Robin

Greener

EC314: Managerial Economics

Chapters 5, 6 & 7 Essay Test

This test is worth 60 points total. Be sure to answer each question clearly and concisely!
Avoid answering questions that weren’t asked.

Before attempting this test, make sure that you have studied a) Chapters 5, 6 & 7 from the
textbook, b) the instructor’s comments on Chapters 5, 6, & 7, c) the Chapter Readings for
Chapters 5, 6 & 7, and the Chapter Perspectives for Chapters 5, 6 & 7.

Chapter 5: Applications of the economic way of thinking: international economics

A. International Trade (10)

Economists are nearly unanimous in their support of free trade yet
governments often use tariffs and quotas to interfere with free trade.
According to the textbook, what explains the difference? Who is correct, the
economists or the government, and why?

I was able to find the answer in the textbook but it was not in Chapter 5 for some
reason, but in Chapter 6. Even though economists are well known for their support of
free trade and believes this provides the best situation for the economy, the reason
the government interferes is because they recognize that there are winners and
losers when it comes to trade. When the government feels like they are on the losing
side of free trade, they will implement tariffs and quota to gain back power. Capital
and labor in the import countries will have losses while the consumers and labor in
export countries will benefit. The losers want to make sure that this doesn’t happen
so they will pressure the government to step in. This actually makes the economy
worse off, even though that is not the thought. Economists are correct on believing
in free trade.

B. International Finance (10)

1. What does it mean for the U.S. dollar to be “strong” or “weak”?
When comparing the US Dollar or the US form of currency to a different countries
form of currency, the US dollar is considered to be strong when the foreign
currency is cheaper in terms of dollars. The US dollar is considered to be weaker
when it costs more dollars to buy a foreign currency.

2. Who gains and who loses from a weak or a strong dollar and why? Is it
better for a country to have a weak or a strong dollar?
When the weaker dollar is present, the exports are cheaper to foreign countries
and the imports are more expensive to the domestic consumers. This means that
export industries will increase and import industries decrease. Consumers are the
losers when it comes to a weaker dollar. Domestic businesses are the losers
when there is a stronger dollar because the exports become more expensive.

There is no way to decide whether it is better for the country to have a weak
dollar or a strong. Because when it is weak, the consumers are down and
businesses are up. When it is strong the consumers are up and businesses are
down.

Chapter 6: Applications of the economic way of thinking: environmental economics

Robin Greener

A. Environmental Economics (10)

Nobody likes pollution (or crime, or accidents)! But economists, as they so
often do, bring a different perspective to the issue of pollution. Assume that
a paper plant dumps the chemicals it uses in making paper into the river it
is located next to, polluting the river for downstream users. The paper plant
operates in a perfectly competitive market (the price it charges for its
products equals its average total cost of production, not counting the costs
of pollution, and it earns only a normal profit on its business.)
1. Who loses and who gains from the pollution caused by this plant? (5)
The people who live on the river downstream would be the ones most effected by
the plant. They will have to spend their money to help clean up the pollution the
plant created. The Plant gains because they do not have to pay for all the
pollution they are creating which allows lower costs which means lower price,
which means they sell more. But mostly the people who buy the paper because
they have a cheaper price of paper because the price is cheaper.
2. Explain why the economist says that it doesn’t make sense to reduce the
amount of pollution to zero. What is the “optimal” amount of pollution?
(5)
The rule is that if the marginal benefit is exceeding the marginal cost then you
should do it. There comes a time when cleaning up all the pollution costs more
than the benefits. The optimal amount of pollution is when the marginal cost of
cleaning equals the marginal benefit.

B. Quicksilver Capital (10points)

The authors, in the textbook and in the online readings for Chapter 6,
present both the potential advantages and the potential disadvantages of
increased capital mobility. These arguments are relevant from both a
domestic (companies shopping for subsidies and tax breaks from
governments as a condition for relocating) and international (outsourcing of
productive activities and relocating headquarters to another country) point
of view. Based on what you have read, do you think that this increasing
mobility of capital will, on net, be a good or a bad thing for the
competitiveness of business and of government? Be sure to tie your answer
to the points made in the textbook and the readings.

Having an increase in capital mobility can allow firms to take advantage of good mix
between capital and labor which decreases the production costs. It also allows the
government to be more efficient because of the pressure of losing tax revenues.
Robin Greener

Chapter 7: Consumer choice and demand in traditional and network markets

A. The law of demand says that when the price of something goes down people
buy less of it (and vice versa), all other things being equal. Such a change is
referred to as an increase in quantity demanded and is shown by a
movement down along a given demand curve. By contrast, an increase in
demand is shown by a rightward shift in the entire demand curve.
1. Some people seem to believe that there are goods for which the law of
demand is irrelevant, goods that people just “can’t do without.” Why do
economists believe that the law of demand applies to all goods. (4)

They have the substitution effect and the income effect. The income effect is
when the price of a good goes up, the consumer’s effective purchasing power
goes down, forcing the consumer to buy less of all normal goods. A substitution
effect is when the price of one good changes they go to another good that price
has fallen that is a substitute. They believe that cigarettes, alcohol and gas are
irrelevant. This is false as when the price of these goods go up then the
consumer will be forced to buy less of the good. This means that the demand
curve is not perfectly inelastic and will be effected.

2. Explain what would have to happen to each of the following in order for
the demand for widgets to go up:
a. Consumer incomes (2)

Need more information. If a normal good and increase in income will increase
the demand for the good. If it is an inferior good and increase in income will
cause the demand to decrease this is because they can afford better things so
they don’t need to buy the inferior goods anymore.

b. Prices of other goods (2)

Need more information. If the goods end up being unrelated then a change in
the price of one good will have no effect on the end demand for another good.
If they are substitutes an increase in price of one will cause an increase in
demand for the other. If they are compliments then an increase in price in
one good will cause a decrease in demand for the other.

2. You hire a consultant to estimate the elasticity of demand for widgets,

the product that your company produces and sells. When you receive the
report, it indicates that the elasticity of demand for widgets is -0.6.
Briefly explain what that means and how it would affect your firm’s
pricing decision? (4)

That pretty much means that if there is a change like a 1% increase in price then
the demand will decrease .6%. The demand for widgets is inelastic. It is
important the firm raises the price until the demand for widgets is no longer
inelastic.

B. For “standard” goods, the consumption of a good today has no effect on

future consumption. But, the authors suggest that this is not true of all
goods.
1. Briefly explain the distinction between a “lagged-demand” and a
“network” good, giving examples of each. (4)
Robin Greener

Lagged demand good is when consumption today affects consumption in the

future periods. Examples being alcohol and tobacco. You get addicted to it.
2. If the widgets are a “network” good, how would it affect your firm’s
pricing strategy. (4)
You would have a reason to lower the price of the good to encourage others to
become users. Like Facebook, it would not be valuable without many users. That
is why it is important that they have easy access so they can have the largest
network possible and make it more valuable because of that.