A boss can type 200 words per minute and sell 2000 units of the company’s product in
one day. His assistant can type 150 words per minute and sell 1000 units of the
company’s product in one day. Discuss who has absolute and comparative advantages in
the “production” of typing and selling.
Equilibrium conditions are used to analyze the desirability of economic outcomes.
Last year, the price of heating oil was $4 per gallon, and Jonetta purchased 100 gallons
of heating oil. This year, the price of heating oil falls to $3 per gallon while Jonetta’s
income is unchanged. Jonetta decides to share her good fortune by giving her retired
father a gift of $100. Consider an indifference curve-budget line diagram with heating
oil on the horizontal axis and “all other goods” on the vertical axis.
(i) Does the price change make Jonetta’s budget line flatter or steeper? Justify your
choice.
(ii) After Jonetta gives the $100 gift, will her new budget line lie above, lie below, or
pass through her initial optimum? Justify your choice.
(iii) Sketch an indifference curve-budget line diagram that illustrates this situation. This
year, will Jonetta be better or worse off than she was last year?
Marginal Revenue measures the slope of the Demand curve.
If the Consumer Price Index (CPI) reports an inflation rate of 0%, then a person with a
fixed income will be neither better off or worse off.
Once it has been produced, the efficient price for a nonrivalrous good is zero.
The value of a productive asset is equal to the present value of the stream of dividends
that it produces.
Determine how each of the following situations would affect the demand for current
consumption, the supply of current consumption, and the interest rate.
Social welfare would be increased if a monopolistically competitive industry were
replaced with a competitive industry.
A farmer has a comparative advantage at growing wheat if his cost of growing wheat is
less than the cost of another farmer growing wheat.
A firm’s revenue can be calculated from its demand curve using the formula “price
times quantity.”
To achieve economic efficiency when transactions costs are present, liability should be
assigned to the source of any external costs.
When can we expect a factor-price effect to occur? How does a factor-price effect alter
an industry’s short-run and long-run supply curves?
Define the term normal good. How can a normal good be recognized from
(i) the Engel curve diagram,
(ii) the income elasticity of demand, and
(iii) the substitution and income effects of a price change?
When there are two goods (X and Y), the consumer’s optimum is typically found by
locating the basket where the marginal value of X in terms of Y equalsPX/PY. Explain
in words what this equality means, and describe two situations where the consumer’s
optimum is not characterized by this equation.
Deficit spending by the government is unwise, because taxpayers receive nothing of
value when their taxes are used to make interest payments.