Name:

ng Thu Trang

Class: GMA 01

Chapter 1: The principles of Economics

Question for review 1. Give three examples of important trade-offs that you face in your life.
Ex 1: When I graduate from high school, I had to make a trade-off between studying in other city and studying in a school near my house. Ex 2: When I had a chance to change my class, I made a trade-off between canceling 2 year in school to restart from beginning and staying in old class to finish school in time. EX 3: I decided whether to buy a new laptop.

2. What is the opportunity cost of seeing a movie?

The opportunity cost of seeing a movie is what you must give up to get it. Time is the largest cost of seeing a movie. If you see a move, you will miss opportunity to do other jobs such as doing your homework, cleaning your house, going to music concert or playing some sports to improve your health. In case of that job brings you a salary, the opportunity cost is amount of money you can earn in time you watch a move. Besides, the money that you use for movie such as electricity money (if you see a movie at home) money to buy a ticket (if you go to cinema) or money for food and drink you eat during the film may be used for another thing. Finally, sitting one place for an hour to see a movie is not good for your health. Doing something more dynamically instead will be better for your body. So the last opportunity cost is your health.

3. Water is necessary for life. Is the marginal benefit of a glass of water large
or small? More than 70% surface of Earth is covered by water. Water plays a crucial role in our life. It ensures the existence for every creature. However the marginal benefit of a glass of water is very small. Because water is very plentiful, we are almost easy to have it. So an extra glass of water would not yield very much. Unless you have joined a marathon competition or you have walked under sunshine for hours, marginal benefit of water is not large.

4. Why should policymakers think about incentives?

The policymakers should think more about incentives. Rational people respond to incentives because they make decisions by comparing costs and benefits. Moreover, many policies change the cost or benefit and, therefore, alter consumer s behavior. A tax on gasoline, for example, encourages people to drive a smaller and more-efficient car or take public transportation. In other words, change in policies directly impact on people s incentives and thus, change life of them. Therefore, policymakers must consider not only the direct effects but also the less obvious indirect effects that work through incentives.

5. Why isn t trade among countries like a game with some winners and
some losers? Trade among countries isn t like a game with some winners and some losers because trade makes each country better off. By trading with other, everyone can buy a great variety of goods and services at the lowest cost. Trade allows countries to specialize in what they do best and thus, everyone have the highest level of satisfaction.

6. What does the invisible hand of the marketplace do?

The invisible hand price of goods and services in marketplace directs every economic activity. In any market, buyers consider the price when determining considering how much to demand, and sellers look at the price when deciding

how much to supply. As a result, market price reflects both the value of goods and services to society and the cost to society of making the goods and services. Prices adjust to guide these individual buyers and seller reach outcome that, in many cases, maximize the well-being of society as a whole.

7. Explain the two main causes of market failure and give an example of
each. The two main causes of market failure are externality and market power. Externality is impact of one person s actions on the well-being of a bystander such as pollution. Market power refers to the ability of single person (or a small group) to unduly influence market price. For example, there is only one person who supplies clothes in the town.

8. Why is productivity important?

Productivity is important because it reflects living standard of a nation. If a nation s productivity is high, this means that workers can produce a large quantity of goods and services per unit of time, most people enjoy a high living standard. On the contrary, in nations where workers are less productive, most people endure a more meager existence. The greater a productivity of a country s, the greater its standard of living will be.

9. What is inflation and what causes it?

Inflation is an increase in the overall level of prices in the economy. When government creates a large of nation s money, that is the time inflation appear.

10.

How are inflation and unemployment related in the short run?

There is an inverse relationship between inflation and unemployment rate in the short run. When inflation is increase, unemployment rate will decrease. This will be explained bellow: Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services. Higher demand may over time cause firms to raise their prices, but in the meantime, it also encourages them to hire more workers and produce a larger quantity of goods and services. More hiring means lower unemployment.

Problem and Applications

1. a. A family deciding whether to buy a new car has to make a trade-off between buying a new car and spending that money to do other things such as buying new furniture or going on holiday in this summer. b. A member of Congress decides how much to spend on national parks. If spending so much money on national parks, budget for other structures is reduced. So he must choose between money for national park and money saved to spend on other items or tax cuts. c. A company president decides whether to open a new factory. A trade-off is between a new chance to earn more money and stability of old job. d. A professor deciding how much to prepare for class faces a trade-off between having a better class and spending that time and money for other thing such as going to beauty salon or paying a visit to relatives home. e. A recent college graduate deciding whether to go to graduate school make a trade-off between taking part in an important event in his life and spending that time on doing other thing such as going out with his friends. 2. To compare between the cost of the vacation and benefits it brings me, I ll answer some questions about what I give up to get it: Travelling make me feel relax and refresh. However, is the cost of vacation too much to me? If I worked very hard to get the money, is it worth spending on a few days just for fun? Do I feel comfortable when quit other jobs to going on holiday? That is some comparisons about psychological benefits. Besides, I should consider whether I can spend that time on earning more money or join in other fun activities? Except a vacation, may I use the money for another thing which brings me the same happy? Answer these questions I ll decide whether the cost of the vacation is worth benefit it brings me. 3. A friend asks you to go skiing on Saturday when you were planning to work at my part-time job. The cost of going skiing is amount of money and time you must spend on going skiing plus wages of days you quit your job to go skiing.

