restaurants _____________________________
3. Automobile Producers _____________________________
4. Television stations _____________________________
5. Computer manufacturers _____________________________
6. Owners of Radio Stations _____________________________
7. Producers of Electricity _____________________________
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1. Assume that this housing construction company sells homes in perfect competition at a market
price of $200,000 per home.
Quantity Price Total Revenue Marginal Revenue Total Cost Marginal Cost
0 $200,000 $180,000
1 $200,000 $340,000 $160,000
2 $200,000 $480,000 $140,000
3 $200,000 $600,000 $120,000
4 $200,000 $740,000 $140,000
5 $200,000 $900,000 $160,000
6 $200,000 $1,080,000 $180,000
7 $200,000 $1,280,000 $200,000
8 $200,000 $1,500,000 $220,000
9 $200,000 $1,740,000 $240,000
10 $200,000 $2,000,000 $260,000
11 $200,000 $2,280,000 $280,000
12 $200,000 $2,580,000 $300,000
2. Now assume that the market price falls to $160,000. Fill in the table.
Quantity Price Total Revenue Marginal Revenue Total Cost Marginal Cost
0 $160,000 $180,000
1 $160,000 $340,000 $160,000
2 $160,000 $480,000 $140,000
3 $160,000 $600,000 $120,000
4 $160,000 $740,000 $140,000
5 $160,000 $900,000 $160,000
6 $160,000 $1,080,000 $180,000
7 $160,000 $1,280,000 $200,000
8 $160,000 $1,500,000 $220,000
9 $160,000 $1,740,000 $240,000
10 $160,000 $2,000,000 $260,000
11 $160,000 $2,280,000 $280,000
12 $160,000 $2,580,000 $300,000
Since there is an economic loss, should the company continue to produce in the short-run? Or
should the company shut-down temporarily? ___________________________
Why? _________________________________________________________________
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Page 2
3. Now assume that the market price falls to $120,000. Fill in the table on the back side.
Quantity Price Total Revenue Marginal Revenue Total Cost Marginal Cost
0 $120,000 $180,000
1 $120,000 $340,000 $160,000
2 $120,000 $480,000 $140,000
3 $120,000 $600,000 $120,000
4 $120,000 $740,000 $140,000
5 $120,000 $900,000 $160,000
6 $120,000 $1,080,000 $180,000
7 $120,000 $1,280,000 $200,000
8 $120,000 $1,500,000 $220,000
9 $120,000 $1,740,000 $240,000
10 $120,000 $2,000,000 $260,000
11 $120,000 $2,280,000 $280,000
12 $120,000 $2,580,000 $300,000
Since there is an economic loss, should the company continue to produce in the short-run? Or
should the company shut-down temporarily? ___________________________
Why? _________________________________________________________________
4. Fill-in the following table. Assume there are 1,000 companies in this industry.
Price Supply of One Company Market Supply Market Demand
$140,000 10,000
160,000 9,000
180,000 8,000
200,000 7 7,000 7,000
220,000 6,000
240,000 5,000
260,000 4,000
280,000 3,000
300,000 2,000
320,000 1,000
340,000 0
5. What price would have to exist in the market so that each of the 1,000 companies earned an
economic profit equal to zero? ____________________ What does “economic profit of zero”
mean?___________________________________________________________________
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Quantity Price Total Revenue Marginal Revenue Total Cost Marginal Cost
0 $11 $ 7
1 $10 $11
2 $ 9 $16
3 $ 8 $22
4 $ 7 $29
5 $ 6 $37
6 $ 5 $46
7 $ 4 $56
Fill in the Table. Remember that the total revenue is equal to the price time the
quantity. The marginal revenue is the change in the total revenue from
producing one more unit. And the marginal cost is the change in the total cost
from producing one more unit.
Using the principles developed in the class, the quantity this monopolist should
produce in order to maximize profits is ________________.
2. Explain why this monopolist cannot change any price she wants, such as $11.
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1. Why do students and the elderly pay a lower price for movies than others?
2. Why does SDG&E charge a lower price to business users than to household users?
4. Other than cost savings, why do grocery stores charge a lower price to people
who clip coupons than to people who do not?
2. In this section, the reasons for the phenomenon of natural monopolies were
described.
