ECON 1150 Assignment 1

Due January 28, 2019

Chapters 1, 2 3, and 4

Name __Carolina Diaz Hernandez____ Student # _300307295_

1. If you are trying to decide whether to buy a car, what are the most important factors to focus on
when making your decision? What are some of the factors that you ignore, or leave out of your
decision? Explain how your thinking resembles an economic model.

A/ If I was going to buy a car, I would check the cost, brand and features that it has, like for example if
it’s mechanic or automatic, color, horse power, if its diesel or gasoline. I ignore the amount of seats
usually, but if it was my choice I would rather have a two seats only.
My thinking resembles to the economic model because I only base my decisions on my needs for the
purpose which is the car I would want to buy.

2. What do economists say about the role of institutions in promoting the social interest?

A/ The institutions meet or promote the social interest when the resources are given the best and fair
use, for example, creating incentives.

3. Which of the following statements is positive, which is normative, and which can be tested? Explain
why.

a) The U.S. government should cut its imports.

A/ This is a normative statement , it cannot be tested because it is an assumption.

b) China is the United States’ largest trading partner.

A/ This positive statement can be tested, because we can find out if it is right or wrong.

c) If the price of antiretroviral drugs increases, HIV/AIDS sufferers will decrease their consumption
of the drugs.
A/ This is a positive statement and can be tested, because we can find out if it is right or wrong.

4. Centrally planned economies have been less efficient than market economies.

a) Has this difference in efficiency happened by chance, or is there some underlying reason?
A/ The reason for this efficiency in my concept, is that market economies are more people oriented,
whereas centrally planned economies are more country oriented (government)
 b) If market economies are more economically efficient than centrally planned economies, would
there ever be a reason to prefer having a centrally planned economy rather than a market
economy?
A/ There are a few things that are good from the centrally planned economy, for example, prices
can be kept under control and more people would be able to afford more goods and services,
unemployment levels would drop and the government would be aiming to provide more
employments.

5. Jane is deciding whether to go to school for 8 weeks this summer. The cost of tuition and textbooks
is $1,700 and housing and other expenses will cost her $600. If she does not go to school, she will
live in her parents' house for free and they will cover her food and other expenses for her. Also, if
Jane does not go to summer school she could work fulltime. But the best job she can get pays only
$600 per week, and Jane would only agree to give up her free time for no less than $750 per week.
However, if she goes to summer school, she'll have to spend 40 hours a week attending classes and
studying.

a) What will the summer school cost Jane in terms of money spent?

A/ It will cost her $2,300 between tuition, books, housing and other expenses.

b) What are the opportunity costs of going to summer school that Jane does not pay explicitly?
Explain.

A/ Live with her parents for free. Not receiving any money from working because she is not working
for less than 750 a week

c) What is Jane's total opportunity cost of going to school this summer? Explain your answer.

A/ She will have to pay for all her expenses 2,300 plus the money she will not get from work those 8
weeks (600x8) 4,800. So the total opportunity cost of going to school this summer would be 7,100.

d) Suppose that if Jane does not go to summer school, she will eventually take the classes anyway.
What is Jane's marginal benefit of going to summer school?

A/ She will be ahead on her classes and get her degree faster.

e) Suppose Jane decides to go to school in the summer. Explain her decision using the concepts of
marginal cost and marginal benefit.

A/

6. As oil prices rose during 2006, the demand for alternative fuels increased. Ethanol, one
alternative fuel, is made from corn. According to an article 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 the 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 graph for the tortilla market and use it to show the effect on this
market of an increase in the price of corn. Once again, be sure to indicate the equilibrium price
and quantity before and after the increase in the demand for ethanol.
 c) By 2015, the price of oil had fallen, which reduced the price of gasoline. The demand for ethanol
fell along with the price of gasoline. What impact would the fall in the demand for ethanol have
on the market for tortillas?

7. Do the following Supply and Demand Analysis.

a) Soft drinks and milk are substitutes for consumers. Draw a graph showing the effect of an increase in
the price of milk on the demand for soft drinks.
b) Soft drinks are a normal good. Draw a graph showing the effect of an increase in income on the
demand for soft drinks.

c) Last year a very severe ice storm hit the north counties of New York state, and the states of Vermont
and Maine. Electric poles were down and no one had power for days. It was reported that the price of
kerosene heaters skyrocketed and the number purchased increased during this time. Using a supply and
demand diagram, show the impact of the ice storm on the market for kerosene heaters.
d) Consumers can use either natural gas or heating oil to warm their houses. Suppose the price of
natural gas increases. Use a demand and supply diagram to show the impact of the higher price of
natural gas on the market for home heating oil.

8. What would you predict about the relative price elasticity of demand for each of the following
items? Explain your reasoning.
a) Food

b) Vegetables

c) Leafy vegetables

d) Leafy vegetables sold at your local supermarket

e) Leafy vegetables sold at your local supermarket on Wednesdays.

9. Briefly explain whether you agree or disagree with the following statement: “The only way to
increase the revenue from selling a product is to increase the product’s price.”

10. With higher fuel costs, airlines raised their average fare from $0.75 to $1.25 per passenger
kilometer and the number of passenger kilometres decreased from 2.5 million a day to 1.5
million a day.
a) What is the price elasticity of demand for air travel over this price range?

b) Describe the demand for air travel.