ECON 110 Study Guide - Kraft Dinner, Opportunity Cost, Exogeny

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Published on 16 Apr 2013
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A1-1. False. Opportunity cost is the value of the next best alternative foregone. In this
case, the value of the best alternative (which is only one on the night) is my total benefit
minus my total cost from the alternative. Any alternative’s value is the net benefit.
Attending Bieber’s concert is worth to me up to 50$ whereas actually attending his
concert will cost me $40. Thus I am giving up the $10 and so the opportunity cost of
seeing the Hip is $10.
A1-2. True. An increase in household income increases their ability and willingness to
buy more goods and services. This means that demand from households increase,
causing firms to experience a rise in sales and in turn an increase in revenue due to the
greater number of goods and services sold. This explanation is supported by the
concept of the circular flow of income and expenditure showing how economic agents
are linked. When households receive a greater income from selling their factors of
production (land, labour, capital) to firms, this increases the payments they receive for
them. These payments or income is then spent on more goods and services, which
increases the revenue of firms.
A1-3. True. This is a purely positive economic statement as it can be testified and there
is no value judgment involved. An endogenous variable is one whose value is
determined within the theory. In this case when the Government taxes, the variables
affected would be the price and quantity. An increase in tax has a direct effect on price
and quantity because it increases the price of what is taxed and an increase in price of
anything decreases the quantity demanded by individuals. This in turn means less
people will consume gas as it has become expensive and this will help reducing the
emissions, which is the exogenous variable. however we should keep in mind that not
all positive statement are necessarily true. So although increase in tax has a direct effect
on price, it may not reduce the quantity of gasoline sold because people will still want to
continue driving and these days a car has become a necessity and key mean of
transport. So in turn, even the reduction in pollution emission may not be true due to this
however this statement can clearly be testified hence it is positive.
A1-4. The opportunity cost for Japan to produce 1 computer is 3 cell phones whereas for
Finland, the opportunity cost of producing 1 computer is 4 cell phones. This shows that
Japan has a competitive advantage in producing computers and Finland has it in
producing cell phones, because for 1 unit of resource Finland produces 4 cell phones as
opposed to Japan's 3 cell phones and they both produce the same amount of computers
but Japan has to give up one less cell phone to do so. Both the countries will be better
off once Finland starts trading 1 cell phone for a third or quarter computer with Japan
A1-5. Uncertain. Opening an economy to free trade can have several impacts. Firstly it
means that a country is now able to pursue its comparative advantage increase their
production and exports of the goods that they are relatively good at producing along with
decreasing the production and increasing imports of the goods that they aren’t so good
at producing. However there is uncertainty as to what type of products they are trading.
For some economies, opening up to trade can mean losing the local market share
because now the domestic/local market can import from abroad which will be more cost
effective for them. This is an advantage for buyers but may not be for the sellers. Also
coming back to what products they are selling perhaps an economy that opens up to
trade and produces goods that people from outside their country start to demand can be
beneficial as they can export their goods as well as keep their local market share
which may result in an increase in number of sales and in turn increase in their revenue.
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Document Summary

Opportunity cost is the value of the next best alternative foregone. In this case, the value of the best alternative (which is only one on the night) is my total benefit minus my total cost from the alternative. Attending bieber"s concert is worth to me up to 50$ whereas actually attending his concert will cost me . Thus i am giving up the and so the opportunity cost of seeing the hip is . An increase in household income increases their ability and willingness to buy more goods and services. This means that demand from households increase, causing firms to experience a rise in sales and in turn an increase in revenue due to the greater number of goods and services sold. This explanation is supported by the concept of the circular flow of income and expenditure showing how economic agents are linked.

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