The bus system in North County is a natural monopoly while the airline industry is
not. Using the reasons discussed in this section, explain why this is so.
1. Fill in the table below. Assume that all workers are hired in a perfectly competitive labor
market at a wage of $9.
Labor Total Product MPP Price MRP MRC = Wage
1 10 $1
2 21 1
3 33 1
4 44 1
5 54 1
6 63 1
7 71 1
8 78 1
In the graph below, draw the MRP curve and the MRC curve (assuming a wage of $9). Show
the profit-maximizing number of workers hired.
$
___________________________________
0 Number of Workers
2. Would the demand for the following workers be relatively elastic or relatively inelastic? Why?
1. Free agent football players try to raise their salaries by switching teams.
Elastic or Inelastic? __________________________________
Why?____________________________________________________
2. The Presidents (CEOs) of corporations try to get raises in their own salaries.
Elastic or Inelastic?___________________________________
Why?____________________________________________________
3. Those who run cash registers at grocery stores try to get increases in their wages.
Elastic or Inelastic?__________________________________
Why?____________________________________________________
16
The previous class discussed the derivation of the demand for labor. Wages are
determined by the demand for labor and the supply of labor. This class will discuss the
factors that are responsible for the fact that some people receive higher wages than other
people. Before we do this, take a few minutes to try to provide some reasons why certain
people might earn higher wages than others. In particular, what reasons can you give
for the fact that, on average, men receive higher wages than women do?
1.
2.
3.
4.
5.
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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?
6. Government provides Social Security and Medicare for those who are age 65 and up
1. Form into groups of three or four people. Discuss the following: If a household had an
annual income of each of the following, would you consider the household “rich”?
$1,000,000 _____
$ 500,000 _____
$ 250,000 _____
$ 125,000 _____
$ 100,000 _____
$ 75,000 _____
$ 50,000 _____
2. If you have not examined the data in the chapter, consider the following questions:
1. How much income did a household need this year to be in the 80 th percentile (80% of
American households would have less income while 20% would have more income)?
___________________
2. How much income did a household need this year to be in the 95 th percentile (95% of
American households would have less income while 5% would have more income)?
___________________
3. Based on your best guess as to your own family’s income this year, approximately what
percentile in the income distribution did your family fall? Do this for each person in the group.
___________________
4. In 2002, the poverty threshold for a single person residing in San Diego was approximately
$1,200 per month. Form a budget for yourself, assuming that you have exactly this income.
Consider all of your expenses. (If you are not single, the poverty thresholds are different: about
$1,400 for 2 adults, $1,500 for one adult and one child, $1,800 for 2 adults and one child or for
one adult and two children, $2,200 for 2 adults and 2 children, etc. Use these numbers to prepare
your budget.
5. Ethics Question
Consider the following proposition: taxes should be raised on the richer people, with the
money given as transfers to the poorer people, so as to make the distribution of income more
equal. You will be assigned to argue either for or against this proposition. Name as many
arguments as you can for the position you are assigned.
1.
2.
3.
4.
5.
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1. What will be the estimated total government spending in the current year?
3. In the current year, what percent of the federal budget will be discretionary?
4. Over the next few years, what is projected to happen to each of the following (in
total and as a percent of the total budget): (1) defense; (2) social security; (3) Medicare
5. Over the next few years, what is projected to happen to total government
spending?
0 0
$10,000 $ 500
$20,000 2,000
$30,000 4,500
$40,000 8,000
$50,000 12,500
Fill-in the table above. Is the tax above progressive, regressive, or proportional? Why?
2. Given the definitions of progressive, regressive and proportional taxes, do you believe
each of the following taxes to be progressive, regressive, or proportional. In each case,
state WHY.
1. Assume that there are only four goods produced. The following represent the prices
and quantities sold in the base year (2000) and the current year (2005):
What was the Nominal Gross Domestic Product (GDP) in 2000? Show calculations.
What was the Nominal Gross Domestic Product (GDP) in 2005? Show calculations.
What was the Real Gross Domestic Product (Real GDP) in 2005? Show calculations.
23
SHOW CALCULATIONS.
3. Jane does not work now but she is looking for a part-time job _______________
4. Mary is a single mother; she looked for a job for six months
without luck. Last month, she gave up looking. _______________
3. In each of the following cases, state whether the unemployment would be classified as
"frictional"; “seasonal”; "structural"; or "cyclical".
