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Assignment 1 - Group Project.docx

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ECON 111
Ian James Cromb

ECONOMICS 110/111 Assignment 1 Problems: A1-1) False As the cost of seeing Tragically Hip is free, there is no additional value gained from going to that concert. On the other hand, due to the fact that I value seeing Bieber’s show as $50 while the tickets themselves for his show are worth $40, the additional $10 would represent the amount of pleasure I would gain if I went to see his performance. As opportunity cost is what must be given up as the best alternative, if I decide to go to see the Hip, my lost opportunity cost would be the $10 of net pleasure I would gain from seeing Bieber. A1-2) True When referring to the circular flow diagram of cash flow between firms and households, the correlation shows that an increase in household incomes corresponds to an increase in funds flowing from the market of goods and services to firms. Since the factors of production are owned by households (either directly or through their ownership of firms) this increased flow is transferred to households through the factor markets. The Circular Flow of Income & Expenditure Goods Markets Individuals Firms (Consumers) (Producers) Factor Markets A1-3) True This statement is a positive statement as there are no value judgments involved in the statement as a normative statement would have. This is further confirmed as all parts of the statement are testable with facts including endogenous factors such as the price of gasoline, the quantity of gasoline and the quantity of pollution. An exogenous on the other hand would be outside of the model like the government’s ability to control gasoline tax. A1-4) False It is true that Japan has an absolute advantage in the production of both cell phones and computers in comparison to Finland, since it has higher and more efficient productivity in the production of both goods. However, Japan has a comparative advantage in the production of computers, as making one unit of computer only bears an opportunity cost of 3 cellphones in comparison to Finland’s opportunity cost of 4 cellphones. Finland on the other hand, has a comparative advantage in the production of cellphones as one unit of cellphones costs only an opportunity cost of 1/4 of a computer in comparison to Japan’s opportunity cost of 1/3 of a computer. As long as two potential trading partners have different opportunity costs, they can each benefit from trade by obtaining a good at a cost below their own opportunity cost. Therefore, if both countries maximize their outputs accordingly to their comparative advantages, they would mutually become more efficient and benefit from their trades. A1-5) False Although it is true that global trade allows an economy to prosper as a whole in terms of broadening the access of different goods and services provided by different sectors, allocation of resources and increasing the efficiency on production outputs; international trade does not benefit everyone in the economy. Due to the fact that certain sectors in an economy hold a comparative advantage against other sectors with comparative disadvantages, the profitable gains are imbalanced for certain individuals within the economy. As an economy tries to maximize their output of certain goods or services in order to maximize possible profitability, it allocates more resources such as human labour into those specific comparative advantaged sectors, resulting in employees within the disadvantaged sector to be laid off. On average, country gains but there are short-run winners and losers. A1-6) The statement is false; an increase in consumer income will not result in the increase of the price for all the grocery items. There are two kinds of goods with different responses to increase in income. Normal and inferior goods are distinguished by affordability. The demand curve for normal goods will shift to the right if incomes increase, which will cause an increase in price for those goods. The demand curve for inferior goods will shift to the left if incomes increase, which will cause a decrease in price for those goods. Now illustrated by the graph (refer to the graph 1 for A1-6), increase in consumer incomes will move the demand curve for normal goods to shift towards the right. This is followed by an increase of the price in the goods. However for the inferior goods (graph 2), the increase in incomes will result in shift to the left for the demand curve. This will decrease the price of goods. A1-7) The statement is true. Housing prices are expected to rise in the future which means people will try to avoid the higher prices later on by purchasing now. However, at the same time owners of houses will not want to sell their houses right now because they are hoping to get more money in the future for their house since prices are rising. Refer to A1-7 graph – demand will shift right because of consumers eager to buy and supply will shift left because of owners waiting to sell. Equilibrium will shift from the intersection of the original supply and demand curves (E1) to the intersection of the new supply and demand curves (E2). Price will definitely increase but it seems that quantity is ambiguous depending on how the graph is drawn and whether the demand increase is greater or less than the supply decrease. A1-8) The statement is false. Movement along the demand won’t increase the price and quantity because of the downward slope but shifting the demand curve to the right would increase price and quantity (as illustrated in A1-8 graphs attached). A1-9. a) In order to obtain a graph of the production possibility boundary for good x and y, several points were calculated using the given equation. These points are summarized below: Table 1.1 – Relationship between Good x and Good y Good x 0 1 2 3 4 5 6 7 8 9 10 Good y 100 99 96 91 84 75 64 51 36 19 0 The following data points were then graphed to produce the graph below: Figure 1.1 – The Production Possibility Boundary for the Production of Goods Y and X Production Possibility Boundary of Good x and y 120 100 𝑃 𝑋) 𝑥 80 60 C (5, 50) D (8,36) 40 Quantity of good y 0 0 2 4 6 8 10 12 Quantity of good x When “x” is 0, then according to the equation , the y value would   ( )  The maximum amount of x occurs at the x-intercept of this equation. This is because there cannot a negative supply of y goods and as indicated in figure 1.1, the maximum value in the range ( ), x
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