Name_______________________________________

Laurentian University Winter 2012 Department of Economics Brian K. MacLean

ASSIGNMENT ONE
Due: January 25, 2012, at the beginning of class Instructions: See final page of the assignment.

ECON 1007 EL03

PART I: Multiple Choice. Circle the letter representing the best answer from the
alternatives provided. Answer all questions. (14 points)
1. a. b. c. d. e. 2. a. b. c. d. e. 3. The Cost-Benefit Principle tells people that they should take an action if benefits equal costs. costs exceed benefits. marginal costs exceed marginal benefits. marginal benefits exceed marginal costs. benefits are positive. A sunk cost is the value of money put into an investment. beyond recovery at the moment a decision must be made. important to consider when conducting cost-benefit analysis. equal to the opportunity cost when the interest rate is zero. the same as a marginal cost. According to the Cost-Benefit Principle, when deciding whether to pursue an activity further, which of the following costs are relevant? Sunk costs. Marginal costs. Average costs. Total costs. Opportunistic costs.

a. b. c. d. e. 4. If one person can perform a task in fewer hours than another, the person is said to have _______________________ in performing the task. a. an absolute advantage b. a comparative advantage c. both a comparative advantage and an absolute advantage d. neither an absolute nor a comparative advantage e. either an absolute or a comparative advantage

 For Questions 5 to 7, refer to the graph provided.

5. Using the term efficiently in the technical sense, the economy efficiently produces both cloth and wine at which point? a. a b. b c. c d. d e. e 6. Which point could represent production in the economy if it were experiencing substantial underutilization of resources ( with high unemployment)? a. a b. b c. c d. d e. e 7. Which point on the graph is not currently attainable for this economy? a. a b. b c. c d. d e. e 8. Equilibrium a. is a concept unique to economics. b. occurs where supply exceeds demand. c. results when opposing forces fail to cancel each other out. d. indicates balance. e. refers to a constant state of change.

 9. In the supply and demand model, which of the following is not true of the equilibrium? a. All buyers and sellers are satisfied with their respective quantities, given the market price. b. Supply and demand intersect. c. Quantity supplied equals quantity demanded. d. The price has no tendency to change. e. Buyers and sellers wish to change their behaviour. 10. According to the law of demand, an increase in price will a. decrease demand. b. decrease quantity demanded. c. increase demand. d. increase quantity demanded. e. not affect quantity demanded. 11. If an increase in income leads to a decrease in the demand for a good, the good is a(n) a. substitute good. b. complementary good. c. inferior good. d. normal good. e. superior good.

12. Select which of the following is the Latin expression for other things being equal: a. post hoc ergo propter hoc b. de gustibus non est disputandum c. a mari usque ad mare d. labor omnia vincit e. ceteris paribus

13. Which of the following statements is an example of a positive economics? A. specialization according to comparative advantage makes everyone better off B. public policy should aim to maximize economic surplus C. we should apply cost-benefit analysis to issues of loyalty, marital fidelity, acquisition of knowledge, and so on, and never be bound by moral principles and high ideals D. if the price of service declines, then the quantity demanded will tend to rise, all else equal E. none of the above 14.Which of the follow examples is an example of the post hoc fallacy? a. when one farmer in a market works longer hours and produces more, the farmer gets more income; therefore if all farmers in that market work longer hours and produce more, all farmers will get more income b. if one event occurs before another event, then the first event must be the cause of the second event c. if one person in a stadium stands up and gets a better view, everyone in the stadium can get a better view by standing u p d. if one employer can get higher profits by cutting workers wages, all employers can get higher profits by cutting workers wages e. if one person can get higher income by saving more and then earning interest, incomes will always rise if everyone increases their saving at the same time

PART I: Problems (29 points)

1. Refer to the graph provided below to answer the following questions about this supply and demand diagram representing a perfectly competitive market. (4 points)

a. What is the prediction of the supply and demand model about the state of the market when the price is $3? When the price is $3, the model predicts that the market would be in a state of (equilibrium/shortage/surplus)? [Circle the correct answer]. b. What is the prediction of the supply and demand model about the state of the market when the price is $7? When the price is $7, the model predicts that the market would be in a state of (equilibrium/shortage/surplus)? [Circle the correct answer]. c.. What is the prediction of the supply and demand model about the state of the market when the price is $5? When the price is $5, the model predicts that the market would be in a state of (equilibrium/shortage/surplus)? [Circle the correct answer]. d. What is the equilibrium quantity in this market? The equilibrium quantity is _____________________.

