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    Economic Problems

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    Chapter 3 # 2

    Economists Edward Lazear and Robert Michael have calculated that the average family spend two and a half times as much on each adult as they do each child.
    a) Does this mean that children are deprived and that the distribution is unfair?
    b) Do you think these percentages change with family income? If so, how?
    c) Do you think that the allocation would be different in a family in a Soviet-style socialist country than in a capitalist country? Why?

    Chapter 3 # 4
    One of the specific problems Soviet-style socialist economics had was keeping up with capitalist countries technology.
    a) Can you think of any reason inherent in a centrally planned economy that would make innovation difficult?
    b) Can you think of any reason inherent in a capitalist country that would foster innovation?
    c) Joseph Schumpeter, a famous Harvard economist of the 1930s, predicted that as firms in capitalist societies grew in size they would innovate less. Can you suggest what his argument might have been?
    d) Schumpeter's prediction did not come true. Modern capitalist economies have had enormous innovations. Can you provide explanations as to why?

    Chapter 4 # 3
    Draw hypothetical supply and demand curves for tea. Show how the equilibrium price and quantity will be affected by each of the following occurrences:
    a) Bad weather wreaks havoc with the tea crop.
    b) A medical report implying tea is bad for your health is published.
    c) A technological innovation lowers the cost of producing tea.
    d) Consumers' income falls. (Assume tea is a normal good.)

    Chapter 4 # 4
    You're a commodity trader and you've just heard a report that the winter wheat harvest will be 2.09 billion bushels, a 44 percent jump, rather than an expected 35 percent jump to 1.96 billion bushels.
    a) What would you expect would happen to wheat prices?
    b) Demonstrate graphically the effect you suggested in a a.

    Chapter 4 #6
    State whether supply/demand analysis used without significant modification is suitable to assess the following:
    a) The impact of an increase in the demand for pencils on the price of pencils.
    b) The impact of an increase in the supply of labor on the quantity of labor demanded.
    c) The impact of an increase in aggregate savings on aggregate expenditures.
    d) The impact of a new method of producing CDs on the price of CDs.

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    Solution Preview

    Many of these questions are open-ended; there isn't one right answer, so don't consider these comments definitive. Rather, use them to further your own ideas. This is the best way to prepare for a test.

    Simply because each child receives less absolutely doesn't mean the child isn't receiving an equivalent lifestyle. The lifestyle is simply different, as children have different needs. Adults often have expensive habits, such as drinking and smoking which children (hopefully) don't. In addition, many things that adults buy are for the benefit of the entire family. For example, fixing the car benefits the adult, but clearly the child as well whenever he/she needs to be transported. It seems like it would be difficult to determine exactly how much income is allocated to whom. But in any case, as long as the child has food, clothing, shelter and healthcare, the distribution is "fair." After all, it's the adults who earn the money. In lower income families, a greater percentage of the money would need to be given to each child to ensure that they have these necessities. In a centrally planned economy, almost all the child's needs would be provided by the state. It seems likely that more of the money would go to the adults.

    The best way to think about the second question is to consider what happens in a centrally planned economy. First, possible causes for problems with last year's plan are explored. This process takes six months. Each firm proposes an output and requests a certain amount of input from its association. It is in their best interests to set production goals low, to ensure that they can meet them and get bonuses. Likewise they will request more input than they really need. Each industry is governed by an association, which is aware of firms' tendency to pad their figures. Eventually each firm agrees to a goal. Attempts to balance the industries' goals with the government's are made. It is highly unlikely that these numbers will balance the first time around. In fact this can be a very complicated process, as sometimes the input of one industry is also the output required to produce that product. For example, coal is required to produce steel, and steel is needed to produce coal. Sometimes using imports can simplify this process. Then the entire plan is reviewed by the highest levels of government to assure it meets national goals. Finally, each firm receives its individual plan.

    The accuracy of the economic plan depends on the accuracy of the predictions upon which it is based. If for example some resource is depleted, and this isn't realized until after the plan is approved, the whole economy could be thrown off balance. Soviet citizens were used to shortages for this very reason, and were creative in their responses. For example one year there was a shortage of boots, but lots of condoms. They proceeded to used condoms over their shoes to protect them from the weather. Everyone got enough food to eat, but often it was not of the highest quality. They Central Planning committee would use high prices to allocate scarce resources to consumers, just as capitalistic economies do. Because economies grow slowly from year to year, ...