Economics Module 3 - Assignment Example

your answers should be written in a red colored font below each question. If the question has multiple parts, please separate your answer by parts --i.e. 2a, 2b, 2c, etc. Part 1. Profit and Loss (40 points)Read the example below and answer the questions that follow.    Suppose T-shirt Bobbie has a shop next to a large sports stadium.  The stadium consistently attracts a lot of visitors to the area.  It costs Bobbie $18,000 per month to lease a building, rent the needed t-shirt equipment, purchase plain t-shirts and various decals, and employ some part-timers to help when business is buzzing.1.1 If T-shirt Bobbie sells 1,000 shirts for $20 each, how much does she generate in total revenue? (5 pts.)1000(20)= $20,000 1.

2 What are her monthly costs of operation? (5 pts.)$18000 per month 1.3   How much does she receive in monthly profit?  Is it positive or negative? (5 pts.)Profit is $2000= $2000(revenue) - $18000(monthly cost)1.4   What does this profit indicate?    (5 pts.) Profit indicates that the business is successful.1.5   Does it make sense to stay in business?  Why or why not? (10 pts.)Yes it makes sense because she is making profit, granted she continues to sell 1000 shirts every month.1.6   Now assume it is a bad year for the stadium.

   The home team is losing and attendance drops sharply.  Sales decline, revenues fall and T-shirt Bobbie is losing $5,000 a month.  What does this indicate and how should T-shirt Bobbie respond if this happens year-after-year? (10 pts.)This means that either Bobby needs to sell more shirts or increase the price of his shirt for $30.Part  2. The Broken Window Fallacy  (60 points)The following resources will be of use when answering the questions for Part 2.   Read Common Sense Economics (2010) 1.9. Production of goods and services people value, not just jobs, provides the source of high living standards.

 Watch at least one of the following entertaining videos:  (i) LearnLiberty.orgs The Broken Window Fallacy (3.09); and (ii) Stossel Macro Video 04 - Government spending, jobs, and unemployment (2.40)Listen to or read at least one of the following pieces: (i)        What is Seen and What Is Not Seen by Frederic Bastiat. Or, listen-on-the-go to the Audio  (8.11); and (ii)Creating Jobs vs. Creating Wealth by Dwight Lee (Audio, 8.58 minutes).  Directions:  Use your knowledge of the “Broken Window Fallacy” to evaluate each of the following claims.

  These statements are used frequently by proponents to argue that government spending can help pull an economy out of a recession. What does economic analysis indicate with regard to this argument? (Hint:  Write the “seen” and the “not seen” effect of each one of these proposals.)2.1   “I propose that we hire all of the unemployed people as government workers and pay half of them to dig holes and the other half to fill them back up.  This way everyone who wants a job can have one!

”(20 pts.)This is a true policy that was implemented by the government to basically find a reason to spend. As of now, the focal point is in spending when the government must enact programs to stimulate growth. FDR has similar initiatives during the Great Depression as he forced the government to spend in public infrastructure even when it was necessary. This policy created jobs and reached its objectives of keeping unemployment rates low.2.2   “The unemployment rate is high and, therefore, it is time to stimulate the economy!

  I propose that we use tax dollars to pay car dealers to destroy older used cars by smashing them and sending them to the dump.  This will cause people to buy new cars which will increase economic activity and put us on the path to recovery.”(20 pts.)This is a policy known as Cash for Clunkers, which was known as Cash for Clunkers. In essence, the focal point if the policy was to pay car dealers $3500 to $4500 so that they can destroy older cars. Additionally, car dealers were required to take the necessary process to dissolve the engine so they would not be able to resell it.

The objective of this notion was to stimulate the economy by essentially forcing Americans to buy new cars, which would increase auto sales. Spending on auto sales shifted spending from other industries to the automobile industry rather than create spending on another segment of the economy. The detrimental effect of this program was evident as sales plummeted for the new car as soon as this program ended.  2.3   Paul Krugman, a few days after the 2001 terrorist attacks on the World Trade Center and the Pentagon, made the statement provided below.

Based on your knowledge of the Broken Window Fallacy, do you think Dr. Krugman is right?  Are acts of war and terrorism potentially good for the economy?   Why or why not?(20 pts.) “Ghastly as it may seem to say this, the terror attack -- like the original day of infamy, which brought an end to the Great Depression -- could even do some economic good….the destruction isnt big compared with the economy, but rebuilding will generate at least some increase in business spending.” – New York Times article published on September 14th, 2001 by Paul Krugman, a Nobel Prize winning economist.

 The money, time, and effort that was utilized to clean up and repair the World Trade Center was not ideal because it could have been invested in other parts of America as well. In essence, the spending in WTC was not optimized correctly. It was evident that the spending in this segment did not harness development and growth. It was detrimental as a matter of fact because economists have fallen into the trap of the Broken Window Fallacy. No acts of terrorism are not good for the economy but war is.

War boosts the economy and churns factories. The rebuilding of WTC did not really benefit the American economy, which was why Krugman mad this statement.ReferencesCash for Clunkers. (n.d.). Cash for Clunkers. Retrieved August 28, 2014, from http://www.cashforclunkers.org/Samuelson, P. A., & Nordhaus, W. D. (1985). Economics (12th ed.). New York: McGraw-Hill.What is the broken window fallacy?. (n.d.). Investopedia. Retrieved August 28, 2014, from http://www.investopedia.com/ask/answers/08/broken-window-fallacy.asp