ECONOMICS TEST ASSIGNMENT
Part A
Answer all the three questions. Maximum of 250 words for each question. Use diagrams where appropriate to enhance and explain your response. Provide supporting evidence and references where appropriate to justify your arguments.
Note that inanswering economics questions it is important to first identify which part of economic theory you should be drawing on in order to respond appropriately.
Your response should always be firstly identifying what part of theory the question relates to and explaining that theory, how the theory helps to answer the question and then presenting the solution to the question poised.
Question 1.
Suppose you are in charge of sales at a pharmaceutical company, and yourfirm has a new drug that causes bald men to grow hair. Assume that the company wantsto earn as much revenue as possible from this drug.
If the elasticity of demand for your company’s product at the current price is 1.4, would you advise the company to raise theprice, lower the price, or to keep the price the same? What if the elasticity were 0.6? What if it were 1? Explain your answer.
Question 2.
Automobile manufacturing is an industry subject to significant economiesof scale. Suppose there are four domestic auto manufacturers, but the demand fordomestic autos is no more than 2.5 times the quantity produced at the bottom of thelong-run average cost curve. What do you expect will happen to the domestic autoindustry in the long run?
Question 3.
Imagine that the government statisticians who calculate the inflation ratehave been updating the basic basket of goods once every 10 years, but now they decide to update it every five years. How will this change affect the amount of substitution bias and quality/new goods bias?
Presentation
The following points are a general guide for presenting assessment items.
Responses to assessment items should be typed. Use 1.5 spacing.
Use a wide left margin. Markers need space to be able to include their comments. Use a standard 12pt font such as Times New Roman, Calibri or Arial.
Most importantly, always use your spelling and grammar checker, but remember that this does not pick up all errors. You must still manually and carefully edit your work.
Part 2:
Problem 1
Why might it be necessary to reduce consumer spending in order to attain faster economic growth? Would it be worth the sacrifice?
Problem 2
In 2014 the dollar value of total output was roughly $40 billion in North Korea and $1,600 billion in South Korea. South Korea devotes 2.7 percent of its output to defense and North Korea devotes 14.8 percent of its output to defense.
(a) Compute how much North Korea spends on its military
(b) Which nation spends more, in absolute dollars?
Problem 3
Suppose the following data reflect the production possibilities for providing health care and education:
Units per Year Health Care 400 370 330 270 190 100 0 Education 0 20 40 50 60 70 80
(a) Graph the production possibilities curve.
(b) If maximum health care is provided, how much education will be provided?
(c) What is the opportunity cost of increasing health care from 270 to 330 units?
Problem 4
Assume that total output is determined by the formula: Total Output = Number of Workers x Productivity
(a) If the workforce is growing by 1 percent a year but productivity doesn’t improve, how fast can output increase?
(b) If productivity increases by 3 percent and the number of workers increases by 1 percent a year, how fast will output grow?
Problem 5
According to the News Wire “Inequality,” what is the average per capita income in nations where the highest-income decile gets (a) over 45 percent of total
income? (b) less than 30 percent of total income?
