Macroeconomics Assignment

1. Economics provides a range of choices to decision makers regarding the outcomes or impacts of alternative courses of action. Describe the two types of economic analysis (see examples on the bottom of page three). Come up with three questions of your own as examples for each type of analysis, that relates to you or your community.

Positive Analysis = focuses on facts and statistics, cause and effect, theory development and inferences made from specific data, consequences of certain actions, etc. Answers the question ‘what is’ or ‘what will be’. – If the government raises the tax on beer, will it lead to a fall in profits of the brewers? – How will a reduction in income tax improve the incentives of the unemployed to find work? -How would the inflation and unemployment rates be affected if the national debt jumped to 20 trillion tomorrow?

Normative Analysis = Looks at what is ideal or desirable in the economy, based on judgment calls/opinions. Answers the question ‘what ought to be’.
-Should the government increase taxes on alcohol?
-Should those unemployed (and not seeking work) for more than 12 months be able to acquire the benefits of unemployment?
-Should taxes on goods detrimental to people’s health (tobacco, alcohol, etc.) be increased in exchange for a decrease in other taxes (property, income, etc)?

2. Define in your own words and use examples to illustrate:

a. Opportunity cost- when you make a decision, your opportunity cost is the next most valuable alternative, or the value of the next best option. What you sacrifice. Example: if I wasn’t doing this macro assignment I would be watching Netflix. So I am sacrificing watching Netflix in order to do this assignment. b. Ceteris paribus – describes the effect of one variable on another, if all other variables that may affect the second variable are constant. Latin translation: all other variables are fixed. c. Marginal change- the incremental change in value for the next additional unit d. Scarcity – people have unlimited wants but resources to produce those goods and services are limited, creates restricted options. e. Production possibilities curve – a graph that shows the possible combinations of 2 products that can be produced while fully employing all of its resources. The line is the constraint, if a point lies inside the line resources are not fully employed, and if its outside the line it is attainable. f. Principle of diminishing returns – the concept that if you increase a resource, and hold all the other constant, eventually the marginal product will decline.

Example: my Micro professor demonstrated an example of having one person staple as many pieces of paper in half as they could in a minute, then he added another person, still one stapler, still one minute, then he continued to add more and more students while keeping all other variables the same. While the marginal product increased from 1 to 2 to 3 students, it began to decline or diminish as more students were added. g. Real Value- is an adjusted nominal value, it looks at the value of what a certain amount of money can buy versus it’s face value. h. Human capital – is the resource of knowledge, abilities and experiences of people. Example: To be an author, you must learn to write, edit, learn the proper grammar and spelling standards, etc. i. Natural Resources – resources produced with out the help of man (naturally) to be used for the production of goods and services. Example: oil, water, wood, gas deposits, rock, wood, etc.

j. Factors of production- all the resources used to produce goods and services, including land (natural resources), labor (human capital and entrepreneurship) and capital (physical capital).

3. Table 2.2 on page 42 shows the change in real value of minimum wage between 1974 and 2011. What do economists mean by “real”? What happened? Is this a problem; why or why not? What if anything should we do about it?

Real value is an adjusted nominal value, it looks at the value of what a certain amount of money can buy versus its face value. In Table 2.2 it shows that the nominal value minimum increased from 1974 to 2011, but its real value, or what that sum of money can buy, actually decreased. If this
trend continues it definitely will be a problem, as household who makes minimum wage may eventually not be able to buy their basic needs. Ideally, the solution would be to increase minimum wage’s real value, we could do this by simultaneously increasing it with its nominal value, or limit inflation which would also increase the real value.

4. Sam was in the market for a house when his uncle died and left him $250,000, which is the price of the house he was considering. He could put the money into a long term CD at 4%. If he pays cash for the house, the annual insurance is $3,000 and the taxes are $4,000. What is his opportunity cost per year to buy the house?

Well if Sam purchased the house, it would cost him $7000 a year, where as if he put the money away in a CD he would earn $10,000 a year. Therefore Sam’s opportunity cost would actually be $17,000, because the next best option (investing his money in a CD) would not only save him the $7000 it costs him to own the home, but also what he would be earning from interest payments.

5. Critical Thinking: Just barely covering their cost, a company supplying parts to a manufacturing plant had to raise their price 20% for a part they had been selling for $20 each. The customer, however, protested saying they had a production run going at a fixed price to their customer so could the supplier continue to provide at the original cost for another couple of weeks. The supplier agreed and told his marketing department to put the price back to its original level for two weeks. The marketing department decided it would be easier to just give the manufacturing plant a 20% discount for two weeks to make everyone happy. A week later the boss came running in and said “What have you done, we are not covering cost anymore.” The marketing manager, said, “But boss, I did just what you said.”

Who is correct? At what price are they selling the part? Show your math.

The company raised the price of the part by 20%…

$20.00 x .2 = $4$4.00 + $20.00 = $24.00

When the marketing department decided to give a 20% discount rather than selling it at its original price, they gave 20% off the new price of $24.00…

$24.00 x .2 = $4.80$24.00 – $4.80 = $19.20

So in the end they were selling the part for $19.20, $0.80 less than the original price, which is why they were no longer covering costs. The boss was correct.