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Homework answers.

1. Graph the following demand schedule. Complete the chart by first inserting the formula
    for the coefficient of price elasticity of demand. Calculate elasticity of demand and 
    show the three levels of price elasticity of demand on a graph.

Price	Quantity	Ed = (Q2 -Q1) / [Q2 - Q1)/2] / (P2 - P1) / [(P2 - P1)/2]
20	1000	ED = (200/900) / (10/25) = .56 ED = (200/700) / (10/35) = 1.00 ED = (200/500) / (10/45) = 1.80
30	800
40	600
50	400

2. Draw both a perfectly elastic and perfectly inelastic demand curve. Give an example of each
   and state the characteristics that determined their elasticity.

	Examples: Agricultural: potatoes are close to perfectly elastic although both Maine and Idaho would like to convince us differently. Purdue did convince many his chickens are better. Insulin is products is close to perfectly inelastic for diabetics.
	Characteristic              Elastic                  Inelastic              product type                 luxury                   necessity               % of budget                  high                        low                    substitutes                  many                       none                   eregency                   little                         lots

1. Use the utility maximizing rule to determine how many of goods A, B, and C to purchase with a $22 budget. 
    List the order in which the goods would be purchased.

2. Explain why most consumers receive a surplus when purchasing a product.

Goods are purchased at an equilibrium price. Buyers would be willing to pay more than the equilibrium price for quantities below the equilibrium quantity. Paying the lower equilibrium price is thought of as a surplus.

3. Graph the following data and calculate the MRS_XY.

Video Tapes  Per Month	A Night  On The Town	Marginal Rate of Substitution		Live Online Tutors Powered by LivePerson
1	13
2	9	4
3	6	3
4	4	2
6	3	.5
9	2	.33
13	1	.25

1. Below each variable place its formula, finish the chart, and graph the results.

File 22 does not have homework questions.

File 23 Questions for homework

1. Use two graphs to depict the supply and demand relationship between a purely competitive industry and a firm within the 
    industry making a profit. Explain the likelihood of this situation continuing. 

Entry into this market is easy and many seeing the profit will enter the market. Free international trade makes markets more competitive and lowers profit.

2. Use graphs to depict a purely competitive adjustment. Explain why the adjustment takes place.

Suppose industry demand and supply yield an equilibrium price P at which a firm's economic profit is zero. 1. Step 1 indicates an increase in demand to D' causing economic profit. 2. Market entry is relatively easy and this profit draws in new firms increasing supply to S'. Economic profit disappears. 3. This automatic purely competitive adjustment causes equilibrium long run economic profit for pure competition to be zero. To many, zero long run economic profit represents an ideal economic model as all the company earns is a normal return on investment.

3.  Give an economic analysis of pure competition. 

     A. Competition is efficient.
         1. Price settles where long-run ATC is at its lowest point indicating goods are produced efficiently.
         2. P = MR = MC indicating that resources are allocated efficiently as the
            $'s spent by consumers (P) = the $'s received by producers (MR) = the
            $ cost of producers (MC) and economic profit is zero.
      B. Shortcomings
          1. Spillover costs (pollution) and benefits (education) aren't properly measured resulting in goods being 
              over and under produced.
              a. Government intervention was needed to lower automobile pollution.
              b. Governments supports education with grants and inexpensive loan problems to students and colleges.
          2. Monopoly power develops to negate Adam Smith's "invisible hand" of competition which is required 
              to assure that the purely competitive adjustment occurs.
          3. Eliminating economic profit makes it difficult for competitive firms to afford expensive R & D and technology.

File 24 Questions for homework

1. Contrast a monopoly making a profit with one trying to minimize its loss. What circumstances could cause a monopoly not to make a profit? 

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A. ATC includes normal return on investment. B. MC cuts ATC at lowest point. C. Profit is maximized by producing a quantity and charging a price indicated by the intersection of MC and MR. D. The resulting profit is not a payment for enterprise, it is economic rent. E. High inelastic demand will result in a higher price, greater profit, and a more restricted (smaller) quantity.	A. Rising costs and shrinking demand may result in a monopoly not making a profit.   B. When this happens, demand (average revenue) is always below the ATC and a loss results.
2. State the traditional reasons why a monopoly is not as efficient as a purely competitive firm.     Why might this analysis be incorrect?    Monopolies increase profits by restricting output to increase price.    Demand is inelastic so total revenue increases. This analysis assumes    a monopoly has the  same average total costs as would the many firms    that would replace it with a more competitive market.

File 25 Questions for homework

1. Draw a graph depicting a monopolistically competitive firm operating at a profit. Other things being equal, what will happen to this profit? Why? 

Some believe economic profit tends toward zero as the number of firms adjust to varying profit levels.

2. Contrast the economic efficiency of a purely competitive firm with one operating in a monopolistically competitive market. 

Because demand is not perfectly elastic for monopolistic, it has a higher price and a lower quantity.

