Microeconomic statements

1. Indicate whether each of the following statements applies to microeconomics or macroeconomics, and why: 12 Marks Total

a. The unemployment rate in Canada was 7.0 percent in January 2010

Answer: This is the macroeconomic statement because it describes the unemployment rate of the whole country.

b. A Canadian software firm discharged 15 workers last month and transferred the work to India.

Answer: This is the microeconomic statement because it focuses in an individual Canadian software firm of how they make decision in transferring their 15 workers to other workplace in India.

c. An unexpected freeze in central Florida reduced the citrus crop and caused the price of oranges to rise.

Answer: This is the microeconomic statement because it talks about specific incident that happened in Florida which causes the raise in price of one specific product which is the oranges.

d. Canadian economic output i.e. GDP (Gross Domestic Product) adjusted for inflation grew by 3.0 percent in 2010.

Answer: This is the macroeconomic statement because it describes the GDP of how much goods produced effects the inflation of the whole country in Canada.

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e. Last week the Scotia Bank lowered its interest rate on business loans by one-half of 1 percentage point.

Answer: This is the microeconomic statement because it gives the information of the individual firm - Scotia Bank and what they did last week with the interest rate on business loan.

f. The Canadian consumer price index an indicator of national inflation rose by 2.2% in 2011.

Answer: This is the macroeconomic statement because it describes the rate of growth of the whole national inflation in 2011.

2. The Consumers Budget Lines: See pages 8 and 9. Suppose you won $15 on a Lotto Canada ticket at the local 7-Eleven and decided to spend all the winnings on candy bars and bags of peanuts. The price of candy bars is $0.75 and the price of peanuts is $1.50. 20 Marks Total

a. What does a production possibility curve represent? 2 Marks Answer: A production possibility curve represents the different combinations of goods and services that a country can produce in a fully employed economy with a fixed availability of supplies of resources and technology. In this case, the production possibilities curve represents the different combinations of consumer goods - automobiles and capital goods – forklifts in the country Exania.

b. Plot the data graphically (clearly label each axis and each point, showing which combinations are “Attainable” and which combinations are “Unattainable”). 6 Marks [pic] 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 c. Upon what 4 specific assumptions is this production possibilities curve based? 4 Marks

Answer: The 4 specific assumptions this production possibilities curve based are the full employment, fixed availability of supplies of resources, constant technology and the two goods.

d. If the economy is at point C, what is the cost to get one more automobile? 3 Marks a. (Hint: Trace the curve, how many forklifts do you need to give up?) Answer: If the economy is at point C, the cost to get one more automobile is (21-12)/(6-4) = 9/2 = 4.5 forklifts.

e. If the economy is at point C, what is the cost to get one more forklift? 3 Marks Answer: If the economy is at point C, the cost to get one more forklift is (4 – 2)/ (27-21) = 2/6 = 1/3 = 0.33 automobiles.

f. State the “law of increasing opportunity costs”. Explain how this production possibilities curve reflects this law. 2 Marks

Answer: The “law of increasing opportunity costs” is, as the production of a good increases, the opportunity cost of producing an additional rises. This production possibilities curve reflects this law by the shape and the slope of it. The shape is concave from the origin of the graph.

When we move from point A – point E, as we can see that we give up a larger amount of forklifts to produce the equal added amounts of automobiles.

g. Assume the Exania economy operates like the production possibilities table and curve you have plotted. If Exania were actually producing 3 automobiles and 20 fork lifts (plot this point as “F” ), what could you conclude about the employment of Exania’s available resources? 2 Marks

Answer: If Exania were actually producing 3 automobiles and 20 forklifts, I could conclude that the assumption of full employment is not applied or with other words, it could mean Exania is not being productivity.

h. To get to a point outside the production possibilities curve (That is, to experience economic growth) what would this country’s economy have to do? State 3 points. 3 Marks

Answer: To get to a point outside the production possibilities curve (economic growth), this country’s economy has to: 1. Increase in factors or quality of supplies (resources) 2. Give up some consumption of goods (automobiles) so more capital goods (forklifts) could be produced 3. Improve or innovate in technology.

4.Impact of events on the Economy: Explain (Using words), AND illustrate (With production possibilities curves) how if at all each of the following developments would affect the location and movement of a country’s production possibilities curve. In each case show and label the “Current Curve” and the “Future Curve” or “Point” as the case might be. (Read Page 19 before doing this question.) 8 Marks

a. The quality of college education increases. 2 Marks

Answer: The quality of college education increases which means there is an improvement in factor supplies quality (worker’s skills improve). This describes an economic growth by favouring the “future goods” – capital goods –education (point F) or in other words, the productivity would rise. Therefore, the country’s production possibilities curve would shift outward more from the origin to the right.

c. A new technique improves the efficiency of extracting iron from ore. 2 Marks Answer:

d. A devastating earthquake destroys numerous factories and other production facilities. 2 Marks Answer:

5. In the above Circular Flow Model of how the economy works, if box B represents the factor market and flow (3) represents money income, and then what do the other 10 unknowns represent? List each unknown and clearly state what they represent. 10 Marks

Answer:

A- Business or Firms – place to use input to produce goods and services B- Factor Market – place to exchange between business and household for income or input C- Household/ Individuals – place that have the factors of production (land, labour, entrepreneur, capital) D- Product Market – place to exchange between business and household for revenue or goods and service. 1- The money cost in forms of salaries, rent, interest, profit that (A) business or firms bring to the (B) Factor Market in order to get the input from (C) household. 3- The money income that (C) households get from (A) business or firms when doing trade-off in the (B) Factor Market. 6- The consumption, the money from income that (C) household brings to the (D) Product market in order to get goods and services provided by (A)Business/firms.

8- The money from (C) household when doing exchange for good and service at the (D) Product Market comes back to the (A) business/firms. 7- When (A) Business/firms produce goods and services then bring to (D) Product Market in order to get the money exchange from (C) household/individuals – who come to get the products and services. 5- The goods and services that are going home with (C) household/individuals after do exchange with (A) Business/firms in the (D) Product Market. 4- When the (C) household/individuals bring their sources (entrepreneur, labour, land, capital) to the (B) Factor Market to exchange with (A) Business and bring income back. 2- When (A)Business get the input from (C) household at the (B) Factor Market.