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Tutorial 1chapter 2

1. The document provides a tutorial with review questions and problems about different economic systems including command, market, and laissez-faire. It asks the reader to identify features of each system and apply economic concepts like supply and demand, profit maximization, and resource allocation. 2. Questions involve calculating profits and costs for businesses using different production techniques given price changes. They examine how businesses and industries would respond to market signals in terms of input choices and expansion/contraction. 3. The problems model real-world entrepreneurial decisions and business operations, evaluating opportunities based on revenues, costs, and profits to determine viability and resource allocation in competitive markets.

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53 views3 pages

Tutorial 1chapter 2

1. The document provides a tutorial with review questions and problems about different economic systems including command, market, and laissez-faire. It asks the reader to identify features of each system and apply economic concepts like supply and demand, profit maximization, and resource allocation. 2. Questions involve calculating profits and costs for businesses using different production techniques given price changes. They examine how businesses and industries would respond to market signals in terms of input choices and expansion/contraction. 3. The problems model real-world entrepreneurial decisions and business operations, evaluating opportunities based on revenues, costs, and profits to determine viability and resource allocation in competitive markets.

Uploaded by

WinterDiary
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Tutorial 1: Chapter 2

REVIEW QUESTIONS

1. Decide whether each of the following descriptions most closely corresponds to being part of a
command system, a market system, or a laissez-faire system.
a. A woman who wants to start a flower shop finds she cannot do so unless the central
government has already decided to allow a flower shop in her area.
b. Shops stock and sell the goods their customers want but the government levies a sales tax
on each transaction in order to fund elementary schools, public libraries, and welfare
programs for the poor.
c. The only taxes levied by the government are to pay for national defense, law enforcement,
and a legal system designed to enforce contracts between private citizens.

2. Match each term with the correct definition.


private property
freedom of enterprise
mutually agreeable
freedom of choice
self-interest
competition
market

a. An institution that brings buyers and sellers together.


b. The right of private persons and firms to obtain, control, employ, dispose of, and bequeath
land, capital, and other property.
c. The presence in a market of independent buyers and sellers who compete with one
another and who are free to enter and exit the market as they each see fit.
d. The freedom of firms to obtain economic resources, decide what products to produce with
those resources, and sell those products in markets of their choice.
e. What each individual or firm believes is best for itself and seeks to obtain.
f. Economic transactions willingly undertaken by both the buyer and the seller because each
feels that the transaction will make him or her better off.
g. The freedom of resource owners to dispose of their resources as they think best; of
workers to enter any line of work for which they are qualified; and of consumers to spend
their incomes in whatever way they feel is most appropriate.
4. Assume that a business firm finds that its profit is greatest when it produces $40 worth of
product A. Suppose also that each of the three techniques shown in the table below will
produce the desired output.

                                             Resource units required

Resource Price per unit Technique #1 Technique #2 Technique #3


Labor $3 5 2 3
Land $4 2 4 2
Capital $2 2 4 5
Entrepreneurial ability $2 4 2 4

a. With the resource prices shown, which technique will the firm choose? Why? Will
production using that technique result in profit or loss? What will be the amount of that
profit or loss? Will the industry expand or contract? When will that expansion or
contraction end?
b. Assume now that a new technique, technique 4, is developed. It combines 2 units of labor,
2 of land, 6 of capital, and 3 of entrepreneurial ability. With the resources priced as shown
in the table, will the firm adopt the new technique? Explain your answer.
c. Suppose that an increase in the labor supply causes the price of labor to fall to $1.50 per
unit, all other resource prices remaining unchanged. Which technique will the producer
now choose? Explain.
d. “The market system causes the economy to conserve most in the use of resources that are
particularly scarce in supply. Resources that are scarcest relative to the demand for them
have the highest prices. As a result, producers use these resources as sparingly as is
possible.” Evaluate this statement. Does your answer to part c, above, bear out this
contention? Explain.

PROBLEMS

1. Table 2.1 contains information on three techniques for producing $15 worth of bar soap.
Assume that we specified “$15 worth of bar soap” because soap costs $3 per bar and all three
techniques produce 5 bars of soap ($15 = $3 per bar × 5 bars). So you know each technique
produces 5 bars of soap.
a. What technique will you want to use if the price of a bar of soap falls to $2.75? Which
technique will you use if the price of a bar of soap rises to $4? To $5?
b. How many bars of soap will you want to produce if the price of a bar of soap falls to
$2.00?
c. Suppose that the price of soap is again $3 per bar but that the prices of all four resources
are now $1 per unit. Which is now the least-profitable technique?
d. If the resource prices return to their original levels (those shown in the table) but a new
technique is invented that can produce 3 bars of soap (yes, 3 bars, not 5 bars!) using 1 unit
of each of the four resources, will firms prefer the new technique? Why or why not?
2. Suppose Natasha currently makes $50,000 per year working as a manager at a cable TV
company. She then develops two possible entrepreneurial business opportunities. In one, she
will quit her job to start an organic soap company. In the other, she will try to develop an
Internet-based competitor to the local cable company. For the soap-making opportunity, she
anticipates annual revenue of $465,000. She estimates the costs for the necessary land, labor,
and capital to be $395,000 per year. For the Internet opportunity, she anticipates costs for
land, labor, and capital of $3,250,000 per year and revenues of $3,275,000 per year. (a)
Should she quit her current job to become an entrepreneur? (b) If she does quit her current
job, which opportunity would she pursue?

3. With current technology, suppose a firm is producing 400 loaves of banana bread daily. Also
assume that the least-cost combination of resources for producing those loaves is 5 units of
labor, 7 units of land, 2 units of capital, and 1 unit of entrepreneurial ability, selling at prices
of $40, $60, $60, and $20, respectively. If the firm can sell these 400 loaves at $2 per unit,
what is its total revenue? Its total cost? Its profit or loss? Will it continue to produce banana
bread? If this firm’s situation is typical for the other makers of banana bread, will resources
flow toward or away from this bakery good?

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