File 26 Questions for homework

2. What changes in this situation would result in the firm breaking even or even incurring a loss?
     A. A decrease in demand or an increase in cost could eliminate profit.
     B. A change in consumer attitudes increased demand for foreign cars during the 1980's.
     C. OPEC price controls decreased supply and increased factor costs in the 1970's.

File 27 Questions for homework

1. Use the following data to calculate the optimum amount of resources to employ Labor costs $12 and capital costs $18.
    First calculate the proportion of resources to use and then the absolute number to hire.

2. Use the substitution effect and output effect to explain how the personal computer affected the supply and demand for office personnel.
    The substitution effect results in fewer workers being hired as companies purchase computers because of their high MRP per dollar. 
    This increase in output makes labor more productive increasing its MRP causing more labor to be hired.

File 28 Questions for homework

1. Contrast a competitive market for labor with one that is monopsonistic. 

Monopsony pays a wage rate below MRC by  paying the amount indicated by the individual supply curve.

2. Depict and contrast how craft and industrial unions try to affect the wages received by their members.

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Tried to shift supply of workers to the left with licensing, apprenticeships, child labor laws, etc. to increase wages.	Try to control supply of workers and emphasized collective bargaining to increase wages.

3. Why might the monopolizing efforts of a monopsony and a union engaged in collective
 bargaining result in a price and quantity similar to that of a competitive market?

File 29 Questions for homework

1. Explain how the single-tax movement of the 19th century relates to the idea of changing the current structure of 
    property taxes in America's cities. 

           Socialist philosophers questioned whether pure economic rent should be paid.
            a. Originally free, owners of land receive pure economic rent which is a surplus. 
            b. Henry George wanted to tax rent away in 19th century America. 
                 1) Called the single-tax movement, he wanted to replace
                     all taxes with one tax on land. 
                 2) Three problems exist with this philosophy.
                      a)  Land is not free to current owners.
                      b) Capital improvements are necessary to make modern land useful.
                      c) Modern rent does perform a rationing function because land is of such differing quality.
                      

2. Name some industries that have recently lost their economic rent. Was this rent deserved? Why did they lose the rent? 
Who was hurt? Who was helped?

Automobiles, steel, and other Rust Belt oligopolies lost much of their economic rent during the 1970's and 1980's. 
The market felt it was deserved. The primary causes were competition from overseas and an inability of company 
managers to adapt to a changing environment. People hurt included owners, managers, employees, suppliers, and 
their communities. Both industries recovered but President Bush found it necessary to increase tarrifs on imported 
steel in 2002.Some feel antitrust activity against Microsoft is an attempt to eliminate economic rent. In the short run, 
consumers and those who invested in competing companies were the primary beneficiaries. In the long run, the theory 
of creative destruction indicates a more efficient system will result, and 
all system participants will benefit. 

File 30 Questions for homework

1. What did Ronald Coase demonstrate concerning government involvement with the regulation of externalities? 
Give an example of the application of his theory.

Analysis by Ronald Coase revealed that government should not get involved with disputes over externality costs 
when property ownership is well-defined and the number of people involved is small. He demonstrated that 
individual maximizing behavior would correct these problems. The government should only be involved when the 
number of participants is so large as to make bargaining costs prohibitive. For example, the government
should not get involved in a noise pollution problem near an amusement park but should get involved with 
acid rain generated in the

Midwest and falling into New England.

2. Depict how rent-seekers may obtain a surplus at the expense of the public good.

Question involves special interest groups such as PAC's, whose activities are self- serving and often at the expense of others.

3. Explain the market system solution to the problem of too much pollution.

Supply and demand are used to determine the price and quantity of some tolerable level of pollution. Pollution is then considered a 
factor of production, and like any factor, it will be purchased based upon its marginal revenue product. 

2. What difficult market forces are encountered by the agriculture industry? How do these forces affect supply, demand, 
and the total revenue received by farmers? Explain how some of these forces were caused by government actions; some 
of which succeeded, some of which failed.  

Farmers sell in an uncertain market 

1. Demand is very inelastic as people's physical needs are limited and lowering price will not substantially increase quantity sold.
2. Demand increases slowly for most agricultural products as many are inferior goods for which quantity demanded decreases
 as income increases.
3. Supply is very inelastic in the short run as crops will only grow so fast
4. Supply is volatile because of the weather
5. Technology has caused supply to increase substantially
6. Annual supply fluctuations cause the prices farmers receive to fluctuate considerably. Fluctuating prices mean fluctuating profits.

File 32 Questions for homework

2. Why and how was government regulation redirected during the 1980's?
    A. In the 1980's, government regulation was redirecting away from maintaining competition toward social regulation. 
        Government regulation of industry changed direction because:
        1. International competition requires companies work together in developing high-cost technology and share in its high cost
        2. Many feel government should foster cooperation among competitors with an industrial policy while others feel the market
            system should be left to determine factor allocations
   B. Regulations protecting individuals have become more prominent.
       a. Environmental Protection Agency (EPA) protects individuals from pollution (air, water, noise).
             b. Consumer Protection and Safety Commission (CPSC) protects consumers from unsafe products.
             c. Food and Drug Administration (FDA) protects consumers from dangerous food, drugs, cosmetics, etc.
             d. Federal Trade Commission (FTC) protects the consumer from unfair trade practices such as deceptive advertising.
             e. Occupational Safety and Health Administration (OSHA) protects people while at work.
             f. Equal Employment Opportunity Commission (EEOC) attempts to eliminate workplace prejudice.
             g. National Labor Relations Board (NLRB) regulates activities between business and unions.

