Extra Assignment #2

Chapter 1

1. Economics is the study of agents and how they make choice with scarce resources and how those
choices affect society.

2. Economic agent -an individual or group that makes choices

3. Scarce resources – unlimited wants with limited resources

4. Positive vs Normative economics – Positive is what actually happens, normative is what ought
to be
5. Microeconomics vs Macroeconomics – macro is the study of economy as a whole, economy
wide phenomena. Micro studies how individuals, households, firms, and government make
decisions
6. Three principles of economics. Explain. Give an example. – the three principles are
optimization, equilibrium and empiricism. To optimize the amount of pollution in the water is
to find the point where it is economically to feasible to eliminate the most waste with the least
amount of money.
7. Describe the solution, step-by-step, of at least 1 difficult problem in this chapter
The ethical implications of a hotly debated government policy would best be considered
a _________
Normative question as it deals with subjective material.
Normative economics has to do with subjective material and how the world ought to be which is
why this is the best answer.

Chapter 2

1. Economic model. Give an example – Modeling the increase in income additional years of
education brings is a model.
2. What is an assumption of a model? – the basis for the model and the data you get from it
3. How do we test models? What is scientific method? – We can compare results of the model and
see how the model stacks up to real world data. Scientific process is the ongoing process used to
make models of the world and test them with data.
4. Correlation and types of correlation – statistical association between variables, positive and
negative correlation
5. Causation – when one thing directly causes another
6. Why correlation is different from causation? In correlation things aren’t directly affected,
variables are associated with other things. In causation something directly affects another. Like
if I throw a rock at a bird, I caused that bird to die. If the bird serves as good fertilizer, then
the amount of rocks thrown at birds and good fertilizer are correlated.
7. How to establish causation? Explain main problems (omitted variables, reverse causality) You
have to prove that one thing directly affects another and rule out any other variables that
might mean it is correlated instead. With naming cows, the animal welfare is taken out and is
an omitted variable. Reverse causality can also be lurking. Gambling is said to make you
healthier, but data shows healthier people gamble instead. Gambling happens because of health
not health caused by gambling.
8. Explain how a controlled experiment is different from a natural experiment. Give examples.
Controlled experiment is where actual economists or scientist conduct an experiment with a
treatment and look for results. A natural experiment is where something naturally happens
that you can study and observe results. You can study how screens affect memory in
classrooms, and how Medicaid benefits those with it and without it.
9. Describe the solution, step-by-step, of at least 1 difficult problem in this chapter
Demonstrate causation or correlation with the following examples:
More police officers and lower crime rates is likely to be causation
.
More economic growth and higher employment levels is likely to be causation
.
The length of women's skirts and stock market performance is likely to be
correlation

Chapter 3
1. Types of optimization. Explain them total value- overall net benefit of one option Marginal
Analysis – calculates the marginal benefit of changing between different options
2. Solve a problem using marginal analysis and total analysis. Why do they give you the same result?
You are using the same numbers, using marginal analysis it will show what the best option is
by marginally comparing them and net benefit shows you the best overall option. Each will
yield the best overall option
3. Explain what opportunity cost is. Give examples opportunity cost is the cost of the next best
option you gave up. If I have $40 that I can either buy gas with or save and I choose to save it,
then my opportunity cost is the gas
4. How do we put opportunity costs in $ terms? Put it into a number of money in expected benefit,
compare benefits of each opportunity cost
5. When the benefits are the same, what do we optimize? When the costs are the same, what do we
optimize? When benefits and costs are different, what do we optimize? When benefits are the same,
we optimize the net benefit. When cost is the same, we optimize benefits. When benefits and
costs are different then we optimize the best benefit per dollar spent.
6. Draw a graph with the solution of each of the cases in item (5), for marginal analysis and
optimization using total value
 OptimizingConstant Price
in Different benefits and
costs
15
8
10
CostCost

