Economics Homework Thirteen Answers - Student One

VeronikaF

1. Which is true about the average fixed costs (AFC) of a firm? (a) a firm can eliminate these costs by shutting down in the short run.

(a) is the correct answer since in the short run there are many fixed costs, but in the long run there are only variable costs.

Nope, though your statement about the long run is correct. The firm is still stuck with his fixed costs even if he shuts down (makes output go to zero). It would be like the bus ride to DC if the trip were canceled the morning of the trip. The bus company would still want to be paid for setting aside the bus and driver for a day. (Minus 2).

The correct answer is "(b) as output increases, AFC decreases." That's because AFC equals FC divided by Q. As Q increases, AFC must decrease (FC is constant).

2. Some politicians complain about how people are losing their jobs to workers in China. Is this problem the result of "free trade" or "protectionism"?

Free trade, not protectionism, is causing people in the USA to lose their jobs to workers in China. Protectionism opposes trade between countries since people believe money is not everything and that trading with China is as if you were sharing your candy with your enemy. I personally think free trade is the way to go since it pushes each country to do what they do best and not waste their time on producing a certain good when they could more efficiently produce a different good. Trying to do another’s job will result in mistakes, an increase in transaction cost, and less consumer surplus.

Superb analysis, and I particularly like your analogy about "sharing your candy with your enemy."

3. What is one of the primary responsibilities of the Federal Reserve Bank?

The Federal Reserve Bank, an independent central bank, is in existence to adjust the discount rate - the interest that is charged to commercial banks.

Excellent.

4. Review: Suppose that after completing this course, you start a new company. In your first year, you "broke even" (had zero profits), and in your second year you want to increase your revenue and profits. After careful study of your market, you decide that you can increase your revenue by increasing your price. Therefore your good must be price elastic/inelastic (choose one).

To raise the price of your goods produced they must be inelastic, which means that the consumers will be willing to pay any price for that certain good.

Right, although you overstate it a bit. Consumers are not necessarily willing "to pay any price for that certain good." The point is that consumer demand does not decline much when the price increases for an inelastic good. PxQ, which is revenue, increases when P increases for an inelastic good.

6. You can go on www.orbitz.com and watch the price of airline tickets change from day-to-day. If you pick fixed dates of travel, such as Jan. 15 to fly somewhere and Jan. 18 to return, then you will notice that the closer you get to those dates, the higher the price of the ticket usually is. In other words, the earlier in advance that you can buy a ticket, the cheaper it usually is. Explain how this illustrates a basic difference between long run and short run costs.

Long run costs are variable unlike short run costs which are fixed. If you pay for the tickets before hand the price will be cheaper because there are so many airline companies to choose from, which causes it to be a variable cost. If you wait until the day before the flight to buy your tickets you will not have any other options except to buy that expensively priced ticket. The price of that ticket is fixed since you have no options or “variables” to choose otherwise. You are basically forced to pay an extra amount of money if you want that ticket since the quantity has decreases and the tickets are scarcer and, as we all know, when something become “limited” the price automatically increases since the value of that item increases.

Good analysis, particularly near the end. The early part of your answer overstates the fixed versus variable point, but you have the right idea.

Honors:

Answer question 8, and then 2 out of the following 3 questions:

8. Explain why in long-run equilibrium the price charged in monopolistic competition is greater than marginal cost but equal to average total cost.

The price is greater than marginal cost because the sales cost is not the lowest possible cost. There is competition and not a total monopoly over the common goods produced even though the company may have a monopoly over their “unique” goods they sell. By doing this, you will increase your profit but not necessarily give up the demand since, in monopolistic competition, there are not perfect substitutes. The price is also equal to average total cost because the firm should shut done if there are any long run losses, such as when price is greater than average cost.

Good.

9. Economics is sometimes called the “dismal science” because economists predicted population to grow faster than the food supply, marginal returns to diminish, and profits to vanish. But, in fact, there is an abundance of food and profits have not vanished. Why is economics not so dismal after all?

Most of these assumptions have not occurred but may come in existence in the future. We must not worry about what is to come eventually, but focus on the present so that catastrophe may not occur. If we spend all our time predicting and worrying we are losing opportunities to find a solution and in economics that is what you study. In economics you study the future and the possibilities that are available. Economics also shows how we must live our lives to the fullest and worry about today and not tomorrow. Economics is a type of science which instead of analyzing chemical equations and plant species, you dissect the art of business and make a cycle of money instead of a food chain. Economics is about studying what has brought the great empires into existence, including the one we live in today. Economics is the underlying truth of life as we see it.

Terrific! Absolutely superb, should be a model answer.

10. "Protectionism" is a pejorative (negative) word. Can you think of a more positive, flattering word to express the same concept in a supportive way?

Nationalism could be the word to describe the same meaning as Protectionism, but in a more positive way since it means your nation is of primary importance. Protectionists want the U.S. companies to stay in their own country and hire American citizens instead of producing in China with Chinese laborers. They do not want the U.S. to trade with other countries and let them “steal” the jobs of American citizens. Protectionists believe that we should help our kind and not go strictly for cheaper production since money is not everything; they prefer isolation.

Fantastic suggestion! Will probably use as a model answer.

78/80. Well done on the last homework. Congratulations on your terrific homework throughout the course!

See Also[edit]

Economics Homework