1) Jonathan is currently working for a clothing company and earning $20,000 per
year. In hopes of raising his future income he is considering quitting his job and
returning to school to get his degree. He estimates that tuition and textbooks would
cost $4,000/year while all other living expenses would be $8,000/year. Jonathan thus
calculates his costs for the first year of college to be $12,000. Was he correct? If not,
what is the total cost for this first year?
2) According to a survey of consumer opinion, people strongly desire safer cars and say
they are willing to pay substantially more for safer cars. Using this information, one auto
firm adds numerous safety features to its cars, raising the price by several thousand
dollars. Sales drop sharply and the firm loses money. What likely went wrong?
3) "The United States can't gain from trading with Canada, because their economy is so
big that they can produce all goods more efficiently than Canada." Is this a valid claim?
Explain from either Counties perspective.
4) Explain why, if specialization and trade always makes it possible to increase a
country's consumption, in effect generating extra output from the existing stock of
scarce resources, anyone would favour placing restrictions on trade through such means
as tariffs or quotas.
5) Explain why trade between two countries can be profitable for both even if one is
better than the other in producing all goods and services.
6) Use a graph to answer each of the following: How is the equilibrium price in a market
determined? What happens if the current price is above the equilibrium price? What
happens if the current price is below the equilibrium price?
7) Using a graph, show market equilibrium. Next, show how the graph changes when
input costs increase, ceteris paribus. Explain what happens in the market as a result.
8) Not long ago the papers announced that there was a surplus of apples produced in
the Okanagan Valley of British Columbia. Explain how there can be surpluses in a world
9) In 2007, the price of gasoline in Canada was higher than it had been in 2006. Also in
2007, more gasoline was purchased in Canada than had been in 2006. According to the
law of demand, higher prices cause lower quantities demanded, not higher. Use graphs
to explain three potential reasons what might have happened to bring about a higher
price and a higher quantity sold in 2007 than in 2006 if the supply and demand curves
had their normal shapes.
10) Goods or services with low price elasticity of demand are sometimes said to be
"necessities." Explain, using two examples, why that way of labelling goods can be
11) Explain to your boss at the Premiere Pizza Palace why, if the elasticity of demand for
PPP's pizza is 0.8, then ceteris paribus it would be a bad idea for the company to hold a
"20% off" sale.
12) The elasticity of demand for Expo 2000 tickets was found to be 0.61. Explain what
that number tells us about the effects of Expo's pricing on profits. Suggest reasons why
the organizers might believe that they made the right pricing decision.
Figure 6 -1
13) In the room where you are answering this question, the ceiling is above the floor.
With that in mind, use Figure 6-1 to demonstrate a price ceiling and a price floor and
use it to help explain why when we talk about them in economics, price floors are above
equilibrium and price ceilings are below.
14) "Scarcity implies that some way of rationing goods and services must be found."
Explain what this statement means. In what ways can the rationing be done?
15) Use Figure 6-2 to explain the microeconomic effects of a minimum wage set above
the equilibrium wage rate. Who would likely be most affected?
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The account cost will be $12,000, but the economists consider an opportunity cost: a cost associated with the foregone earnings. Because Jonathan could have earned $20,000 if he does not quit a job, the economic cost that takes the opportunity cost into account is $12,000 + $20,000 = $32,000.
Because people buy other goods than a car, they are not willing to pay for a safer car even with the reasonable additional cost given extra income to spend. Suppose people are given extra income that is exactly enough to buy a safer car. Because people like to consume a variety of goods and services, the exact extra amount will not be spent on the purchase of safer vehicle but spend on other items. In this case, because the extra income is not given, an increase in the price of safer car translates to the decrease in the sale with money that do not get spend on it.
According to the Ricardo, any countries gain from trade because any countries have a comparative advantage for some goods again other countries. This questions implies that the U.S. has the absolute advantage; the country is...