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Business Economics Problem

Set 1 1. The Social Security system provides income for people over age 65. If a recipient of Social Security decides to work and earn some income, the amount he or she receives in Social Security benefits is typically reduced.

How does the provision of Social Security affect people’s incentive to save while working?

The provision of Social Security will decrease people’s income after tax this leads to people not to save incentives while working.

How does the reduction in benefits associated with higher earnings affect people’s incentive to work past age 65?

The people’s incentive to work past age 65 will be decreased because the income after tax is reduced when they work past age 65. 2. Imagine a society that produces military goods and consumer goods, which we’ll call �

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��guns” and “butter.

” A. Draw a production possibilities frontier for guns and butter. Using the concept of opportunity cost, explain why it most likely has a bowed-out shape The PPF graph is bow-shaped because of different resources with varying opportunity costs. The opportunity cost of butter depends on the quantity of butters and guns that economy is producing. The economy divides its resources between two industries, this yields other points on the PPF. The opportunity cost of butter is highest when the economy is producing much butter and fewer guns where the frontier is steep (Point B).

When the economy is producing less butter and many guns, the frontier is flatter, and the opportunity cost of butter is low (Point A). B. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient. Regarding to above PPF

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graph, the point B is impossible for the economy to achieve.

It is outside of the PPF. Point C is feasible but inefficient because it is inside of the PPF. C. Imagine that the society has two political parties, called the Hawks (who want a strong military) and the Doves (who want a smaller military). Show a point on your production possibilities frontier that the Hawks might choose and a point the Doves might choose. The Hawks might choose Point A because they prefer to produce more guns.

On the other hand, the Doves might choose Point B because they prefer to produce much butter. 3. The following table describes the production possibilities of two cities in the country of Baseballia:Pairs of Red Socks per Pairs of White Socks per Worker per Hour Worker per Hour

Boston 3 3 Chicago 2 1 A. Without trade, what is the price of white socks (in terms of red socks) in Boston? What is the price in Chicago? The price = The opportunity cost. The price of white socks (in terms of red socks) in Boston = 1 The price of white socks (in terms of red socks) in Chicago = 2 B.

Which city has an absolute advantage in the production of each color sock? Which city has a comparative advantage in the production of each color sock? ,

Absolute advantage : The Boston has an absolute advantage both in producing white socks and in producing red socks because it requires less time than the Chicago to produce a unit of either goods.
Comparative advantage The opp. cost of red socks

The opp. cost of white socks Boston1 white1 red Chicago1/2 white2

red % Comparative advantage : when describing the opportunity cost of two products. The producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing Good X and is said to have a comparative advantage in producing it.

The Boston has a comparative advantage in producing white socks because it has a lower opportunity cost of producing white socks than dose the Chicago. The Chicago has a comparative advantage in producing red socks because it has a lower opportunity cost of producing red socks than dose the Boston.

If the cities trade with each other, which color sock will each export?

The Boston will export white socks and the Chicago will export red socks because of their comparative advantages.

What is the range of prices at which trade can occur?

(Please see the opportunity cost table of number 2-B) It’s obvious that the Boston will export white socks in exchange for red socks. 1 red socks will be traded for no more than 1 white socks ( the upper bound) and no less than 1/2 white socks(the lower bound).

The Chicago will export red socks in exchange for white socks. 1 white socks will be trade for no more than 2 red socks( the upper bound) and no less than 1 red socks(the lower bound) .

Are the following statements true or false? Explain in each case.

“Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods. ” : True – Because each country have a comparative advantage in producing some good.
“Certain very talented people have a comparative

advantage in everything they do. ” : False – Because no one can have a comparative advantage in everything. Comparative advantage reflects the opportunity cost of one thing in terms of another. (It means that we must have a comparative disadvantage in the other thing)

“If a certain trade is good for one person, it can’t be good for the other one. ” : False – Because trades cannot occur if both sides do not benefit.

“If trade is good for a country, it must be good for everyone in the country. ” : False – Exporting and importing some goods will benefit the nation as a whole. But, it will be harmful to domestic manufacturers of imported goods.

Explain each of the following statements using supply-and-demand diagrams.

