ECONOMICS FINAL

CH1
2. True or false: Your willingness to drive downtown to save $30 on a
new appliance should depend on what fraction of the total selling price
$30 is. Explain. (LO3)

False, according to the cost benefit principle which states that an individual
(or a firm or a society) should take an action if, and only if, the extra benefits from taking the
action are at least as great as the extra costs.

The Cost-Benefit Principle tells us that you should buy it downtown if the benefit of doing so
exceeds the cost. The benefit of taking any action is the dollar value of everything you gain
by taking it, the cost of taking any action is the dollar value of everything you give up by
taking it. Here, the cost of buying downtown is the dollar value you assign to the time and
trouble it takes to make the trip.

For Example, if you’d agree to drive downtown and back for $29 but not for $28.99, then
your cost of making the trip is $29. In this case, you should buy the new appliance
downtown because the $30 you’ll save (your benefit) is greater than your $29 cost of
making the trip. But suppose the cost of making the trip had been greater than $30. In
that case, your best bet would have been to buy the appliance from the nearby store.
Confronted with this choice, different people may choose differently, depending on how
costly they think it is to make the trip downtown. But although there is no uniquely correct
choice, most people who are asked what they would do in this situation say they would
buy the game downtown.
CHAPTER 2 Q5

How will technological innovations that boost labor productivity affect

an economy’s production possibilities curve? (LO3)

Technological innovations that boost labor productivity will typically shift an economy's
production possibilities curve outward. Here's how:

1. Increased Efficiency: Technological innovations often lead to more efficient ways of

producing goods and services. When labor productivity improves, workers can produce
more output in the same amount of time, leading to an increase in overall efficiency.

2. Capacity Expansion: Higher productivity means that the economy can produce more
goods and services with the same number of resources. This effectively expands the capacity
of the economy to produce a greater quantity of both goods.

3. Resource Reallocation: As productivity increases, resources (including labor) may be

reallocated from less productive sectors to more productive ones. This reallocation
contributes to the economy's ability to produce more with the same inputs.

4. Innovation and Growth: Technological advancements often stimulate further innovation

and economic growth. This continuous cycle of innovation, productivity improvement, and
growth results in a sustained outward shift of the production possibilities curve.

5. New Possibilities: Higher productivity may enable the production of entirely new goods
and services that were not feasible before. This leads to an expansion of the types of goods
and services that can be produced in the economy.

In summary, technological innovations that enhance labor productivity contribute to

economic growth and an outward shift in the production possibilities curve, allowing the
economy to achieve higher levels of output and a greater variety of goods and services.
CHAPTER 3 Q1

Explain the distinction between the horizontal and vertical

interpretations of the demand curve.?
There are two ways that the demand curve can be read or interpreted:

First: The Horizontal Interpretation:

- which tells how much of it consumers wish to purchase at various prices.

- Using the horizontal interpretation, we start with price on the

vertical axis and read the corresponding quantity demanded on the horizontal axis. Thus,
at a price of $4 per slice, the demand curve in following graph tells us that the quantity of
pizza demanded will be 8,000 slices per day.

Second : The Vertical Interpretation:

- which tells us what the buyer’s reservation price for the good is, given a fixed quantity
from the horizontal axis.

- Using the Vertical interpretation which is to start with quantity on the horizontal axis
and then read the marginal buyer’s reservation price on the vertical axis.

- Thus, when the quantity of pizza sold is 12,000 slices per day, the demand
curve in following graph, tells us that the marginal buyer’s reservation price is $3 per slice
CHAPTER 3 Q4

Distinguish between the meaning of the expressions change in

demand” and “change in the quantity demanded”.
1. Change in Demand:

- Definition: "Change in demand" refers to a shift in the entire demand curve, indicating a
change in the quantity demanded at every price level.

- Causes: Various factors can lead to a change in demand, such as changes in consumer
preferences, income (for anormal goods), prices of related goods, future prices expectations,
and the number of consumers in the market.

- Graphical Representation: On a demand graph, a change in demand is illustrated by a

shift of the entire demand curve to the left or right.

2. Change in Quantity Demanded:

- Definition: "Change in quantity demanded" refers to a movement along the existing

demand curve in response to a change in the price of the good or service.

- Causes: The sole factor affecting the quantity demanded in this case is the price of the
goods itself.

- Graphical Representation: On a demand curve, a change in quantity demanded is

represented by a movement along the curve, either to the right (increase in quantity
demanded) or to the left (decrease in quantity demanded).
So Key Differences:

- "Change in demand" is influenced by various factors beyond price.

- "Change in quantity demanded" is influenced solely by a change in the price of the

product.

- In summary, "change in demand" reflects a broader shift in factors affecting overall

demand, while "change in quantity demanded" specifically addresses variations in quantity
due to changes in price.