Principles of Microeconomics
Principles of Microeconomics ECON 111
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This 9 page Class Notes was uploaded by Mr. Fermin Price on Thursday October 29, 2015. The Class Notes belongs to ECON 111 at University of San Francisco taught by Staff in Fall. Since its upload, it has received 47 views. For similar materials see /class/231254/econ-111-university-of-san-francisco in Economcs at University of San Francisco.
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Date Created: 10/29/15
Name Economics 111 Fall 201 1 Instructor Mario Muzzi Problem Set 1 Due 91511 1 10 pts History of Economic Thought In half of a page each typed and double spaced a Describe the concept of the Invisible Hand What did Adam Smith mean when he wrote the following It is not from the benevolence of the butcher the brewer or the baker that we expect our dinner but from their regard to their own interest This quote from the Wealth of Nations exemplifies Adam Smith s notion of the invisible hand Adam Smith believed that human beings are primarily motivated by self interest He also believed that through a market based economic system individuals chasing their own self interest would unintentionally promote general economic well being The market based system punishes individuals who do or make things that society does not want eg wooden vultures and rewards individuals who do or make things that society or at least a segment of society wants eg wooden tables b Describe mercantilism Describe Thomas Mun s and DaVid Hume s criticism of mercantilism policies M ercantilism From the 163911 to the middle of the 18 1 centuries mercantilists dominated policy making decisions in western Europe The mercantilists believed that 1 the accumulation of gold and silver increased the wealth of a country 2 in order to increase wealth a country should export but not import so as to increase the in ow of precious metals and 3 a country should encourage population growth to keep labor cheap Thomas Mun and David Hume put forth the first significant criticism of mercantilist policies Thomas Mun in as early as 1630 criticized the M ercantilists by pointing out that an in ow of treasure simply had the effect of increasing prices domestically But it wasn t until the mid 18 1 century 1 752 when DavidHume a renowned British philosopher restated Mun s argument Hume exposed the primary weaknesses in M ercantilist thought M ercantilists wanted to export goods and import as little as possible This meant that other nations would consume all of the world s output while the mercantilist nations simply imported gold Specie Flow Mechanism Suppose a mercantilist country exported more than it imported The mercantilist country would experience an increase in the supply of N gold At the time gold was the primary medium of exchange Therefore gold in ows raised the money supply which in turn caused prices of goods in the mercantilist country to increase making exports less attractive and imports more attractive 10 pts Production Possibility Frontier You and your military thugs have just taken over the State of Iowa As the new dictator of the Peoples Republic of Iowa you face the following combinations of possible corn production per year and wheat production per year Corn 7 in millions of bushels Wheat 7 in millions of bushels 0 75 60 12 45 22 30 30 15 36 0 40 a Draw Iowa s Production Possibility Frontier PPF for Corn and Wheat Plot this accurately Iowa39s PPF 40 35 30 Wheat Millions Bushels 0 0 5 10152025303540455055606570 Corn Millions Bushels 75 b What shape is the PPF and why Iowa s PPF has a concave shape because of diminishing return of the land when ifthe dictator wants to increase the production of wheat he will start using land that is less suitable for the production of wheat in the case for corn the same happens c Assume that when you take over as dictator there is no wheat being produced in Iowa You decide to pass a law requiring the production of 12 million bushels of wheat What is the opportunity cost of this decision At the initial point no land is dedicated to produce wheat so 75 millions bushels of corn are produced When the new law is passed 12 millions bushels of wheat are produced because that law land that was previously used to produce corn now is dedicated to produce wheat The production of corn drops from 75 millions of bushel to 60 millions of bushels hence the opportunity cost of producing 12 millions ofbushel ofwheat in this economy is 15 millions ofbushels of corn d As you incrementally increase the production of wheat What happens to the opportunity cost for the production of wheat Why As the dictator increases the production of wheat the opportunity cost increase because of the diminishing returns of the land Intuitively what is happening in this economy is that as the production of wheat increase land that is more suitably to produce corn than to produce wheat is used which increases the amount of corn you have to give up to get certain fix amount of wheat e Assume that your brother is a biochemist who tells you that he has invented a seed which increases the production of corn by 20 Assuming your brother is right and growers use the new seed show what would happen to the PPF Iowa39s PPF 99h OUIO 0 0 H 0 Wheat Millions Bushels H N O O 0 5 10 15202530354045505560657075808590 Corn Millions Bushels With