Eco 112 - Wa1

1. What is the mechanism by which the "invisible hand" pushes markets to equilibrium?

a. Self Interest

2. Explain the two main causes of market failure and give an example of each.

Externality, the impact of one person’s actions on the wellbeing of a bystander (Pollution)

Market Power, the ability of a single economic actor to have a substantial influence on market prices (Monopolization – no other source to keep self interest in check)

3. Use a production possibilities frontier to describe efficiency. (This question can be answered either with or without the use of a graph, depending on whether you have a graphing program on your computer. It is possible to describe the various points on the PPF without a graph.)

b. Efficiency would be any point A,B or C. Depending on how the resources are allocated for the two industries (boats and trucks), it can be seen that this is the maximum output. Point D represents inefficiency, what is produced, but not what is capable of being produced. Point E is unachievable with the current resources.

4. What is the difference between a positive and a normative statement? Give an example of each.

c. Positive statements are descriptive – the make a claim on how the world is. (The selective service system requires males 18-25 to register.)

d. Normative statements are prescriptive – they make a claim on how the world ought to be. (Women should be required to register for Selective Service.)

5. Explain how absolute advantage differs from comparative advantage.

e. Absolute advantage is the ability to produce goods using fewer inputs than another producer, while comparative advantage is to a good at a lower opportunity cost than another producer.

6. What are the factors that determine the quantity of a good that buyers demand?

f. Income (normal or inferior goods), Prices of Related Goods (substitutes, complements), Tastes, Expectations, and Number of Buyers....