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# Princ Of Macroecon ECN 001B

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This 3 page Class Notes was uploaded by Madie Schinner on Tuesday September 8, 2015. The Class Notes belongs to ECN 001B at University of California - Davis taught by Staff in Fall. Since its upload, it has received 12 views. For similar materials see /class/191886/ecn-001b-university-of-california-davis in Economcs at University of California - Davis.

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Date Created: 09/08/15

Practice Problems 1 Understanding Marginal Cost and Marginal Benefit Suppose that Universal Studios wants to cast Tom Cruise in their upcoming comedy Nutcase Filming will last 4 months in Nome Alaska From Tom s perspective the downside is that he will have to live in Alaska and more importantly he will have to spend 4 months away from the love of his life Katie who is actually his 53911 love of his life All that being said Tom will only do the movie for 15 million dollars Universal Studios tells Tom s agent that they will pay him 18 million if he does the movie a Is Tom demanding something or supplying something b What is Tom s marginal benefit c What is Tom s marginal cost d Will Tom sign up to do the movie What is the essential condition that determines Tom s decision Suppose that an economist hired by Universal Studios has estimated that casting Tom Cruise in this role would generate an additional 20 million in box office receipts as opposed to casting any other actor Assume as before that Universal had offered Tom 18 million for the role e What is the marginal benefit for Universal Studios f What is the marginal cost for Universal Studios g Will the economist tell Universal Studios to hire Tom Cruise 2 An Actual Economic Model The Law of Demand This basic economic model is derived in depth in Econ 1A This brief introduction is meant to illustrate how an economic model can be expressed in different ways The basic premise is that the quantity demanded of most goods or services falls when price rises while the quantity demanded increases when price falls An economic model can be expressed in the following ways 1 Tabular Form 2 Algebraic Form 3 Graphical Form For our example we are interested in quantity demanded of beer What are some factors that affect the amount of beer that you want to consume Some factors are 1 price of beer the obvious factor 2 income 3 prices of other products 4 tastes and preferences For now we focus on the primary factor which is price Suppose we give Johnny some hypothetical prices on a bottle of beer and ask him how many bottles would he consume at those prices The following table illustrates the Law of Demand in tabular form Note that quantity demanded of beer decreases as price rises This is one way to express the economic model See if you can express the Law of Demand in algebraic form using the information in the table above Think about what the exogenous variable might be and what the endogenous variable is What is the slope The exogenous variable is price while the endogenous variable is quantity of beer demanded We give Johnny these hypothetical prices that we set and are interested in finding out how many bottles of beer he would consume given those prices Let P price of beer and Q quantity demanded of beer Slope can be calculated as the change of Q over the change in P see Math Review Section Q Q 0 10 25 P2 P1 4 0 If we assume that the Law of Demand is a linear function then it must be true that the slope is constant You can see that the slope is 25 no matter which two points we use to compare changes In this case we examined the change in quantity demanded if price were to increase from 0 to 4 Law ofDemand in algebraic Form is Q 10 251 How did we get 10 Recall that for linear functions the yintercept is the value of Y when X is 0 In this case it is the value ofP when 39 Note that the negative slope indicates a negative or inverse relationship between price and quantity The Law of Demand in Graphical Form If you forgot how to graph the textbook has a good appendix of graphing This is important since most of the analysis done in Econ IE will be using graphs Price 0 5 10 Quantity Important Point 1 Holding everything constant ceteris paribus if a variable that is measured along one of the two axes changes there will be a movement along the curve Example Suppose initially beer was free We would be at the point 10 0 If the price of beer which is measured on the vertical axis increases to 2 a bottle we would be at the point 52 which is on the curve Important Point 2 If a variable changes that is not along one of the two axes there will be a shift in the curve Example Suppose that Johnny sobered up his tastes and preferences have changed He now drinks in moderation At any given price he will now demand less beer than before new compare Is this model realistic What are the flaws

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