ECN 201: Principles of Microeconomics

Homework 1(Spring 2014) Last Date of Submission: Monday, February 10, 2014
1. The following events occur one at a time: i. The price of crude oil rises. ii. The price of a car rises. iii. All speed limits on highways are abolished. iv. Robots cut car production costs. Which of these events will increase or decrease (state which occurs) a. The demand for gasoline? b. The supply of gasoline? c. The quantity of gasoline demanded? d. The quantity of gasoline supplied? 2. Brazil produces ethanol from sugar, and the land used to grow sugar can be used to grow food crops. Suppose that Brazils production possibilities for ethanol and food crops are as follows;
Ethanol (barrels per day) 70 64 54 40 22 0 Food Crops (tons per day) 0 1 2 3 4 5

i. ii. iii. iv. 3. i.

Draw a graph of Brazils PPF If Brazil increases its production of ethanol from 40 barrels per day to 54 barrels per day, what is the opportunity cost of the additional ethanol? If Brazil increases its production of food crops from 2 tons per day to 3 tons per day, what is the opportunity cost of the additional food? Does Brazil face an increasing opportunity cost of ethanol? Classify the following topics as relating to microeconomics or macroeconomics. a. a familys decision about how much income to save b. the effect of government regulations on auto emissions c. the impact of higher national saving on economic growth d. a firms decision about how many workers to hire e. the relationship between the inflation rate and f. changes in the quantity of money Classify each of the following statements as positive or normative. Explain. a. Society faces a short-run trade-off between inflation and

ii.

b. c. d. e.

unemployment. A reduction in the rate of growth of money will reduce the rate of inflation. The Federal Reserve should reduce the rate of growth of money. Society ought to require welfare recipients to look for jobs. Lower tax rates encourage more work and more saving.

4. Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply is increased or decreased. Then show the effect on the price and quantity of minivans. a. People decide to have more children. b. A strike by steelworkers raises steel prices. c. Engineers develop new automated machinery for the production of minivans. d. The price of station wagons rises. e. A stock-market crash lowers peoples wealth.