Economics 251Dr. Hartmann

Spring 2017 Worksheet 2 key

  1. Demand and supply

a)_1__ higher cost of acquiring rights ; _2__ raises the cost of production

3__ shifts the supply curve to the left ; _4__ the price rises and quantity falls

  1. AS; decrease; decrease; increase The problem is about how the typhoon affected business production and not consumer demand.
  1. Here are some comments on this problem.
  1. The question asked for an AD-AS analysis. This is a demand-supply analysis on the macro level. Thus, drawing a demand and supply graph for the health care market would be incorrect. This would be analysis on the micro level. (This is why I circled the words health care to indicate it is incorrect. You could have identified the graph as “how increase in health care expenses affects the US market. I would just label is US market.) One could argue the quantity demanded of health care dropped with the higher prices, but there is no reason to expect demand for all goods and serviced fell (i.e., AD fell).
  1. Note that the price level (PL) on the AD-AS graph reflects the weighted average of the prices of all goods and services produced within the United States and not just the price of health care.

The higher spending on health care for employees -> diverts away spending from worker training, developing employee skills for instance -> employees are then less productive -> leads to increase in cost of production of all goods and services -> this shifts the AS curve to the left (i.e., a reduction in our country’s ability and willingness to produce items at every price level). The shift in AS results in a decrease in production (i.e., real GDP) and a rise in the price level (PL). (Notice the steps in the logic.) This analysis is similar to our discussion of the OPEC crisis in the 1970s. Oil prices in the 1970s tripled making certain machines too expensive to operate and thus had to be scrapped. Also, note the stream of statements/logic follows the same order as question (1b).

Also, recall for full credit please label all curves, direction of shifts, market, and how price and quantity changed.

  1. In order for your answer to be considered complete, you had to provide the analysis requested in the problem set. See assignment for what this entails. Also as directed in the assignment, see handout “Interpretation of Economic Indicators” on class webpage to determine which of these figures you should base your analysis upon and why. You were also asked to use the figures given to evaluate the health of the economy.

Durable Goods – annual figure; Inventories – percentage change; Initial jobless claims – 4 week MA See readings for why.

  1. See web for current figures.
  1. a) 5.3m *.246 = 1.3 m unemployed

b) We know that 7.04m– 5.3m= 1.74m are not working and not looking for a job

Therefore, the number of people not working = 1.74m+ 1.3m= 3.04m not working

c) See textbook and lecture notes for answer.

  1. Nominal expenditures on market basket in 2006 is $8*8 + $5*4 = $84. Problem is very similar to one done in lecture. Be careful with your math notation.

Expenditure2006/ CPI2006 = expenditure2016/ CPI2016a) 84/100 = 96/CPI2016b) CPI2006 = 87.5

CPI2016= 114.29

  1. See web for current figures.