AIU Exam Markets & Decision Making

Transcription

1 AIU Exam Markets & Decision Making School: Business & Economics Major: Economics Course title: Markets & Decision Making Credits for course: 3 credits Description of course: The effects of taxes on supply and demand What determines who really bears the burden of a tax The costs and benefits of taxes, and why taxes impose a cost that is greater than the tax revenue they raise The difference between progressive and regressive taxes and the tradeoff between tax equity and tax efficiency The structure of the U.S. tax System Why good decision making begins with accurately defining costs and benefits The importance of implicit and explicit costs in decision making How accounting profit and economic profit differ, and why economic profit is the correct basis for decisions Why there are three different types of economic decisions: either or, how much, and those involving sunk costs The principles of decision making that correspond to each type of economic decision Why people sometimes behave in irrational yet predictable ways How to make decisions involving time Book & chapter: Economics by Paul Krugman, Chapters 3 and 4 Link to book: 20economics.pdf Bibliography of book: Krugman, Paul. Robin Wells. "Economics." Worth Publishers, 4 th Edition (2015).. Format of the assignment: Assignment must have an AIU cover page, introduction to the topics of the chapter, answers to the questions below, conclusion about the exam and the bibliography of book at end of assignment. Instructions for Adding Course & Submitting Exam: Go to the top of your student platform. On the left you will see a link to add a course called Add Courses into Curriculum. Click there. Then you will see a button to add a new course. It will then ask you to give the specific name of the course, which is given above on this exam.

2 Then you submit the assignment through another link at the top of the platform called Submit an assignment. You choose the course name from the drop-down list. Then you choose to send the assignment offline. Then you upload the file(s) for the course. Please include questions with your answers, so that we can see the question being answered. Questions Chapter 3 1. Both Canada and the United States produce lumber and footballs with constant opportunity costs. The United States can produce either 10 tons of lumber and no footballs, or 1,000 footballs and no lumber, or any combination in between. Canada can produce either 8 tons of lumber and no footballs, or 400 footballs and no lumber, or any combination in between. a. Draw the U.S. and Canadian production possibility frontiers in two separate diagrams, with footballs on the horizontal axis and lumber on the vertical axis. b. In autarky, if the United States wants to consume 500 footballs, how much lumber can it consume at most? Label this point A in your diagram. Similarly, if Canada wants to consume 1 ton of lumber, how many footballs can it consume in autarky? Label this point C in your diagram. c. Which country has the absolute advantage in lumber production? d. Which country has the comparative advantage in lumber production? Suppose each country specializes in the good in which it has the comparative advantage, and there is trade. e. How many footballs does the United States produce? How much lumber does Canada produce? f. Is it possible for the United States to consume 500 footballs and 7 tons of lumber? Label this point B in your diagram. Is it possible for Canada at the same time to consume 500 footballs and 1 ton of lumber? Label this point D in your diagram. 2. For each of the following trade relationships, explain the likely source of the comparative advantage of each of the exporting countries. a. The United States exports software to Venezuela, and Venezuela exports oil to the United States. b. The United States exports airplanes to China, and China exports clothing to the United States. c. The United States exports wheat to Colombia, and Colombia exports coffee to the United States. 3. Since 2000, the value of U.S. imports of men s and boy s apparel from China has more than tripled. What prediction does the Heckscher-Ohlin model make about the wages received by labor in China? 4. Shoes are labor-intensive and satellites are capital intensive to produce. The United States has abundant capital. China has abundant labor. According to the Heckscher Ohlin model,

3 which good will China export? Which good will the United States export? In the United States, what will happen to the price of labor (the wage) and to the price of capital? 5. The accompanying table indicates the U.S. domestic demand schedule and domestic supply schedule for commercial jet airplanes. Suppose that the world price of a commercial jet airplane is $100 million. a. In autarky, how many commercial jet airplanes does the United States produce, and at what price are they bought and sold? b. With trade, what will the price for commercial jet airplanes be? Will the United States import or export airplanes? How many? 6. The accompanying table shows the U.S. domestic demand schedule and domestic supply schedule for oranges. Suppose that the world price of oranges is $0.30 per orange. a. Draw the U.S. domestic supply curve and domestic demand curve. b. With free trade, how many oranges will the United States import or export? Suppose that the U.S. government imposes a tariff on oranges of $0.20 per orange. c. How many oranges will the United States import or export after introduction of the tariff? d. In your diagram, shade the gain or loss to the economy as a whole from the introduction of this tariff.