3. Explain the concept of prosecuting conduct and not bigness
         Rule of reason expressed the concept prosecuting conduct and not bigness.
          1. Applied by the Supreme Court in a 1911 antitrust case against Standard Oil of New Jersey and the American 
              Tobacco Company
          2. Court stated that behavior must be unreasonable in a competitive sense and anti-competitive effects must be
              demonstrated. 
          3. Both companies were found guilty. 

4. Compare horizontal and vertical mergers.
     A. Horizontal integration results from a merger of competing companies. US Steel was formed by the merger
          of competing steel companies.
     B. Vertical integration involves companies that have supply dealings. Standard Oil combined refineries and oil
          transportation systems.

File 33 Questions for homework

2. Using the data from file 23, calculate the percentage increase in poverty-level income for 
a family of four and the percentage increase in median family income received by couples with
 the wife not working. Comment on the results.

Appendix A Questions for homework

1. Complete this chart and related questions.

A. Which country has an absolute advantage in TV's?   U.S.

                                                                  in computers?   Japan

B. Draw a linear production possibility frontier for each country putting TV's on the x-axis.

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Appendix III Bibliography

1. The Age of Diminishing Expectation, Paul Krugman, The MIT Press, 1990.

2. America in the Global 90's, Austin H. Kiplinger and Knight A. Kiplinger, Kiplinger Books, 1989.

3. Apocalypse on Wall Street, David McClain, Dow-Jones Irwin, 1988.

4. The Bankruptcy of America, Stephen Wilson, Rindge Mills Press, 1992.

5. Business Almanac, Louis Rukeyser, Editor-In-Chief, Simon and Schuster, 1988.

6. Day of Reckoning, Benjamin M. Friedman, Random House, 1988.

7. Dollars and Dreams, Frank Levy, W.W. Norton and Company, 1988.

8. The Economic Future of American Families, Frank Levy and Richard C. Michel, The Urban Institute Press, 1991.

9. The End of the American Century, Steven Schlossstein, Congdon and Wood Inc., 1989.

10. The First Universal Nation, Ben J. Wattenberg, The Free Press, 1991.

11. Free to Choose, Milton and Rose Friedman, Harcourt Brace Jovanovich, 1979.

12. Generations, William Strauss and Neil Howe, William Morrow and Company, 1991.

13. The Great Crash of 1929, John Kenneth Gailbraith, Houghton Mifflin, 1988.

14. The Great Depression of 1990, Ravi Batra, Simon and Schuster, 1985.

15. Interest Rates, The Markets, and the New Financial World, Henry Kaufman, Times Books, 1986.

16. Head To Head, Lester Thurow, William Morrow and Company, 1992.

17. Made in America, The MIT Commission on Industrial Productivity,

The MIT Press, 1989.

18. The New Realities, Peter F. Drucker, Harper & Row, 1989.

19. The Next Economy, Paul Hawken, Ballantine Books, 1983.

20. The Overworked American, Juliet B. Schor, Basic Books, 1991.

21. The Politics of Rich and Poor, Kevin Phillips, Random House, 1990.

22. The Rise and Fall of the Great Powers, Paul Kennedy, Vintage Books, 1987.

23. The Roaring 80's, Adam Smith, Summit Books, 1987.

Appendix IV The Author's Favorite Questions

The following questions relate to the concept of creative destruction (p.5):

Creative destruction of 20th century economist Joseph Schumpeter

p.6-1. How is the concept of creative destruction currently affecting the

p.6-2. Explain how the concept of creative destruction has affected European politics in the recent past and how it may affect European politics in the near future.

p.23-1. What structural changes (changes in the variables affecting economic

p.48-1. Have Americans lost their willingness to take economic risks?

p.48-2. How will demographic factors affect economic activity over the next decade or two?

p.52-1. How much should the citizens of the United States invest for the

p.92-2. Bob Gates, founder, developer, and primary owner of Microsoft Corporation, is said to be worth about 7 billion dollars. Discuss in "positive economic terms" (see page 1) this accumulation of wealth (see Question #3).

p.115-4. Has the federal government helped those hurt in the past by the creative destruction caused by economic change such as the current

p.10-2. How would you expect government involvement in the market for college graduates to affect their market price? Has this happened?

p.78-3. What is your college community doing and what could they do to enhance

p.84-2. Use the concepts explained in this chapter to analyze what college students can do to increase the amount they will earn upon graduation.

p.110-2. Why do you feel the Lorenz Curve for college graduates has

Interesting tax question:

p.14-2. Is the benefit received by citizens from government economic activity linear in relation to income? That is, does a person earning $100,000 annually receive approximately twice the benefit received by someone earning $50,000?

INDEX