Principles of Microeconomics Lesson 5

Principles of Microeconomics Lesson 5

Principles of Microeconomics Lesson 5- Review the lecture notes
– The Book being used for this course is (Title: Survey of Economics: Principles, Applications, and Tools), Edition: 4, Author: Arthur O�Sullivan, Steven Sheffrin, and Stephen Perez, ISBN: 0-13-609380-9
– Paper should be in APA format
– The combined total of words for this order should have a minimum of 1550 words.
– Separate the Discussions / Assignments in the same document so that they can easily be identifiable.
– The eBook (if able to access can be found at: http://lti.next.ecollege.com/Main/LTI/ScriptedLinkLaunchView.ed?json=%7b’handler_urn’%3a’pearson%2f%24ClientString%24_econ_xl%2fslink%2fx-pearson-%24ClientString%24_econ_xl’%2c’targetId’%3a’ebook’%2c’page’%3a’i’%7d&path=%2f(NEXT(5a1bcc5b78))%2fMain%2fCourseMode%2fVizedHtmlView%2fRenderVizedHtmlView.ed&
– Or at: https://view.ebookplus.pearsoncmg.com/ebook/launcheText.do?values=bookID::19009::platform::1030::bookPageNumber::i::fromloginpage::N::invokeType::lms::launchState::goToEBook::platform::1030::userID::12910062::scenario::11::scenarioid::scenario11::courseid::12260559_eCollege_chrlstn::plus::y::pageid::i::sessionID::1997590202152395370102016::smsUserID::66564792::isSecuredPlatform::true::hsid::6f07bae5fcccd8fc487ef27261bb77c4
– Provide support for your answers using references from a text, lecture notes, and/or other credible sources, each cited appropriately.
– Citing (in text and reference list) and paraphrases as well in the research.
– In text Citations should look like: (O’Sullivan, Sheffrin, & Perez, 2010, p. xx)
– Reference page citation for book should be: O’Sullivan, A., Sheffrin, S. M., & Perez, S. J. (2010). Survey of economics: Principles, applications, and tools [ePearson] (4th ed.).

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Discussion 5.1 –
Deliverables: minimum 200 words
Perform the following tasks:
� Step 1: Answer the following question and, if appropriate, include personal experience as part of your answer:
� The value of your home depends in part on how well maintained other homes, parks and amenities in your neighborhood are. Discuss how local ordinances try to promote land use that generates external benefits for your fellow neighbors.

Assignment 5.1 – National Defense
Deliverables: minimum 400 words
This assignment supports the following lesson objective:
� Analyze how the government responds to the spillover costs from pollution
Assignment Overview
This writing assignment examines the role of national defense in the economy.
Activity Details
Perform the following tasks:
� Step 1: Access the assignment handout (Handout 1).
� Step 2: Complete the �National Defense� exercise.
Using a word processor (such as MS Word), complete the exercise.

