Microeconomics Homework 3

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May 26, 2024

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AP Microeconomics Page 1 of 2 Assignment: Apply Concepts of Basic Economics 1. As Thanksgiving approaches, Martha sees many advertisements encouraging her to donate her time or money to help serve Thanksgiving dinner to the poor families in her community. A. If Martha donates $20, is she acting in her own self-interest? Explain your answer. (5 points) B. True or False: If Martha donates two hours on Thanksgiving day to help serve food at the local community center, but doesn't donate any money, it doesn't cost her anything to help the poor families in her community. Explain your answer. (5 points) C. If Oscar donates $100, and Martha donates only $20, is Oscar behaving rationally? Explain your answer. (5 points) 2. Income taxes are taxes levied based on the income you earn. In the U.S., income taxes are progressive, which means that people with higher incomes pay a higher percentage of their income in taxes. Some lawmakers advocate a flat tax, in which every income earner pays the same percentage of income in taxes. A flat tax would significantly reduce the paperwork and rules and regulations associated with the income tax. However, changing the tax rules would cause much disruption in the economy as people changed their economic behavior in response to the change in the tax law. A. Make a normative economic statement in favor of a flat income tax. (5 points) B. Make a normative economic statement that supports a progressive income tax. (5 points) C. Make a positive economic statement that supports a flat income tax. (5 points) D. Make a positive economic statement that supports a progressive income tax. (5 points) 3. Sunk Costs A. Define sunk costs. (5 points) B. Generally, sunk costs don't affect future decisions. However, sometimes they do. Give an example in which a sunk cost influences a future decision. (5 points) 4. PPF A. Draw a PPF curve for the hypothetical nation of Dustbowl. In Dustbowl, only two products are made: bottles of water and feather dusters. Assume that the law of increasing opportunity costs applies to Dustbowl. Label your graph completely. (5 points) Copyright © 2021 Apex Learning. See Terms of Use for further information.

AP Microeconomics Page 2 of 2 Assignment: Apply Concepts of Basic Economics B. What does the law of increasing opportunity costs mean for water and feather duster production in Dustbowl? How does the law of increasing opportunity costs affect your graph? (5 points) C. Suppose the bird migration path suddenly changed, and birds no longer flew over Dustbowl. Further, suppose feathers dropped during bird migration are the major source of feathers for feather dusters. Show how this affects the PPF of Dustbowl in a graph, and explain in words. (5 points) If Martha donates $20, is she acting in her own self-interest? A. If Martha donates $20, she is acting in her own self-interest. Charitable giving, even in small amounts, can provide psychological benefits and personal satisfaction from contributing to a worthy cause. This sense of fulfillment and warmth from helping others can be considered part of Martha's self-interest. Additionally, her $20 donation may garner social recognition or even tax benefits, further serving her personal interests through social approval or financial incentives. As long as the $20 donation doesn't cause significant financial strain, Martha's act of giving can align with her self-interest by providing psychological, social, or economic gains. B. True or False: If Martha donates two hours on Thanksgiving day to help serve food at the local community center, but doesn't donate any money, it doesn't cost her anything to help the poor families in her community. Explain your answer. False. Even though Martha isn't donating money in this scenario, her time has an opportunity cost. By volunteering for two hours on Thanksgiving day, she's sacrificing the ability to engage in other activities or leisure pursuits during that time. Her time has value, and choosing to allocate it to volunteering means foregoing alternative opportunities, which represents an implicit cost. C. If Oscar donates $100, and Martha donates only $20, is Oscar behaving rationally? Explain your answer. To determine if Oscar is behaving rationally, we need to consider his motivations, constraints, and the potential benefits he derives from his donation. If Oscar's donation of $100 is within his means and aligns with his personal values or goals (e.g., making a meaningful impact, tax benefits, or social recognition), then his behavior could be considered rational. However, if the $100 donation significantly strains his financial resources or compromises his ability to meet other essential needs, it may be considered irrational from an economic perspective. Copyright © 2021 Apex Learning. See Terms of Use for further information.