“When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country. The supply of oranges will be reduced because of damages and this can be seen in the above diagram as a shift to the left in the supply curve for oranges.
“When the weather turns warm in New England every summer, the price of hotel rooms in Caribbean resorts plummets.
” The demand for Caribbean resorts is low in the summer and this can be seen in the above diagram as a shift to the left in the demand curve for Caribbean resorts.
“When a war breaks out in the Middle East, the price of gasoline rises, and the price of a used Cadillac falls. The supply of oil will be reduced because of the war and this can be seen in the above diagram as a shift to the left

in the supply curve for oil. With a higher price for gasoline, the cost of operating a car like a Cadillac will increase. As a result, the demand for used Cadillac will decrease and some people who already own Cadillac will try to sell them.

So, the demand curve for used Cadillac shifts to the left, while supply shifts to the right. 6. Market research has revealed the following information about the market for chocolate.The demand schedule can be represented by the equation QD=1600-300p, where QD is the quantity demanded and P is the price.

The supply schedule can be represented by the equation Qs=1400+700P, where Qs is the quantity supplied. Calculate the equilibrium price and quantity in the market for chocolate. The equilibrium price (QD = Qs) : 1600 – 300p = 1400+700p 1000p = 200 ? p=0. 20 QD = Qs = 1600 – 300 (0. 20) = 1400 + 700(0.20) = 1540 bars 7. Suppose the business travelers and vacationers have the following demand for airline tickets from New York to Boston.

Price

Quantity Demanded (business travelers)

Quantity Demanded (vacationers) 1502,100 tickets1,000 tickets 2002,000 800 2501,900 600 3001,800 400 A. As the price of tickets rises from $200 to $250, what is the price elasticity of demand for

business travelers and
vacationers? (Use the midpoint method in your calculations. )

The price elasticity of demand for business travelers: (2000-1900) /((2000+1900)/2) * 100% 5.13 = - = 0. 23 (250-200)/((250+200)/2) * 100% 22. 22 The price elasticity of demand for vacationers: (800-600) /((800+600)/2) * 100% 28. 58 = ------- = 1.9 (250-200)/((250+200)/2) * 100% 22. 22

Why might vacationers have a different elasticity from business travelers?

The price elasticity of demand

for vacationers is higher than the elasticity of demand for business travelers because vacationers can choose more easily a different mode of transportation, such as train, bus and so on. If the price of tickets rises, vacationers try to fine substitutes. The price elasticity is high when close substitutes are available.

Several years ago, flooding along the Missouri and Mississippi rivers destroyed thousands of acres of wheat.A. Farmers whose crops were destroyed by the floods were much worse off, but farmers whose crops were not destroyed benefited from the floods.

Why? The supply of wheat will be decreased by the damage of the floods and the price of wheat will rises. So, farmers whose crops were not destroyed benefited from the floods.

What information would you need about the market for wheat to assess whether famers as a group were hurt or helped by the floods? To assess whether famers as a group were hurt or helped by the floods, you need the price elasticity of the demand of wheat.If the demand of wheat is inelastic, the price of wheat rises steeply. So, the total wheal sales of farmers as a group were helped by the floods is higher than the total damaged estimated sales of farmers as a group were hurt by the floods.

If the government places a $500 tax on luxury cars, will the price paid by consumers rise by more than $500, less than $500, or exactly $500? Explain.

In general, if the government the government places a $500 tax on luxury cars, the price paid by consumers will rise less than $500 because of the price elasticity of demand for the luxury product which is

elastic.

A subsidy is the opposite of a tax. With a $0.50 tax on the buyers of ice-cream cones, the government collects $0. 50 for each cone purchased; with a $0. 50 subsidy for the buyers of ice-cream cones, the government pays buyers $0. 50 for each cone purchased.

Show the effect of a $0. 50 per cone subsidy on the demand curve for ice-cream cones, the effective price paid by consumers, the effective price received by sellers, and the quantity of cones sold. Before the subsidy, P1 is the price.After subsidy, the price received by seller is Ps and the effective price paid by consumers is Pd which is Ps minus 50 cents because of the shift of the demand curve up by 50 cents.

Do consumers gain or lose from this policy?
Do producers gain or lose?
Does the government gain or lose?

The consumers and producers gain since the consumers buy more at a lower price and the producers sell more at a higher price. The government loses because it has to pay subsidy

Business Economics Problemset Essay Example