4 7. The accompanying diagram illustrates the U.S. domestic demand curve and domestic supply curve for beef. The world price of beef is PW. The United States currently imposes an import tariff on beef, so the price of beef is PT. Congress decides to eliminate the tariff. In terms of the areas marked in the diagram, answer the following questions. a. With the elimination of the tariff what is the gain/loss in consumer surplus? b. With the elimination of the tariff what is the gain/loss in producer surplus? c. With the elimination of the tariff what is the gain/loss to the government? d. With the elimination of the tariff what is the gain/loss to the economy as a whole? 8. As the United States has opened up to trade, it has lost many of its low-skill manufacturing jobs, but it has gained jobs in high-skill industries, such as the software industry. Explain whether the United States as a whole has been made better off by trade. 9. In World Trade Organization (WTO) negotiations, if a country agrees to reduce trade barriers (tariffs or quotas), it usually refers to this as a concession to other countries. Do you think that this terminology is appropriate? 10. Producers in import-competing industries often make the following argument: Other countries have an advantage in production of certain goods purely because workers abroad are paid lower wages. In fact, American workers are much more productive than foreign workers. So import-competing industries need to be protected. Is this a valid argument? Explain your answer. Chapter Jackie owns and operates a website design business. To keep up with new technology, she spends $5,000 per year upgrading her computer equipment. She runs the business out of a room in her home. If she didn t use the room as her business office, she could rent it out for $2,000 per year. Jackie knows that if she didn t run her own business, she could return to her previous job at a large software company that would pay her a salary of $60,000 per year. Jackie has no other expenses. a. How much total revenue does Jackie need to make in order to break even in the eyes of her accountant? That is, how much total revenue would give Jackie an accounting profit of just zero?

5 b. How much total revenue does Jackie need to make in order for her to want to remain self-employed? That is, how much total revenue would give Jackie an economic profit of just zero? 12. You own and operate a bike store. Each year, you receive revenue of $200,000 from your bike sales, and it costs you $100,000 to obtain the bikes. In addition, you pay $20,000 for electricity, taxes, and other expenses per year. Instead of running the bike store, you could become an accountant and receive a yearly salary of $40,000. A large clothing retail chain wants to expand and offers to rent the store from you for $50,000 per year. How do you explain to your friends that despite making a profit, it is too costly for you to continue running your store? 13. You have bought a $10 ticket in advance for the college soccer game, a ticket that cannot be resold. You know that going to the soccer game will give you a benefit equal to $20. After you have bought the ticket, you hear that there will be a professional baseball post-season game at the same time. Tickets to the baseball game cost $20, and you know that going to the baseball game will give you a benefit equal to $35. You tell your friends the following: If I had known about the baseball game before buying the ticket to the soccer game, I would have gone to the baseball game instead. But now that I already have the ticket to the soccer game, it s better for me to just go to the soccer game. Are you making the correct decision? Justify your answer by calculating the benefits and costs of your decision. 14. Amy, Bill, and Carla all mow lawns for money. Each of them operates a different lawn mower. The accompanying table shows the total cost to Amy, Bill, and Carla of mowing lawns. a. Calculate Amy s, Bill s, and Carla s marginal costs, and draw each of their marginal cost curves. b. Who has increasing marginal cost, who has decreasing marginal cost, and who has constant marginal cost? 15. Georgia and Lauren are economics students who go to a karate class together. Both have to choose how many classes to go to per week. Each class costs $20. The accompanying table shows Georgia s and Lauren s estimates of the marginal benefit that each of them gets from each class per week.

6 a. Use marginal analysis to find Lauren s optimal number of karate classes per week. Explain your answer. b. Use marginal analysis to find Georgia s optimal number of karate classes per week. Explain your answer. 16. The Centers for Disease Control and Prevention (CDC) recommended against vaccinating the whole population against the smallpox virus because the vaccination has undesirable, and sometimes fatal, side effects. Suppose the accompanying table gives the data that are available about the effects of a smallpox vaccination program. a. Calculate the marginal benefit (in terms of lives saved) and the marginal cost (in terms of lives lost) of each 10% increment of smallpox vaccination. Calculate the net increase in human lives for each 10% increment in population vaccinated. b. Using marginal analysis, determine the optimal percentage of the population that should be vaccinated. 17. Patty delivers pizza using her own car, and she is paid according to the number of pizzas she delivers. The accompanying table shows Patty s total benefit and total cost when she works a specific number of hours.

7 a. Use marginal analysis to determine Patty s optimal number of hours worked. b. Calculate the total profit to Patty from working 0 hours, 1 hour, 2 hours, and so on. Now suppose Patty chooses to work for 1 hour. Compare her total profit from working for 1 hour with her total profit from working the optimal number of hours. How much would she lose by working for only 1 hour? 18. You have been hired as a consultant by a company to develop the company s retirement plan, taking into account different types of predictably irrational behavior commonly displayed by employees. State at least two types of irrational behavior employees might display with regard to the retirement plan and the steps you would take to forestall such behavior.