6
5
4
20
0 1 2 3 4 5 6 7
0
0 2 4 6Benefit8 10 12 14
Benefit

Constant Benefit
8
6
Cost

4
2
0
10 12 14 16 18 20 22 24
Benefit

The least cost in the first graph is optimized

The most benefit is optimized in the second graph
A benefit of 12 and cost of 4 is the most optimized point in the last graph

7. What is comparative statics? Changing variable to observe different outcomes in economics.

8. Describe the principle of optimization at the margin optimizing by moving to the option that
makes you better off and moving away makes you worse off
9. When is marginal analysis easier to do than absolute value analysis? Marginal analysis is easier
to do on more complex problems. Total value you have to add everything up, whereas in
marginal you just have to look at benefit.
10. Describe the solution, step-by-step, of at least 1 difficult problem in this chapter

You are a professor of economics at a university. You've been offered the position of serving as
department head, which comes with an annual salary that is $8,500 higher than your current salary.
 However, the position will require you to work 200 additional hours per year. Suppose the next best use
of your time is spending it with your family, which has value of $40 per hour.
What is the difference in the net benefit from becoming the department head?
The change in net benefit is $500
To optimize become the department head

Chapter 4
1. Perfectly competitive market
In a perfectly competitive market, (1) sellers all sell an identical good or service, and (2) any
individual buyer or any individual seller isn’t powerful enough on his or her own to affect the
market price of that good or service

2. Demand schedule
A demand schedule is a table that reports the quantity demanded at different prices, holding
all else equal
3. Demand curve
The demand curve plots the quantity demanded at different prices. A demand curve plots the
demand schedule
4. Quantity demanded
 Quantity demanded is the amount of a good or service that sellers are willing to sell at a given
price
5. Supply schedule
A supply schedule is a table that reports the quantity supplied at different prices, holding all
else equal
6. Supply curve
The supply curve plots the quantity supplied at different prices. A supply curve plots the
supply schedule.
7. Quantity supplied
 Quantity supplied is the amount of a good or service that sellers are willing to sell at a given
price
8. Market price
If all sellers and all buyers face the same price, it is referred to as the market price
9. Price-takers agent
 A price-taker is a buyer or seller who accepts the market price- buyers can’t bargain for a
higher price
10. Willingness to pay
Willingness to pay is the highest price that a buyer is willing to pay for an extra unit of a good
11. What is the relationship between demand curve and willingness to pay?
Willingness to pay is demand
12. Market demand curve
The market demand curve is the sum of the individual demand curves of all the potential
buyers. It plots the relationship between the total quantity demanded and the market price,
holding all else equal
13. When do we have shifts in demand curve?
taste preferences, income & wealth, availability of prices of related goods, number and scale of
buyers, buyer’s expectations of future
14. What do we mean with a rightward shift in demand curve?
demand of market increased
15. What do we mean with a leftward shift in demand curve?
Demand of market decreased
16. Substitute good
two goods are substitutes when a fall in the price of one leads to a left shift  in the demand
curve for the other
17. Complement good
Two goods are complements when a fall in the price of one leads to a right shift in the demand
curve for the other

18. Market supply curve

The market supply curve is the sum of the individual supply curves of all the potential sellers.
It plots the relationship between the total quantity supplied and the market price, holding all
else equal.
19. When do we have shifts in the supply curve?
input prices, technology, number and scale of sellers, seller’s expectations about the future
20. What do we mean with a rightward shift in supply curve?
Quantity supplied of the market increased
21. What do we mean with a leftward shift in supply curve?
Quantity supplied of the market decreased
22. Competitive equilibrium. Competitive equilibrium price. Competitive equilibrium quantity
crossing point of supply curve and the demand curve
23. Excess demand
Excess demand is a shortage of supplied goods
24. Excess supply
Excess supply is a surplus of supplied goods
25. Draw what happens when we have shifts that increase supply and demand

26. Draw what happens when we have shifts that increase supply and decrease demand
27. Draw what happens when we have shifts that decrease supply and increase demand

