Economics Homework Five Answers - Student Four

Seth P.

1.Economic “efficiency” is getting a good or a service with as little transaction costs as possible, because the more transaction costs there are the less efficient the transaction is. “Wow! You are efficient! You got the pizza here in less than two minutes.”

Good, but efficiency applies to more than "getting a good or service." Efficiency is a broader term that includes producing as well as buying.

2.Goods A and B, with a cross elasticity of +3.8, are substitutes. Goods X and Y, with a cross elasticity of -2.7, are compliments.

Correct, but "complements" with an "e" in the middle, not an "i".

3.The marginal cost to make another unit is $20, because it takes $100 to make 5 so to make one takes $20.

Right.

4.The fast food hamburgers are inferior goods. The steaks are normal goods.

Correct.

5.The basic assumption of the Coase theorem is that anything that adds transaction costs should get out of the way or lesson its involvement, which will let the market work more efficiently. This assumption is important to the result of the theorem because transaction costs make everything less efficient.

Good.

6.When an owner's marginal revenue exceeds his marginal cost he sells more stuff. He orders more products to put on the shelves because he has to keep up with the demand.

Excellent.

7.The Coase theorem says that government regulations that increase transaction costs are not desirable. They have the effect of making things less efficient.

Superb.

8.The greater the number of substitutes for a good, the less price elastic it is, because if there are a bunch of substitutes and you raise the price, people are going to go buy the one that is cheapest.

Good reasoning, wrong conclusion. People go to the substitute, which means the demand drops ENORMOUSLY for the good having the increase in price. That's MORE elastic, not less so. (Minus 1).

9.The smaller the proportion of income consumed by the purchase of a good makes it more income elastic, because you would rather spend less money on something. You would like to spend as little as possible.

Nope. See model answers when ready. (Minus 2).

10.The government would prefer to tax a good that is inelastic because people need it more and will pay even though the price changes.

Superb.

11.The income elasticity for the steak in question 4 is .4. The income elasticity for the hamburgers is -.2.

Excellent! May use as model.

12.Xed = -10%/100% = -.1 These goods are complements because this is a negative number.

Superb again!

Terrific work, best in the class so far with Honors. 117/120.--Andy Schlafly 20:30, 16 October 2009 (EDT)