If my plan is spending Saturday studying at the library, the cost of going skiing in this case is amount of money and time you must spend on going skiing plus the knowledge you missed because you didn t go to the library. 4. Monetary opportunity cost of spending $100 now is $100 plus 5% interest every year. Nonmonetary opportunity cost: Putting $100 away for a year in a bank account, after a year you ll gain $105. If you spend it now, you ll lose interest and chance of investing for other projects in the future. 5. You invested $5 million in developing new product and it has not finished. However, your company s turnover decreased to $3 million. So you lost $2 in compared with your initial capital. If you don t spend additional $1 million to put an end to the project, it ll be never finished and your company will can t continue making the products any more. You ll lose total $5 million. Therefore you should go ahead and maintain the development. 6. After reading three suggestions of The Magic Potion Company s managers, I suppose Hermione s idea is the best. If you want to increase in production, you must be sure that your company is working very well. There is only one thing reflect it. It s company s revenue. The higher the revenue is, the more successful project is. So the thing needed to do is examining whether the extra revenue from selling the additional product is greater or smaller than the extra cost. Both the productivity of workers and average cost are important but they don t indicate the company s profit. 7. a. Talk about affection of provision of Social Security, I think there are two situations. In the first case, provision will reduce incentive of people to save for retirement. In the other, people still put away to have an additional income, not depend on money of Government. b. For recipient of Social Security deciding to work and earn some income, his benefit is reduced. I think if income he earns from an extra work is higher than

income of Social Security, he still works there. On the contrary, if job s salary is not as much as income of Social Security, he will quit the job. 8. a. If many welfare recipients only receive income from Government within two years, they have more incentives to looking for a new job after that. b. To people who is not able to find a job, cutting their benefit after two years is unequal for them. However, a greater incentive to find a job make economy works more efficient. 9. My roommate is a better cook than I am, but I can clean more quickly than my roommate can. If my roommate did all the cooking and I did all the cleaning, we ll use time for chores the most efficiently. Because each is responsibility for what he does best, he ll be able to complete his task in the optimal time. On the contrary, if I divide task into equal part, both I and my roommate must do what we are not really good at. So it takes more time to finish the tasks. Besides, focusing on one task makes productivity and efficiency of work higher. Ex: Viet Nam has a very high rice export in the world. So Viet Nam specializes in providing rice and coffee to Japan. On the other hand, Japan is excellent at technology so they provide us the best technological products currently. That is the trade which makes two countries both better off. 10. To make decisions about how many compact discs to produce, what artists to record, and which consumers should receive the discs, I need to know about musical tastes of everyone, the favorite singer currently, and cost as well as technology to produce compact discs. 11. a. Regulating cable TV prices: Efficiency the cable TV monopoly makes the market failure. b. Providing some poor people with vouchers that can be used to buy food: Equality help poor to have a better life, reduce disparity between standard of living of richer and poor. c. Prohibiting smoking in public places: Efficiency market failure occur because there are too many nonsmokers harmed by smokers in public.

d. Breaking up Standard Oil (which once owned 90 percent of all oil refineries) into several smaller companies e. Imposing higher personal income tax rates on people with higher incomes: Equality the rich will contribute more to help poor to reduce difficult in the life. f. Instituting laws against driving while intoxicated: Efficiency there are too many accidents caused by driver who is in intoxication. 12. a. Everyone in society should be guaranteed the best healthcare possible. - If the poor would be guaranteed the best healthcare possible, the common living standard of whole society will increase significantly. On the other hand, guarantee of the best health services for everyone means the government and public must spend more on health care. As a result, the economy would be less efficient. b. When workers are laid off, they should be able to collect unemployment benefits until they find a new job. - Providing amount of money for the unemployed makes equality in society. However, if the unemployed always receive unemployment benefits, they are encouraged to live without a job. The economy will be adversely affected if unemployment lasts for a long time. So it s necessary to make a balance between equality and efficiency in the economy. 13. The standard of living is improved considerably after Viet Nam became fully independent. This is mainly the result of increased productivity, so that an hour of work produces more goods and services than it used to. The government had suitable policies to develop the economy, encouraged everyone enrichs for themselves and for nation.