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EC 101 Assignment 2




Question;Answer Question #6, sub-questions (a) and (c) only on textbook, pp.116-117. (7 points)Mastering the economic way of thinking means learning to reason in terms of supply anddemand. Here are additional questions on which you can practice. Some are harder thanothers. You should probably begin in each case by sketching a small supply and demandgraph. Then ask you ask yourself whether the event describe would affect the supplycurve or the demand curve, in which direction the curve would move, and what effect thatwould have on the price and the and the quantity exchanged. Don't be content merely toconclude that the price will rise or the price will fall. Would you expect a large or a smallchange in price or in the quantity exchanged? You will usually have to supply someinformation from your own experience. Keep in mind that the answer will often dependon the length of time you are allowing for adjustments to occur. Are you predict-ing avery shot-run effect or are you thinking about the long-run effect?(a) What would happen to the market- clearing price of acoustic guitars in Figure 5-1 if(i)People turned on to some accordion craze and started losing interest inlearning to play the guitar?(ii)The price of electric guitars were to fall substantially?(iii)A number of acoustic guitar makers decide to exit the market and makeviolins instead(c)What effect would you expect each of the following to have (or to have had) on themarket for domestically grown cotton?(i) Nylon is invented.(ii) The cotton gin is invented(iii) The boll weevil (a crop killer) becomes extinct(iv) Foreign cotton growers bring in an exceptionally large harvest.Answer Question #1, all sub-questions (a) - (d) on textbook, p.174. (5 points)Chuck Waggin owns and operates a small tax- accounting firm, which he runs out of thebasement of his home(a) The basement was just wasted space until Chuck turned it into an office forhis business. He says his firm is more profitable than most tax- accountingbusiness because he doesn't have to pay any rent. Do you agree that rent is nota cost of production for Chuck?(b) Chuck recently turned down an offer to go work for a larger firm at a salary of$45,000 a year. Chucks personal income from his business runs about$35,000 a year. Would you say that Chucks firm is profitable?(c) Chuck says he like being his own boss and that he would be willing tosacrifice at least $25,000 a year in income to avoid working foe someone else.Dose that information change your answer to part(b)?(d) Chuck recently invested $10,000 of his savings in an office computer. Howwould you include the effects of this effects of his investment in his costs?3. The following graph shows the market for compact discs. Answer following questions on thebasis of the graph. (4 points)a. Find both the equilibrium price and equilibrium quantity.b. Suppose that the government imposes a price ceiling of $10. What effects does it have onmarket price and quantity (quantity traded)? Describe in detail.c. Now suppose that the government imposes a price ceiling of $25 rather than $10. What effectsdoes it have on market price and quantity (quantity traded)? Describe in detail.d. Instead of a price ceiling, the government imposes a price floor of $25. What effects does ithave on price and quantity (quantity demanded? Describe in detail.4. The U.S. Congress first instituted a minimum wage with the Fair Labor Standards Act of 1938in order to ensure workers a minimally adequate standard of living. In addition to the federalminimum wage, some states implemented their own minimum wages. Answer the followingquestions by searching and visiting relevant websites (Finding the relevant websites is part of theassignment. Do not post the websites in the forum). (4 points)a. Does every state have its own minimum wage? If not, how many do not have? List themb. How many states have minimum wages higher than the Federal? List them.c. Which state has the highest minimum wage and how much is it?d. Which state has the lowest minimum wage and how much is it?


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