Question

In: Economics

Students are to complete the exercises in Word (or some other compatible word processor) and submit...

Students are to complete the exercises in Word (or some other compatible word processor) and submit for evaluation.

Questions

1. The purpose of economics is to provide a way to think. Economic thinking and decision-making recognize that because of scarcity something cannot be obtained without giving up something else. Consequently, we must make our decisions by comparing the costs and benefits and evaluating the tradeoffs. In doing so, five principles of economic thought come into play: tradeoffs, incentives, opportunity costs, marginal thinking, and voluntary exchange. Explain with a specific example of each how you apply these five principles of economic thought in your everyday life.

Table 1-1

Possible Output Combinations

Apples

(thousands of kilos)

Pears

(thousands of kilos)

2. Refer to Table 1-1. The Fruit Farm produces only apples and pears. The table above shows the maximum possible output combinations of the two fruits using all resources and currently available technology.

a. Graph the Fruit Farm's production possibilities frontier. Put apples on the horizontal axis and pears on the vertical axis. Be sure to identify the output combination points on your diagram.

b. Suppose the Fruit Farm is currently producing at point D. What is the opportunity cost of producing an additional 8,000 kilos of pears?

c. Suppose the Fruit Farm is currently producing at point D. What happens to the opportunity cost of producing more and more pears? Does it increase, decrease or remain constant? Explain your answer.

d. Suppose the Fruit Farm is currently producing at point G. What happens to the opportunity cost of producing more and more apples? Does it increase, decrease or remain constant? Explain your answer.

e. Suppose the Fruit Farm is plagued by a maggot infestation which destroys apple trees but not pears. Show in a graph what happens to its PPF.

3. Suppose you own an outdoor recreation company and you want to purchase all-terrain vehicles (ATVs) for your summer business and snowmobiles for your winter business. Your budget for new vehicles this year is $240,000. ATVs cost $8000 each and snowmobiles cost $12,000 each.

a. Draw a budget line for your purchase of new vehicles.

b. What is the opportunity cost of one ATV?

c. What is the opportunity cost of one snowmobile?

Solutions

Expert Solution

1) The 5 principles along with their examples are given as below:

a) Incentives: Incentive means a form of reward which is given so as to prompt to the individuals to do something.

Eg: when bonus is linked with good work ,then it means the workers are incentivised. Higher the effort, more the bonus. This is Incentive.

b) Tradeoffs: the resources in world are limited but demand of goods and services are unlimited. This means that there would be choices between production of goods or between different economic activities. This is tradeoff.

Eg: an individual with his pocket money may decide to watch a movie or save it for vacations. These are Tradeoffs one comes across in everyday life.

c) opportunity costs: these are the costs foregone ie the next best alternative which is given up.

Eg: a country can produce with the given set of resources both food and guns. If it decides to produce good, the opportunity cost would be guns and vice versa.

Another example could be an individual wanting to pursue graduation. The opportunity cost would be the salary foregone had he applied for a job.

d) Voluntary exchange: it is a process which takes place in free market ie when the buyers are paying the price they want to pay and sellers are selling at their minimum accepted price.

Eg: in a perfectly competitive market of tomatoes, there is voluntary exchange taking place. It would be distorted in government's presence or intervention.

E) Marginal thinking: it refers to thinking in terms of margin ie the additional unit.

It could be through the seller or the buyer's perspective.

Eg: if an individual is buying pizza with a given cost, he would be buying it as long as the marginal benefit from the next slice of pizza is equal to the marginal cost he is paying for the additional slice.

Hence these are the five principles of economic thought.

(You can comment for doubts)

Rahul Sunny answered 1 year ago

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