QUESTIONS FOR APPLICATION – ANSWERS
Chapter 1: Introduction to economics
10. Give three examples of important trade-offs that you face in your life.
- Whether I apply for university or pick up a blue-collar job
- Whether I go to HCMC to study or apply to a university in my hometown
- Choosing between living with my dad or my mom after their divorce
11. What does a decision maker need to think about when making decision?
Before making decision, a decision maker needs to think about the costs and benefits of the
choice and also of alternative choices
12. What the PPF is about? Why is it downward sloping? Why is concave?
- The PPF illustrates the combinations of output an economy is able to produce using the
available production factors and methods
- The PPF is downward sloping because resources are limited and to produce an
addictional good, the economy have to reduce the production of another good.
- The PPF is concave because of increasing opportunity cost
13. Explain the menaing of the Circular Flow Diagram
It illustrates the way factors of production, goods and services, and money circulate in an
economy.
Chapter 2: The market forces of demand and supply
42. “An increase in the demand for notebooks raises the quantity of notebooks demanded but
not the quantity supplied.” Is this statement true or false? Explain. Use appropriate graphs to
illustrate the answer.
-> This statement is false. A rise in demand moves the demand curve to the right while the
supply curve is stable. Therefore, the market price and the amount sold go up. A a result, there’s
movement up along the supply curve, implying an increase in the quantity supplied.
43. Over the past 40 years, technological advances have reduced the cost of computer chips.
How do you think this has affected the market for computers? For computer software? For
typewriters? Use appropriate graphs to illustrate the answer.
-> Cheaper computer chips have increased the supply of computers, causing the price of
computers to decline.
-> Computers and computer software are complements, and high computer prices results in
higher computer software prices
-> Computers and typewriters are substitutes, and lower computer prices results in consumers
substituting away from typewriters to computers
44. Ketchup is a complement (as well as a condiment) for hot dogs. If the price of hot dogs
rises, what happens in the market for ketchup? For tomatoes? For tomato juice? For orange
juice? Use appropriate graphs to illustrate the answer.
-> Because ketchup is a complement for hot dogs, the price of hot dogs rises causes the demand
for ketchup to fall, resulting in a new lower equilibrium price for ketchup.
-> The lower demand for ketchup causes a lower demand for tomatoes which results in a new
lower equilibrium price for tomatoes
-> The lower equilibrium price for tomatoes will lower the supply curve for tomato juice,
resulting in a new lower equilibrium price for tomato juice
-> Because tomato juice is a substitute for orange juice, the lower price of tomato juice will
increase the sales of tomato juice and decrease the sales of orange juice
Chapter 3: Elasticity
90. A price change causes the quantity demanded of a good to decrease by 30 percent, while
the total revenue of that good increases by 15 percent. Is the demand curve elastic or
inelastic? Explain
-> The quantity demanded has decreased and so the price must have risen. If the price of goods
rises and total revenue increases, demand must be inelastic.
91. You are the curator of a museum. The museum is running short of funds, so you decide to
increase revenue. Should you increase or decrease the price of admission? Explain. Use
appropriate graphs to illustrate your answer.
-> If the demand is inelastic, I should raise the price to raise revenue because P and TR move in
the same direction.
-> If the demand is elastic, I should decrease the price because P and TR move in the opposite
direction.
92. Explain why the following might be true: A drought around the world raises the total
revenue that farmers receive from the sale of grain, but a drought only in Kansas reduces the
total revenue that Kansas farmers receive. Use appropriate graphs to illustrate your answer.
-> A drought in Kansas would mean that farmers have less grain to sell, meaning a drop in TR,
but Kansas is not the world’s sole supplier of grain. Therefore, a decrease in production in
Kansas would not be enough to significantly raise the price of grain globally.
Chapter 4.1: Supply, demand and government’s policy
126. Lovers of classical music persuade Congress to impose a price ceiling of $40 per concert
ticket. As a result of this policy, do more or fewer people attend classical music concerts?
Explain.
-> If the equilibrium is below the price ceiling of $40, then the imposition will have no effect on
the number of people attending the concerts. If the equilibrium is above the price ceiling of
$40, it would increase quantity demanded (cheaper tickets, more people want to go) but also
decrease quantity supplied (less profitable for concerts organizers). -> Fewer people get to
attend music concerts.
127. A senator wants to raise tax revenue and make workers better off. A staff member
proposes raising the payroll tax paid by firms and using part of the extra revenue to reduce
the payroll tax paid by workers. Would this accomplish the senator’s goal? Explain.
-> This would not accomplish the senator’s goal because the burden of a tax depends on the
elasticity of supply and demand not who pays the tax.
128. If the government places a $500 tax on luxury cars, will the price paid by consumers rise
by more than $500, or less than $500, or exactly $500. Explain.
-> Since the demand for luxury cars is elastic, consumers are more sensitve to changes in price.
To prevent a decrease in demand, suppliers have to take part of the tax themselves. Therefore,
price paid by consumers rise less than $500
Chapter 4.2: Supply, demand and government’s policy
150. An early freeze in California sours the lemon crop. Explain what happens to consumer
surplus in the market for lemons. Explain what happens to consumer surplus in the market for
lemonade. Illustrate your answers with diagrams.
-> An early freeze in California sours the lemon crop -> lowers lemon supply -> price of lemon
increasing and consumer surplus to decrease.
-> A high price in lemon increases the production cost of lemonade -> increases lemonade
prices and decreases consumer surplus
151. Suppose the demand for French bread rises. Explain what happens to producer surplus in
the market for French bread. Explain what happens to producer surplus in the market for
flour. Illustrate your answers with diagrams.
-> An increase in demand for French bread increases the price and quantity of French bread
sold, results in a higher flour demand -> a rise in the price and quantity of flour. Therefore,
producer surplus increases in both markets.
Chapter 4.3: Supply, demand and government’s policy
168. After economics class one day, your friend suggests that taxing food would be a good
way to raise revenue because the demand for food is quite inelastic. In what sense is taxing
food a “good” way to raise revenue? In what sense is it not a “good” way to raise revenue?
-> Taxing food is a “good” way to raise revenue because its demand is inelastic so governments
can raise revenue with a low deadweight loss.
-> Taxing food is not a “good” way to raise revenue because it punishes households with a low-
income that spend a large portion of their money on food.
169. This chapter analyzed the welfare effects of a tax on a good. Now consider the opposite
policy. Suppose that the government subsidizes a good: For each unit of the good sold, the
government pays $2 to the buyer. How does the subsidy affect consumer surplus, producer
surplus, tax revenue, and total surplus? Does a subsidy lead to a deadweight loss? Explain.
- Consumer surplus: Increase, since consumers pay less than the market price with the subsidy
- Producer surplus: Increase, since the increase in demand pushes the market price up.
- Tax revenue: the government is paying out not collecting so there’s no tax revenue
- Total surplus: Increase beacause CS and PS increase
- Yes, a subsidy does lead to a DWL. Given the subsidy, some consumers buy good that costs
more to make than it’s worth to them. That gap = wasted resources = DWL
Problems and applications:
170.
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