Northern Virginia Community College

Annandale Campus
Liberal Arts Division
Principles of Macroeconomics
Homework I
Answer the following exercises thoroughly. Show your work! You must type your homework. I
prefer that you use MS Excel or similar spreadsheet software to prepare your graphs, but if you
prefer to draw them, use graphing paper and a ruler to prepare your graphs. Draw big enough to label
accurately your graphs and use colors, if appropriate, to demonstrate changes. In addition, follow
these instructions:

1. You must turn in a hard copy of your homework when you come to class. (Staple your homework
or lose 5 points!)

2. This must be your final version; it must be neat without strikethrough or blots.

3. If you cannot attend on the day your homework is due, then you can e-mail your homework before
your class period start. For example, if your class starts at 8:00 AM, then your homework must reach
my inbox before 8:00 AM. Remember, I will not accept homework handle late (even if it reach my
inbox by 8:01AM). I do not have the resources to print dozens of homeworks therefore, e-mail is an
option of last resort for those students that cannot come to class and have a reasonable excuse for
their absence. For everyone else, I expect that you will turn in a hard copy of your homework.

4. Electronic files must be setup to be printed. I will not format the homework file for you.

Furthermore, you can use your textbook, notes, or any other resource available. You can also consult
with other students however; you need to turn in your own work. Copying answers from other
students is not acceptable. A violation of this rule will result in a failing grade.
I. Introduction: Limits, Alternatives, and Choices.

1. (10 points) During 2009, movie studios began to release a substantial number of films in 3-D
format. To show films in this format, theater owners have to invest in 3-D equipment that costs
$75,000 for each projector. Typically, theaters owners can charge about $3.00 more for a ticket to a
3-D movie than for a movie in conventional 2-D format. If you owned a movie theater, discuss how
you would go about deciding whether to invest in 3-D equipment.

If I were considering upgrading to the high tech 3-D equipment i would consider a few options. The
first thing i would consider is how long or how many movie tickets i would need to sell to break even
for my new equipment. For each projector you would have to sell 25,000 tickets at an additional $3
to break even with the cost of just one of the 3-D projectors. The next thing i would consider is how
long it would take me to sell those 25 thousand tickets and whether or not it would be an appealing
feature that would draw in more customers. It is very important to analyze the costs and effects of
doing such an expensive upgrade.

2. (8 points) Briefly explain whether each of the following is primarily a microeconomic issue or a
macroeconomic issue.
a. The effect of higher cigarettes taxes on the quantity of cigarettes sold.
Macroeconomics looks at higher up country and government decisions, therfor macroeconomics
would be the issue when involving taxes and the effect on the governments money and budget.

b. The effect of higher income taxes on the total amount of consumer spending.

The higher income taxes would be a result of macroeconomics however its effects on the amount of
total consumer spending would be effecting microeconomics which is the study of decisions that
people and businesses make regarding the allocation of resources and prices of goods and
services.

c. The reasons for the economies of East Asian countries growing faster than the economies of sub
Saharan African countries.

This could really be a combination of both macro and mirco economics. The reason being is that
when a government is running a country in a more poorly condition it is effected by macroeconomics
but when a government is running poorly the consumers and businesses will all together have less
money to spend as a whole so it would be microeconomics effecting it also.

d. The reason for low rates profit in the airline industry.

Microeconomics is the decisions that people and businesses make regarding the allocation of
resources and prices of goods and services. Directly it would be a mirco economics issue,
however if the condition of the government and econcomy was effecting how the airline was
pricing there tickets it could be a macroeconomics issue but i feel like microeconomics is the
majority of the issue effecting ticket price.

3. (9 points) Use the concept of opportunity cost to explain the following.

a. More people choose to get graduate degrees when the job market is poor.
Principles of Macroeconomics Homework I 2

the cost related to the next-best choice available to someone

When i think of opportunity cost i think of
who has picked between several mutually exclusive choices. During a poor job market it is
extremely difficult to get a job with just a bachelors degree . Two out of eight graduating
students with bachelors will find jobs when they get out of college with in a reasonable amount
of time. Due to these odds it would be a better choice and better opportunity cost to continue
school. However the opportunity cost would be you will not be making a salary if you choose to
continue school but you will be in a much better position to get a better career in the future.
b. More people choose to do their own home repairs when the economy is slow and hourly wages are
down.
The opportunity cost here would be that you are using your own time and effort to do your own
repairs. The result is you will lose time but you will save money thus having a higher balance of
money to spend on other options. When the economy is bad it is important to save up money just
incase there is any issues with your job or salary.

c. Fewer students enroll in classes that meet before 10:00 AM.

