Economics Homework Ten Answers - Student One

VeronikaF

1.In your own words, try to give a better definition of "externalities" than provided by this Lecture.

Externalities are either costs or benefits that someone receives without payment. Externalities may be good or bad depending on what the person receives. It basically is the result that affects someone other than the buyer and seller. Everything we do each day has a certain effect on everyone. We may not notice it, but we are like the game of dominos; we act upon each other.

Superb!

2.Explain why marginal revenue must be zero when total revenue is maximized.

Marginal revenue must be zero because when the total revenue is maximized it cannot be increased any further. If marginal revenue was one (1) than total revenue would have to be greater than it is possible. Maximized means that it cannot be increased. It is as far as it goes. And if the marginal revenue were negative one (-1) than the total revenue could not be the highest it could.

Good, but you mean "then" rather than "than".

3\. What is your favorite question on the midterm exam that you answered incorrectly, and why is it your favorite?

My favorite midterm exam question that I got wrong is number 31 on the girl’s exam. The question asks what happens when demand for labor increases. The correct answer is that the product produced by that labor increases in price since the company is having a shortage of workers and has to hire “short term” laborers so their business will continue on. And since the company will have to pay more for that short run cost, they will have to increase the cost of the products that they produce. Until they find workers to fill the lack of laborers, they are going to be spending more money for that average widget produced.

It is not just a short run effect; it is a long run effect also. When the produced produced by labor increases in price, then the firms want to increase more of the product (supply curves are upward sloping: as price increases, so does the quantity produced because firms can earn more money at the higher price). In order to increase more of the product, firms have to hire more labor. This causes the demand for labor to increase. So the cause of an increase in demand is this: an increase in price for the product produced by that labor, answer (d).

4\. Give an example of a positive externality, and an example of a negative externality. The example does not have to be limited to a business.

A positive externality is if your house was by an open field in which every night of the summer, a movie was projected on a large screen. You would not have to pay the admission fee to watch the movie because you could watch it from your back porch.

Right. Ah, but be sure to answer the entire question, which also asked about a negative externality. (Minus 1).

5\. Explain why private firms in the free market are unlikely to try to provide public goods.

If private firms were to provide public goods they would be loosing opportunities of making money by selling those widgets privately. Public goods are for anyone and everyone who can get their hands on them. By providing private goods you are basically giving goods away when you could be selling them privately for a good amount of money. The reason private firms do not provide public goods in the free market is because they would be losing money. The reason for a business is to make money, not give it away.

I think you have the right idea, if you meant to say "By providing PUBLIC goods you are basically giving goods a away when you could be selling them privately for a good amount of money." Also, it should be "losing", not "loosing", and I wouldn't use the expression "good amount of money" when talking about "goods" because it can get confusing. Full credit.

6\. Review question: the cross-elasticity of A with respect to B is positive, and C with respect to D is negative. What is the relationship (complement or substitute?) of goods A and B with each other, and C and D with each other? Explain.

Goods A and B would be substitutes since they are positive and goods C and D would be complements since they are negative. The reason substitutes are positive and complements are negative is that a substitute for a more expensive item gives the consumer a positive result, but a complement is just another expense for the consumer which gives a negative result.

Correct answer, but I'm not sure your reason is correct. The reason the cross-elasticity for a substitute is positive is because consumers will buy the substitute when the price of the other item goes up, and hence the demand for the substitute increases. Price goes up, demand goes up: positive. I think you're saying the same thing but you should doublecheck. Full credit.

Honors Answer 3 out of the following 4 questions:

9\. Provide, in your own words, the best definition of "public good" that you can.

A “public good” is a good that costs no extra expenses to enjoy.

OK. It's a concise definition!

10\. Find a question on the midterm that describes a situation that would be unusual in the real world, and explain why the scenario of the question is unrealistic.

Question 21 on the girl’s midterm exam is an example of an unusual situation. Question 21 is a graph of perfect substitutes and in real life it is very unusual to have something that can perfectly substitute for another. Everything is different and one item that could make you as perfectly satisfied as another is almost unheard of.

Superb.

11\. Revisit the problem on the midterm about the price ceiling (with the graph), which asked how much the shortage would be. Provide the correct answer and explain why. (If you answered it correctly, then provide a similarly difficult substitute question for this.)

The shortage would be 600 units because if the price ceiling is set at $2, the minimum quantity is set at 200 units and the maximum quantity is set at 800 units. To find the surplus or shortage of goods in the market, we must find the distance between the two numbers by subtracting 200 units from 800 units. The result is a shortage of 600 units, the correct answer.

Terrific.

89/90. Superb work! Be sure to review my extended comments.--Andy Schlafly 17:36, 25 November 2009 (EST)