2.

Assume that the market for oranges is perfectly competitive and can be modeled with a demand and supply diagram. Graph the effect on equilibrium price and quantity in the market for oranges for each of the following changes. For each change described, the axes for your graph are provided. Add the appropriate demand and supply curves, and label the curves and the axes to show the changes in equilibrium price and quantity. (8 points)

a. A chemical routinely sprayed on orange trees is found to cause cancer.

b. A new orange picking machine is invented. For the same cost, it can pick more oranges, faster, and with less damage than other machines.

 c. Consumer income falls (assume that oranges are a normal good).

d. The price of tangerines falls (assume that oranges and tangerines are substitutes).

 3. Gilligan and Robinson are stranded on a desert island. To feed themselves each day they can either catch fish or pick fruit as specified in the table below. (4 points) Fruit Fish Gilligan 60 20 Robinson 100 150 Use the information to determine who has each of the following. Circle the correct name for each case. a. Comparative advantage in fruit picking: (Gilligan/Robinson) b. Comparative advantage in fishing: (Gilligan/Robinson) c. Absolute advantage in fruit picking: (Gilligan/Robinson) d. Absolute advantage in fishing: (Gilligan/Robinson) 4. You decide to purchase a one-year, non-refundable membership to a fitness centre for $500. You plan to work out twice a week for 50 weeks during the year. (5 points) a. If you do as you plan, what is the average cost of a visit? b. If you decide to work out a third time each week during the year, what is the marginal cost of the third visit each week? c. After the first week, you realize that you hate to work out. Using the cost-benefit principle of your textbook, what is your optimal number of workouts for the remainder of the year?

d. Is the optimal number of workouts a matter of positive economics or of normative economics? Why? e. Would a medical doctor necessarily agree with your calculation of your optimal number of workouts?

5.

The following table contains data on the relationship between saving and income. (8 points) Income (per year)` $15,000 0 10,000 5,000 20,000 Saving (per year) $1,000 -500 500 0 1,500

a. Rearrange these data into a meaningful order in the table below. (2 points) Income (per year) Saving (per year)

b. Graph the data on the grid below. (2 points)

c. What is the slope of the line representing the relationship between income and saving? (1 point) d. What is the vertical intercept? (1 point) e. Write the equation that represents this line. (2 points) d. What would you predict saving to be at the $12,500 level of income? (1 point) INSTRUCTIONS: 1. Provide your answers in the spaces provided and keep the exact same format and number of pages as the original document. For ease of grading, the same answer should be in the same place on each students assignment so do not modify the format. 2. Whether you seek assistance with the assignment from the tutor during the tutorial session from me during office hours, you should carefully read the relevant textbook material and attempt to answer the question on your own before you seek assistance. 3. You are welcome to work with another student on parts of the assignment that you find difficult to answer on your own, but you must write up your answers on your own and you need to understand the answers you provide and be able to explain them. 1 Your goal should be to learn and to get a good grade for the course as a whole and that depends on you mastering the material. 4. Be sure to staple the pages of your assignment together before you submit it. It is a sign of maturity to submit a neat, properly prepared assignment. 1 If you are called upon in class to explain your answer after you have submitted your assignment, and you are not able to give the right answer again or to explain your answer, it could lead to an investigation of whether you copied your answers from another student. Copying answers from another student is strictly prohibited and infractions will be punished. 9