Economics Homework One Answers - Student Fourteen

Student: -AROM

1. An example of a good would be a vacuum cleaner; an example of a service would be those provided by a professional maid.

Good.

2. This depends on a number of factors. For example, the obvious transaction cost to going to McDonald's is the time it takes to travel there. These costs can be reduced by circumstance, for example if you happen to already be next to the McDonald's on the way home from work or school. Cooking at home may also have transaction costs. For example, if you don't have any food in your refrigerator you need to travel to the store, wait in line, and bag and unbag groceries before you can cook. This may mean that the transaction costs to cooking at home are higher than the transaction costs of going to McDonalds. One of the transaction costs of cooking at home is also learning how to cook, which takes time and effort that could be spent doing other things. For example, someone could not have a job because of the time it took them to learn to cook, so cooking at home would actually have a negative net benefit. If one doesn't already know how to cook this may make going to McDonald's the more economical option. If one already has the food, the expertise, and all the necessary equipment, there are fewer transactions to cooking at home than going to McDonalds. Otherwise, there may be more transactions costs to staying at home.

Time spent shopping and learning how to cook are expenses that should prorated over all meals, not just one. Their costs are negligible when prorated. You mentioned one legitimate transaction cost (travel to McDonald's), but the question asked for two. (Minus 1).

3. Scarcity occurs when people's wants and needs surpass the supply of any good or service. Example: A decrease in the number of doctors would make health care more scarce and the remaining doctors could charge higher fees.

Extra credit: People exaggerate scarcity in their minds when they are selling things that have personal value to them. In their mind an ordinary item can become "one of a kind" or "priceless."

Good.

4. The invisible hand is a metaphor for the collective natural effect of all individuals operating in their own self-interest. Example: If furniture makers try to make more money by making more furniture, the invisible hand will make the price of wood increase as trees are chopped down and become scarcer.

This misses the target. Please read the lecture again, including the "I, Pencil" story. Minus 2.

5. Luke 16: 1-13. The economic point is an illustration of the exchange of goods and services. By giving away the resources of his master, the steward was able to purchase lodging for himself. The spiritual lesson is that wasting anothers money may be good on earth but not good in the eyes of God.

Extra Credit: Matthew was a tax collector.

More to the parable than that. Otherwise good. Minus 1 on answer, plus one on extra credit.

6. Caveat Emptor: Buyer beware means that the buyer of a good is responsible for whatever he purhcases and he is responsible for making sure it isn't harmful to him and is actually what it is represented to be.

Good, but more elaboration sought. Minus 1.

10. It makes sense to offer her any amount of money over $5 and some value less than $500 to leave you alone. Presumably if you offer her $5 or more she will get a net benefit on the transaction because she will be at least as well off as she was before she lost her money, as a result she will no longer have any reason or incentive to incessently complain. This, of course, assumes that she isn't just greedy and will then complain that she could have had whatever you've given her, plus five dollars. You will not want to give her all of the $500 to get her to leave you alone, however, because then you will have no incentive to work since you will not make any money on the deal. Instead it makes economic sense to give her up to the amount of money that it would take to quiet her while still making it worth your while to complete the project on the plane. Thus, if your time was worth $100 an hour to you and it will take you two hours to complete the work on the plane it makes sense to give her any amount of money up to $300 because you will get as much or more money than you think your time is worth. If there's a risk you won't finish in time because she's already wasted your time you need to take that into account as well. So if your time is worth $100/hr, you think it will take you two hours (there's two hours left in the flight), and there's only a 50% chance you'll finish on time you should only give her half as much money to account for the risk of you not finishing and not getting paid at all. So then it only makes sense to give her up to $150. To express the amount of money you could reasonably give her as a math equation:

Amount of money to give woman ≤ (hourly rate) * (amount of time it will take to finish the project) * (probability you will finish on time)

Good essay, but the equal sign shouldn't be there or the payer receives nothing and worked for the other passenger. 35/40.

56/60, plus 35/40, for a total of 91/100. Not bad, but you'd do better if you read the lecture carefully.--Andy Schlafly 14:01, 13 September 2009 (EDT)