Many students like to register for classes later than 10am so they can have time to sleep late and
possibly stay up later. The opportunity cost would be that they will have class longer into the day so
that they can have more time for rest and more time for other activities late at night.

II. The Production Possibilities Model.

4. (15 points) Mary works full-time at the customer service department of a large corporation. Her full-
time shift requires her to work 8 hours per day. These days she is working on two specific tasks:
calling customers to respond to complaints and entering data from a customer satisfaction survey.
The following table shows the amount of work she can accomplish given the time spent on each task.

HOURS DATA OR PHONE

ENTRY CALLS
(# surveys) (# customers)
0 0 or 0
1 16 or 8
2 30 or 15
3 42 or 21
4 52 or 26
5 60 or 30
6 66 or 33
7 70 or 35
8 72 or 36

a. Use the above data to construct Mary’s PPF schedule and graph it.

b. Are the following choices attainable combinations?

i. Data entry for 60 surveys and 26 phone calls.

Attainable

ii. Data entry for 42 surveys and 30 phone calls.

Not attainable

iii. Data entry for 30 surveys and 35 phone calls.

Not attainable

c. Are the following choices efficient combinations?

 i. Data entry for 66 surveys and 15 phone calls.
efficient

ii. Data entry for 52 surveys and 21 phone calls.

Inefficient - only using 7 hours

iii. Data entry for 16 surveys and 35 phone calls.

Efficant

d. Which of the following combinations represents a tradeoff or a free lunch?

i. Data entry for 66 surveys and 15 phone calls.

tradeoff

ii. Data entry for 52 surveys and 21 phone calls.

free lunch

iii. Data entry for 16 surveys and 35 phone calls.

tradeoff

f. Does Mary's opportunity cost of a phone call increases as she spends more time making phone
calls? Explain why or why not

Marys oppertunity cost will be increased because she is using more of the time should could be
using to be doing surveys. Mary will need to hurry up and get off the phone if her goal is to get
more surveys done than phone calls.

g. Identify possible factors of production in play in this exercise and use them to explain how Mary
can increase her production possibilities.
5. (10 points) The following are production possibilities tables for China and the United States.
Assume that before specialization and trade the optimal product-mix for China is alternative B and
for the United States alternative U.

Product China’s production possibilities

Apparel A B C D E F
(in 30 24 18 12 6 0
1000s) 0 6 12 18 24 30
Chemic
als (in
tons)
Product U.S. production possibilities
Apparel R S T U V W
(in 10 8 6 4 2 0
1000s) 0 4 8 12 16 20
Chemic
als (in
tons)

a. Graph China’s and the United States’ PPC.

b. Calculate each country’s opportunity cost of producing apparel and chemicals.

The opportunity cost of producing 6 tons of chemicals is 6 tons of apparel for China. If the
united states reduces its production in apperal by 2 tons then it gains the abilitys to produce 4
tons of chemicals. The opportunity cost of 4 tons of chemicals is 2 tons of apperal.

c. Which country has a comparative advantage in producing apparel? Which country has a
comparative advantage in producing chemicals?

China has comparative advantage in producing apperal because when they decress the same
amount of production of chemicals they are able to produce the same as the united states so china
can produce more apperal.

United states has comparative advantage when producing chemicals because when it reduces its
production of chemicals by 1 it can make 2 tons of apperal where china it is only one ton.

d. Which country has an absolute advantage in producing apparel? Which country has an
absolute advantage in producing chemicals?
China has absolute advantage in both catagories as it has capabilities to produce in higher
qaunities.

e. Using the methodology discussed in class,

 i. Indicate the production activity in which each country should specialize and explain why.
US should produce chemicals and trade off for apperal because of the comparative advantage.
China should produce apparel and trade for chemicals.
ii. Come up with the terms of trade that you plan to use and explain why they are beneficial for
each country.
USA trades 8 chemical units for 12 units of apperal. This way they are getting an advantage of
having more clothes and still have chemicals left over.