A 10 15 $1 $3
B 5 10 $3 $4
C 20 20 $5 $10
1. Using this data, calculate the Consumer Price Index (CPI) for 2005. Assume that
A, B, and C are all consumer goods and that the Base Year is 1982.
2. Assume that you have a COLA tied to the CPI. In 1982, you earned $15,000. How
much do you need to earn in 2005 to have the same purchasing power as you had in
1982?
3. Using the numbers above, calculate the GDP Deflator. Assume that the Base Year is
1982 (in reality, it is 2000).
4. In reality, the GDP Deflator number is likely to be different from the CPI number?
Why is this so?
5. In 1979, the CPI was 72.6. In 1980, the CPI was 82.4. What was the percentage
increase in the CPI in 1980?
25
1. Assume that Mary lends Linda $1,000 for one year at a time when there is no
inflation. They agree on an interest rate of 5%. After the loan is made, inflation
begins! During the year, prices rise 5%. What is the real rate of interest Linda
receives?
2. In 1979, I was driving to work when my car (a Fiat) caught on fire. After getting the
fire out, I realized that I had to have a new car. But I didn’t have the money. So I
borrowed from the bank for a three year loan at 9% interest. In 1980, to the surprise
of everyone, prices rose 13 1/2%! For 1980, what was my real rate of interest?
3. In 1982, Joe bought a house. Figuring that inflation would continue at least 10% a
year, Joe accepted a 30 year loan at 17% nominal interest. In reality, by 1983, prices
were rising at a bit over 3% per year. What real interest rate did Joe expect he was
paying? What real interest rate did Joe actually pay in 1983?
4. Between borrower and lender, who is better off and who is worse off because of
unexpected inflation?
5. Do you believe that each of the following would be better off or worse off because of
unexpected inflation:
6. If you believed that large inflation was coming soon, what would happen to each of
the following:
1. The amount you would save in a bank ___________
1. Assume that, there is only one product produced, which we will call a "widget". If
there were full-employment, production would equal 1,000 widgets to sell at $100 per
widget. Therefore production in the United States is valued at $100,000. Domestic
income also must equal $100,000. This income involves 10 workers being paid $10,000
per year. (Ignore profits for now.) Each worker produces 100 widgets.
Of their $100,000 of income, the workers pay $10,000 in taxes, save $5,000, spend
$85,000 on consumer goods, of which $80,000 were produced in the United States and
$5,000 were imported.
Businesses wish to spend $10,000 on private business investment spending, that is, on
capital goods produced in the United States.
If the government spent the same amount that it raised in taxes ($10,000), what would
happen to production in this economy (inflation, recession, or neither?)? Why?
In order to avoid any problem of unemployment or inflation, how much should the
government spend? Why?
If it did so, the government would have a (budget deficit or surplus?) equal to
$_________________.
If there is a deficit, where would the government get the money to pay for this deficit?
If there is a surplus, what would be done with the surplus?
27
2. Take out some currency. Any amount will do. Examine the front of the bill.
Based on your examination, what does this piece of paper represent? That is,
what is currency?
3. "I have $200 in my checking account." If I go into the bank and tell them that I want
to see my $200, what will they show me? That is, what is a checking account?
5. What is the total value of M-2 in the most recent period? ___________________
What percent of the assets of Bank of America was provided by owners? (Calculate
the stockholders’ equity as a percent of the total assets)
28
by $______________________.
2. Assume that the discount rate is lowered from 6% to 4%. As a result, Bank A
(see question #1) borrows $1,000 from the Fed.
decrease?) by $______________________.
3. Now, assume that the Fed buys $1,000 worth of Treasury Bills from Bank A.
decrease?) by $__________________.
The two cases discussed in class analyzed the effects on foreign exchange markets of an increase
in interest rates in the United States and of an increase in inflation in the United States. Do the
same analysis for each of the following cases:
2. Both Americans and Japanese believe that American goods are of higher quality than before
3. Both Americans and Japanese believe that the Japanese yen will depreciate in the near future
4. Laws change in Japan making it easier for Americans to buy or build companies in Japan
5. Interest rates fall in the United States while they rise in Japan