28. Draw what happens when we have shifts that decrease supply and demand
29. Describe the solution, step-by-step, of at least 1 difficult problem in this chapter
As part of U.S. sugar policy, the government offers to buy raw sugar from domestic sugarcane mills at a
price of 18.75 cents per pound. This government offer is made for as much raw sugar as the sugarcane
mills produce. Any raw sugar purchased by the government is not sold in the domestic market, as this
might cause raw sugar prices to fall.
1.) Using the line drawing  tool, depict the government's demand curve for sugar. Label your curve 'D'.
(Be
sure to have your demand curve touch the
y-axis.)

The price will always stay at $18.75 no matter what quantity because the government is
buying it to keep a healthy market.

Chapter 5

1. Buyer’s problem 1. What do you like 2. How much does it cost 3. How much money do you
have
2. Assumptions of every part of the buyer’s problem 1. We all want biggest bang for buck Was we
actually buy reflects our tastes and preferences 2. Prices are fixed and we can buy as much as
we want without driving price up 3. No saving or borrowing, That even though we use a
straight line to represent purchase choices, we only purchase whole units
3. Describe how to find the budget line taking the max units of one product you can buy and
connecting it to the other max units of products you can buy
4. Draw a budget line and point where are the feasible choices

Budget Line When you have $300

3.5
Sweaters that cost $50

3
2.5
2
1.5
1
0.5
0
0 1 2 3 4 5 6 7
Shoes that cost $25

5. What do we want to maximize in the buyer’s problem? Benefits from consumption

6. What is the equilibrium condition in the buyer’s problem? Perfect market
7. When do we buy more of one good in the buyer’s problem? When prices are lower and benefit
per dollar is higher
8. Draw the budget line when price increases

Budget Line When you have $300

7
Sweaters that cost $100

6
5
4
3
2
1
0
0 2 4 6 8 10 12 14
Shoes that cost $50

9. Draw a budget line when price decreases

 Budget Line When you have $300
14
12
Sweaters that cost $25

10
8
6
4
2
0
-2 3 8 13 18 23 28
Shoes that cost $12.5

10. Draw a budget line when income increases.

Budget Line When you have $600

14
12
Sweaters that cost $50

10
8
6
4
2
0
-2 3 8 13 18 23 28
Shoes that cost $25

11. Draw a budget line when income decreases

Budget Line When you have $150

5
Sweaters that cost $50

0
0 1 2 3 4 5 6 7 8
Shoes that cost $25

12. What is the relationship between buyer’s problem and demand curve?
buyer’s problem affects the demand curve because of the change in prices and buyers
willingness to pay
13. What is the slope of the budget line?
Always negative or decreasing
14. Consumer surplus
Consumer surplus is the difference between the willingness to pay and the price paid for the
good
15. When do we have changes in consumer surplus?
When the demand curve changes
16. Elasticity
 Elasticity is the measure of sensitivity of one variable to a change in another
17. Price elasticity of demand (both formulas)
PED= % change in quantity demanded/% change in price
PED= Q2-Q1/Q2+Q1/2 / P2-P1/P2+P1/2

18. Draw an elastic demand

19. Draw an inelastic demand

20. What is the relationship between revenue and price elasticity of demand? Revenue and elasticity
are dependent on each other. If it is elastic then when prices drop revenue goes up. If it is
inelastic when prices go up revenue goes up. Unit elastic goes up and down proportionally.
21. Cross-price elasticity of demand. Sign of cross-price elasticity of demand cross price elasticity is
percent change in quantity demanded of good x over percent change in price in good y. E XY
22. Income elasticity of demand. Sign of income elasticity of demand percent change in quantity
demanded over percent change in income. EM
23. Describe the solution, step-by-step, of at least 1 difficult problem in this chapter

We can find the budget constraint by using our income

and prices of X and Y.
After that we can find that the opportunity cost of
buying on unit of Y is 70/60 = 1.167