the new seed Iowa s PPF shift to the right note the intercept is unchanged because the increment in productivity only affect Corn and now Iowa has the possibility of produce 20 more corn using the same amount of land 3 10 pts Suppose Paul and Helga are stranded on an island In order to survive two tasks must be performed shing and climbing for coconuts Assume that Helga can catch one sh every 5 hours and grab one coconut every 2 hours While Paul who is a bit clumsy and slow can catch one sh every 15 hours and grab one coconut every 3 hours Further assume that during an average month each will work 150 hours a What are Helga s production possibilities In other words how many sh can Helga catch in a month How many coconuts can she grab What are Paul s production possibilities IfHelga spends all her timefishing she will catch 30fish in a month 150 hrs5 hrs If H elga spends all her time grabbing coconuts she will grab 75 coconuts in a month 150 hrs2 hrs 1 Paa1epehae a11 hte 1mg shmg he wt11 eateh 10 sh m a rmnth 150 hrs15 hte 1Paa1epehae a11 hte 1mg gtahhthg EDEDmAlS he wt11gtah 50 EDEDmAlS m a mdhth 15 3hte b Graph one month Productlon Posslblllty Frontiers for Helga and Paul Helge Eacanm 75 Eacanm PM 3 W m Flsh e Is Helga betterroffperformmg both aeamtles and hot aadmg Wlth Paul7 What would Adam smlth say7 What would Davld Rlcardo say7 Nd Made the pnhetp1e afcamparatlve aavahtage hath He1ga aha Paa1 hehe tmm epeetahzaadh aha Dadln 8y epeetahzthg m the ptdaaetmh eae e a thah Paa1 m the ptdaaeadh dhdth gddae Adam Smxth waa1a hat have teedehmehaea that He1ga bade W39th Paa awa Rteatad a E hahd waa1a ha dehyhehaea th 1ga aha Paa1 trade heeaaee he ahaetema the bene ts dpaae Lhmugh the edheept DL Dmpara ve aavahtage d Who has the eomparaave advantage lh shlhg7 Explam HeIga r 75 CDCDmAtS 30 Fxsh 25 CDEDmAlSI Fxsh PaaI r 50 CDCDmAtS 10 Fxsh 5 Commas1 Fxsh Helga has the comparative advantage in the production of fish because in order to catch one fish she must give up only 25 coconuts Instead Paul must give up 5 coconuts in order to catch one fish e Would Paul and Helga both bene t if they traded 5 coconuts for every one sh Would they both bene t if they traded 4 coconuts for every one sh What is the range of terms of trade of sh for huts at which both Paul and Helga bene t from trade No although Helga would bene t Paul would not Helga would bene t by trading her fish for coconuts Helga s opportunity cost is 25 coconuts for one fish Any time Helga wants coconuts she should catch a fish and then trade the one fish for five coconuts She profits 25 coconut for each trade On the other hand Paul receives no benefit from trading when the terms of trade is 5 coconuts for one fish because his opportunity cost is already 5 coconuts for 1 fish Yes both Helga and Paul benefit when the terms of trade is 4 coconuts for 1 fish Helga would benefit by trading her fish for coconuts Paul would benefit by trading his coconuts for fish Again Helga s opportunity cost is 25 coconuts for one fish Anytime Helga wants coconuts she should catch fish which will costs her 25 coconuts for one fish and then trade the one fish for 4 coconuts She profits 15 coconuts for each trade On the other hand Paul should grab 4 coconuts which will cost him 8 fish and trade four coconuts to Helga for 1 fish Paul profits by 2 fish Without trade it would have cost Paul 5 coconut to have 1 fish With trade its costs Paul only 4 coconuts to have one fish So long as the terms of trade for fish is between 25 coconuts and 5 coconuts then both Helga andPaul will benefitfrom trade 5cgtxgt25c Dmand F r L demand andor supply curves rememberto label your graphs a 3 pts lee moves rts soeeerball maklng plauttopaldstau wh re wag lower 1h theU 5 some e e es are ohsurhers boyeott Nl e produets beeause they behave that lee mauufaetures rts produets usmg chlldlaborm Palustau Whatha pens to the market foerke soccexballs7 P S s n m n D a Nikesnccel39 Ems b 2 pts The bndge toll to eross the Bay Budge lncreases to 4 00 Whathappehs to the arketforBART7 A waI mmase pl Pa N no no m BART e 3 pts Ah earthquake rocks the Crty ofSan Franclsco As aresult half ofthe erues houslng ls destroyed ahd due to fear offuture earthquakes people do not Wan o hve here any more What happens to the marketforhousmg m San Frmcxsco7 Lhe 12ft thle thefear afamlther earthquakz causes demand m also shxji m the 121 P S 5 mm m D m u Hausmg D d 39 shx mg demand m the 21 p Pa P1 0 m m an a Suns2122quot e 2 pts The government Wants to dumurage people from smokmg The sl m u Elgaveues 0 I pt v pl w for several days What wlll happen to the market forbattenes7 Pedpze Expect the Hmncane to cause a dzaekedttt Therefore the demahd fa hattenes thetedses Ah Increase th supply due m erpeemttdhs although 1255 111ter m deem due to tame edhsemhts 15 dzsd acceptable Belleues 5 8 ptsEgu hrinm Readthe amele aboutthe marketfor the w console Go to 445316Nmterrdo w Shortage Shrewd Marketrr or Flawed Supply Chaln Read and answer the followlng a 2 pts Accordmg to the artrele what ls the retatl pnee for aw What shouldthe approxrrhate equlllbnum pace for aw be7 7712 relax phee 15 24999 but the mtteze thdtedtes Lhat the murky ezeanhg pnee 15 ptddddzy detweeh 400 dhd 500 b 3 pts Draw a supply and demand dlagram for the w On the same graph sho how the eurrerrtretatl pnee results m a shortage
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