35

30

25

20

15

10

0
0 5 10 15 20 25 30 35

iii. Show how they gain from specialization and trade. Show the outcome after trade in your
graph.
III. Demand and Supply

6. (10 points) As oil prices rose during 2006, the demand for alternatives fuels increased. Ethanol, one
alternative fuel, is made from corn. According to an article published in the Wall Street Journal, the
price of tortillas, which are made from corn, also rose during 2006: “The price spike [in tortillas] is
part of a ripple effect from the ethanol boom”.

a. Draw a demand and supply graph for the corn market and use it to show the effect on this market
of an increase in demand for ethanol. Be sure to indicate the equilibrium price and quantity before
and after the increase in the demand for ethanol.

b. Draw a demand and supply for the tortilla market and use it to show the effect on this market of
the change in the price of corn that you demonstrated before in part (a). Once again, be sure to
indicate the equilibrium price and quantity before and after the increase in the demand for ethanol.
Principles of Macroeconomics Homework I 4

c. During 2009, the demand for gasoline had fallen, lowering its price. The demand for ethanol had
declined as well. Ethanol producers, though, were asking the Environmental Protection Agency
(EPA) to raise the allowable amount of ethanol in gasoline blends from 10% to 15%. If the EPA were
to agree to this proposal, what would be the likely effect on tortilla prices?

7. (14 points) Suppose that during a recent market period, the following relationship existed between
the prices of prerecorded music CD’s, the quantity demanded, and the quantity supplied per week.

Price Quantity Quantity

Demanded Supplied
(millions) (millions)
$10 100 40
$14 90 60
$18 80 80
$22 70 100
$26 60 120

$30

$25

$20

100 90 80 70 60
$15

$10

$5

$0
20 40 60 80 100 120 140

a. What are the market equilibrium price and the market equilibrium quantity?
The market equilibrium price is around $17-18 and that is producing an equilibrium qaunity of
around 75 millions supplied.

b. If the price of music CD’s is $22, describe the situation in the market. Explain how the market
equilibrium is restored.
The demand will be decreasing if the price is increased from the equilibrium price.. The effect of less
demand will encourage a surplus of cds on the market thus it is important to reduce to price of the
CD.
c. Explain what happens to the market equilibrium and how the market adjusts to its new equilibrium
when online music stores became available allowing customers to buy singles at 99 cents, which they
could burn on a CD in order to create their own music collection. Assume that this event changes the
quantity demanded by 30 million a week at each price, what is the new price and quantity in
equilibrium?

By reducing the demand by 30 million a week, you will have a price around $14 and a demand of
around 60 million cds.

d. Explain what happens to the market equilibrium in part (a) when MP3 players, like the iPod,
became available while at the same time, the cost of producing prerecorded music CDs falls. Set out
the three-step process of analysis to illustrate the adjustment process. Your three-step process should
address the change in demand, the change in supply, and the change in equilibrium.

The invention the iPod will begin to phase out the purchases of CDS in stores and will have various
effects on the price and demand

The equilibrium price is going to decrees

The supply demanded will also decress.
The demand will decress

8. (5 points) During an examination, a student was asked to draw a demand and supply graph to
illustrate the effect on the laptop computer market of a fall in the price of computer hard drives,
ceteris paribus. She drew the following graph and explained it as follows:
“Hard drives are an input to laptop computers, so a fall in the price of hard drives will cause the
supply curve for personal computers to shift to the right (from S 1 to S2). Because this shift in the
supply curve results in a lower price (P 2), consumers will want to buy more laptops, and the demand
curve will shift to the right (from D 1 to D2). We know that more laptops will be sold, but we can’t be
sure whether the price of laptops will rise or fall. That depends on whether the supply curve or the
demand curve has shifted farther to the right. I assume the effect on supply is greater than the effect
on demand, so I show the final equilibrium price (P 3) as being lower than the initial equilibrium
price (P1).”

I agree with the student when she shows that the supply will be going up at a faster rate then
supplies. I disagree with the student however when the price is going down because in this
equation laptops are first being produced thus the technology cost will not be reduced that much
from a higher demand.