Assignment 5.2: Equations to Determine Costs and Benefits
Deliverables: minimum 400 words
This assignment supports the following lesson objectives:
� Illustrate how a supply and demand diagram is used
� Use economic formulas to determine spillover costs and benefits
Assignment Overview
This practice exercise explores the principles of cost and benefits.
Perform the following tasks:
� Step 1: Access the handout (Handout 2).
You will use the handout for various exercise questions.
� Step 2: Answer the exercise questions.
Use a word processor (such as MS Word) to write the answers to the following questions:
o The following table shows the prices and quantities in three different used-car markets. Complete the table by filling in the last two rows.
Market A Market B Market C
Assumed chance of getting a lemon 60% 80% 95%
Willingness to pay for a used car $6,000 $5,000 $4,500
Number of lemons supplied 70 40 90
Number of plums supplied 30 10 10
Total number of used cars supplied 100 50 100
Equilibrium: Yes or No
If disequilibrium, will price then rise or drop?
o The price of a used car in a thin market is $2,800, and consumers are willing to pay $2,000 for a lemon and $5,000 for a plum. Suppose two
sellers, a lemon owner and a plum owner, each provide a money-back guarantee when they sell their cars for $5,000.
? If the lemon owner sells the car with the guarantee, the net gain for the seller will be $_____________.
? If the plum owner sells the car with the guarantee, the net gain for the seller will be $_____________.
o On the campus of Klepto College, half the iPods are expensive (replacement value is $400) and half are cheap (replacement value is $100).
There is a 20-percent chance that any particular iPod�expensive or cheap�will be stolen in the next year. Suppose that a firm offers iPod
theft insurance for $50 per year: The firm will replace any insured iPod that is stolen. Suppose that the firm sells 20 insurance policies.
? Assume for the moment that the theft rate remains at 20 percent for both types of iPods. The firm�s total revenue equals
______________. The firm�s cost�the money paid out to replace stolen iPods�will be $___________ to replace expensive iPods
and $___________ to replace cheap iPods, for a total of $___________. The insurance firm will make zero economic profit with a price
of $___________.
? Is it realistic to assume that the introduction of insurance will not affect the theft rate? Which is a more plausible assumption, that the
theft rate will decrease to 10 percent or that it will increase to 30 percent? For the more plausible theft rate, compute the zero-profit
insurance price when insurance is purchased exclusively by the owners of expensive iPods.
o In the handout you downloaded in Step 1, read the �Free Riders and the Three-Clock Tower� application and use it as background information
for this question. Consider a small town with 1,000 households. The town could install a wireless WiFi network that would give everyone in town
access to the Internet. Each household is willing to pay a maximum of $50 per year for the network, and the cost of the system is $20,000 per
year.
? Is the WiFi system efficient?
? Suppose the town asks for voluntary contributions to support the network. Would you expect the total contributions to cover the $20,000
cost?
? Suppose the town keeps track of the contributions and issues passwords to people who contributed at least $20. Would you expect the
total contributions to cover the $20,000 cost?
o Vivian is trying to learn to play the violin, much to the dismay of her housemates. Her marginal benefit from the first hour of practice is $8, and
the marginal benefit decreases by $1 per hour (to $7 for the second hour, $6 for the third hour, and so on). For her housemates, the external
cost from the noise pollution is $4 per hour.
? In the market equilibrium (no restrictions), how many hours will Vivian play? Illustrate with a graph.
? What is the socially efficient practice time?
? What is the economic approach to noise pollution, and how would it be applied in this case?
o You are an economic consultant to a member of Congress. Someone just introduced a bill that would impose a carbon tax of $100 per ton,
which would shift the supply curve for heating oil upward by $0.30 per gallon and to the left by 15 percent. The initial (pretax) price of heating oil
is $2.00.
? Use a graph to show the effects of the tax on the price and quantity of heating oil. Will the entire tax be paid by consumers? If not, who
else will bear part of this tax?
? Suppose that the price elasticity of supply of heating oil is 1.0 and the price elasticity of demand is 0.50. Use the price-change formula
developed earlier in this course to predict the new equilibrium price. What fraction of the tax is passed forward to consumers?
o In the handout you downloaded in Step 1, read the �Dear Abby and Environmental Policy� application and use it as background information for
this question. Radiohead enjoys loud music and is willing to pay $9 for the first song and $1 less for each succeeding song ($8 for the second,
$7 for the third, and so on). For her dorm mates, the external cost from the noise pollution is $4 per song.
? Suppose that initially the price of songs is zero. How many songs will Radiohead play? Illustrate with a graph.
? Suppose that the government imposes a pollution tax of $4 per song. How many songs will Radiohead play? Compute the loss in
consumer surplus from the tax, which increases the price of songs from zero to $4.
? Radiohead could soundproof her room, eliminating the noise pollution and her responsibility to pay the tax. If the soundproofing costs
$30, is it worthwhile?
? Radiohead could compensate her dorm mates for each unit of noise pollution�each song played. How much compensation would be
required? From Radiohead�s perspective, is paying compensation better than paying the tax, worse, or the same?
o Suppose that new technology decreases the cost of abating pollution by half. In the handout you downloaded in Step 1, use the �Market for
Pollution Permits� graph as a starting point, and using $21 as the initial permit price (point b), depict graphically the implication of the decrease
in abatement cost of the equilibrium price of marketable permits. What�s the new equilibrium price?
Assignment 5.3: Costs and Performance
Deliverables: minimum 250 words
This assignment supports the following lesson objective:
� Examine elements of business from an economist viewpoint
Assignment Overview
This practice exercise examines the concepts of costs and performance.
Activity Details
Perform the following tasks:
� Step 1: Read the article.
Go to http://wps.prenhall.com/bp_econinthenews_2/76/19626/5024265.cw/index.html to access the article, �Insurers Well-Positioned for California Losses.�
� Step 2: Answer the questions.
After you have read the article, use a word processor (such as MS Word) to answer these questions:
1. What is moral hazard?
2. How does moral hazard relate to this situation?
3. Should the federal government subsidize flood insurance?
Assignment 5.4: Useful Terms in Economics
Deliverables: minimum 300 words
This assignment supports the following lesson objective:
� Define key terms related to market failure
Assignment Overview
This writing assignment examines the terms important to the understanding of market failure.
Activity Details
Perform the following tasks:
� Step 1: Compile a list of glossary terms.
Using a word processor (such as MS Word), define 10 of the following glossary terms in your own words. Use real-life examples to support your definitions.
o Adverse-selection problem
o Asymmetric information
o External cost of production
o External benefit
o Free rider
o Marketable pollution permits
o Mixed market
o Moral hazard
o Pollution tax
o Private cost of production
o Private good
o Public good
o Social cost of production
o Thin market

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