Mastering the economic way of thinking means learning to reason in terms of supply and

Answer Question #6, sub-questions (a) and (c) only on textbook, pp.116-117. (7 points)
Mastering the economic way of thinking means learning to reason in terms of supply and
demand. Here are additional questions on which you can practice. Some are harder than
others. You should probably begin in each case by sketching a small supply and demand
graph. Then ask you ask yourself whether the event describe would affect the supply
curve or the demand curve, in which direction the curve would move, and what effect that
would have on the price and the and the quantity exchanged. Don't be content merely to
conclude that the price will rise or the price will fall. Would you expect a large or a small
change in price or in the quantity exchanged? You will usually have to supply some
information from your own experience. Keep in mind that the answer will often depend
on the length of time you are allowing for adjustments to occur. Are you predict-ing a
very shot-run effect or are you thinking about the long-run effect?

(a) What would happen to the market- clearing price of acoustic guitars in Figure 5-1 if
(i)

People turned on to some accordion craze and started losing interest in
learning to play the guitar?

(ii)

The price of electric guitars were to fall substantially?

(iii)

A number of acoustic guitar makers decide to exit the market and make
violins instead

(c)What effect would you expect each of the following to have (or to have had) on the
market for domestically grown cotton?
(i) Nylon is invented.
(ii) The cotton gin is invented
(iii) The boll weevil (a crop killer) becomes extinct
(iv) Foreign cotton growers bring in an exceptionally large harvest.

Answer Question #1, all sub-questions (a) - (d) on textbook, p.174. (5 points)
Chuck Waggin owns and operates a small tax- accounting firm, which he runs out of the
basement of his home
(a) The basement was just wasted space until Chuck turned it into an office for

his business. He says his firm is more profitable than most tax- accounting
business because he doesn't have to pay any rent. Do you agree that rent is not
a cost of production for Chuck?
(b) Chuck recently turned down an offer to go work for a larger firm at a salary of

$45,000 a year. Chucks personal income from his business runs about
$35,000 a year. Would you say that Chucks firm is profitable?

(c) Chuck says he like being his own boss and that he would be willing to

sacrifice at least $25,000 a year in income to avoid working foe someone else.
Dose that information change your answer to part(b) ?

(d) Chuck recently invested $10,000 of his savings in an office computer. How

would you include the effects of this effects of his investment in his costs?