2 A. A normative economic statement in favor of a flat tax: "A flat tax system promotes allocative efficiency by treating all income earners equally. By having everyone pay the same tax rate, it eliminates deadweight loss caused by distortionary effects of different marginal tax rates on labor supply and investment decisions." B. A normative economic statement supporting a progressive income tax: "A progressive tax upholds the principle of vertical equity, where higher income individuals bear a greater tax burden relative to their ability to pay. It promotes a more equitable distribution of income and alleviates market failures arising from excessive inequality." C. A positive economic statement supporting a flat tax: "Implementing a flat tax could significantly reduce compliance and administrative costs associated with the current complex tax code. This streamlined system provides more transparency and minimizes distortions, potentially boosting incentives for work, saving, and entrepreneurial activities." D. A positive economic statement supporting a progressive income tax: "A progressive tax system acts as an automatic stabilizer during economic contractions. As incomes fall, effective tax rates decrease, boosting disposable income. Conversely, during expansions, higher tax revenues from top brackets help control inflationary pressures.” 3 A. Define sunk costs. Sunk costs refer to expenses or costs that have already been incurred and cannot be recovered or refunded. In other words, these are past costs that you've paid for and can't get back, no matter what decision you make going forward B. Generally, sunk costs shouldn't affect future decisions. But sometimes they do. For example, let's say you paid $2,000 to repair the engine of your old car. After the repair, the mechanic tells you that more issues were found, and it will cost another $3,000 to fix everything. Rationally, you should compare the total cost of $5,000 to fully repair the old car against the cost of buying a new car, which is $4,900. Since a new car is slightly cheaper than repairing the old one, that would be the better economic decision. However, the $2,000 you already spent on the initial engine repair is a sunk cost — money you can't get back. Sometimes people decide to spend the additional $3,000 to fully repair the old car, even though it's more expensive than the $4,900 for a new car. They make this irrational choice because they don't want the initial $2,000 investment to go to waste.The sunk cost of $2,000 influences their decision to keep repairing the old car, even though buying the $4,900 new car is the more cost-effective option in the long run. They let the past sunk cost cloud their judgment about better future decisions.

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4. Al would label the x-axis as "Bottles of Water" and the y-axis as "Feather Dusters" since those are the two goods produced. The curve itself would have a concave (curved inward) shape from the origin to represent the increasing opportunity costs - as more resources go towards one good, the opportunity cost of the next unit increases. It would intersect the y-axis at the maximum level of feather duster production when all resources are devoted to feather dusters, and the x-axis at the maximum bottle of water production when all resources go to that good. The negative slope reflects the trade-off between allocating more resources to one good means fewer for the other. While specific numeric values are not provided, the overall shape adheres to the characteristics of a PPF curve with increasing costs - concave, intersecting axes at maximum levels, and negatively sloped. B The law of increasing opportunity costs in the context of water and feather duster production in Dustbowl essentially represents the principle of diminishing returns. As resources become increasingly specialized and devoted to the production of one good (e.g. water bottles), the opportunity cost of diverting those resources from the other good (feather dusters) increases at an increasing rate. This cognitive bias towards allocating more resources to one endeavor leads to a perception of higher costs associated with shifting production, even though the actual resources remain fixed. Graphically, this manifests as the concave, bowed-inward shape of the production possibility frontier, visually depicting the accelerating opportunity costs as one moves further along the curve towards specialization in a sipgle good.

C. When Dustbow! had an abundant supply of feathers from the migrating birds, it had access to a larger quantity of resources required to produce feather dusters. This allowed Dustbowl to achieve a higher level of potential output for feather dusters, represented by the initial production possibility frontier (PPF) curve. However, with the change in the migration pattern of birds, the supply of feathers, which is a key input for producing feather dusters, has become scarce. This scarcity of a crucial resource acts as a constraint on Dustbowl's production capabilities, leading to a reduction in the maximum attainable output of feather dusters. In microeconomic terms, the inward shift of the PPF curve towards the "Bottles of Water" axis represents a contraction of Dustbowl's production possibilities set. The new PPF curve lies closer to the origin, with a lower maximum point on the "Feather Dusters" axis, indicating that the maximum potential output of feather dusters has decreased due to the limited availability of feathers. At every given level of bottle of water production, the maximum number of feather dusters that Dustbowl can produce is now lower compared to when they had an abundant supply of feathers. This shift in the PPF curve reflects the reduced production efficiency and a diminished capacity to produce both goods, particularly feather dusters, due to the lack of a critical resource. The inward shift of the PPF curve is a direct consequence of the resource constraint imposed by the scarcity of feathers, limiting Dustbowl's ability to achieve its previous levels of potential output for both goods. POF CMigranpn crosed ) Saquq |2 BOHEQD | o watr

Microeconomics Homework 3

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