Econ 162B A0 A1 Fall 2011 Kenny Christianson due October 14 ANSWER KEY PROBLEM SET NUMBER FOUR 1 In an economic analysis of politicians we assume that politicians seek to maximize their chances of being re elected Generally producers have more political access than do consumers Protectionist policies will provide concentrated benefits to a few producers while the costs of the policy are spread out among millions of consumers none of whom have much of an interest in preventing the protectionist policy So even though there are more consumers producers have a greater incentive to influence the political process Producers have more political influence than do consumers Also politicians have an incentive to be myopic to be concerned with short term benefits that occur before re election The short term benefits of protectionism often trump the long term benefits of lower consumer prices 2 Voting by majority rule will provide different results depending on which alternatives are presented first For example A v B A wins with 290 votes B v C B wins with 290 votes Since A is preferred to B and B is preferred to C transitivity implies that A should be preferred to C But A v C C wins with 290 votes So majority rule provides an inconsistent outcome Any of the three alternatives may be preferred depending on the order of the vote Those who control the agenda may be able to control the outcome of the vote 3 There are many inherent problems with illegalized markets on both the demand and the supply sides of the market On the supply side criminals will have a comparative advantage in supplying illegal goods Suppliers have an incentive to offer more potent versions of the product to maximize value per weight and minimize their risk of detection Increased enforcement decreases the supply curve which leads to increased profits for dealers In illegal markets suppliers need not make any guarantees about the quality of the product Since legal contracts cannot be enforced violence becomes the primary means of contract enforcement On the demand side consumers often lack information about the quality of the product and reliability of suppliers Consumers also have an incentive to increase the intensity of consumption to minimize the time spent in consumption in order to reduce the opportunity costs of detection arrest and conviction Demand decreases when a good is made illegal as some consumers tastes change away from the now illegal good In summary when the government tries to protect us by prohibiting production and consumption in a market it often only serves to make the market more dangerous but exchange in the market still takes place Econ 162B A0 A1 Fall 2011 Answer key 4 2 The effects of legalizing marijuana would be to increase the demand for and the supply of marijuana Supply increases because a cost of production the risk of getting caught has been eliminated Demand also increases assuming that consumers tastes for marijuana would change with legalization The quantity exchanged in the market will increase while the effect on price is indeterminate It depends on the relative changes in demand and supply Graphically P P P S S D D Q Q Q If supply increases more than demand increases then price will go down The more elastic is the demand for marijuana then the greater will be the increase in consumption that results from any increase in supply 4 If a man is married to a tax accountant then his wife can do his taxes If the couple gets a divorce then the man would have to hire his own tax accountant Since more economic activity would be exchanged through markets rather than being produced inside the home then GDP would increase Also with an increase in divorce rates more households have to be set up so there would be additional spending on household items 5 GDP can be calculated in two ways using either the final goods approach or the value added approach With the final goods approach 75 million of peanut butter was sold to final consumers so GDP would be 75 million With the value added approach GDP is the sum of value added in each stage of production value added Activity 20 million Peanut farmers sold 20 million worth of peanuts to distributors 10 million Distributors sold 30 million worth of peanuts to processors 20 million Processors sold 50 million worth of peanut butter to producers Producers sold 60 million worth of jars of peanut butter to grocers 10 million Grocers sold 75 million worth of jars of peanut butter to final consumers 15 million total value added 75 million In both cases using either the final goods approach or the value added approach GDP is equal to 75 million GDP is not the sum of all of the intermediate goods which would equal 235 million instead of 75 million Econ 162B A0 A1 Fall 2011 Answer key 4 3 6 a Real GDP increased by 3 5 in 2009 and by 3 0 in 2010 For 2011II the rate of GDP growth was 1 3 Generally GDP growth has been positive since the recession of 2008 2009 with GDP increasing since the third quarter of 2009 although the pace of growth seems to be slowing lately GDP is measured using the categories of consumption investment net exports and government spending b Nominal GDP was 13 939 0 billion in 2009 14 526 5 billion in 2010 and 15 012 8 billion in 2011II c Real GDP was 12 703 1 billion in 2009 13 088 0 billion in 2010 and 13 271 8 billion in 2011II In contrast real GDP was 13 326 billion in 2007IV d Table 1 7 5 shows the relation of GDP GNP NNP NI and PI The table goes from GDP to personal income in the following way Gross domestic product Equals Gross national product Plus Income receipts from the rest of the world Less Income payments to the rest of the world Less Consumption of fixed capital Private Domestic business Capital consumption allowances Less Capital consumption adjustment Households and institutions Government General government Government enterprises Equals Net national product Equals National income Less Statistical discrepancy Less Corporate profits with inventory valuation and capital consumption allowance Taxes on production and imports less subsidies Contributions for government social insurance Net interest and miscellaneous payments on assets Business current transfer payments net Current surplus of government enterprises Wage accruals less disbursements Plus Personal income receipts on assets Equals Personal income Personal current transfer receipts e According to Table 2 1 The major components of personal income are wages other labor