Micro -2008 #50 Multiple Choice (Explanation)

Answer - (C) 

Average Total cost (for each unit) is $6
Total cost for 20 units is $120
Average variable cost (for each unit) is $5
Total variable cost for 20 units is $100
Average Fixed costs (for each unit) is $1
Total fixed cost for 20 units is $20

2008 Question #23 (Explanation)

Answer - (c) Less than the ATC

2015 AP Macroeconomics FRQ #3

FOREX

Watch me answer it here

https://youtu.be/13xyH2d9WBE

2015 AP Macroeconomics FRQ #3

(a)

     (i) If Japan's deficit increases then the Japanese Government spends more than it takes in in tax revenue.

It must borrow to make up the deficit. It borrows by selling bonds. It sells bonds to the public/banks and therefore the money supply decreases. People pay for the bonds with cash, so cash leaves the banks and people's pockets and flows to the government. Money supply decreases.

Less money in the banks means the supply of loanable funds have decreased. 

If the government has the cash,, the banks cannot loan it out. Supply of loanable funds decreases.

From the Fiscal Policy Cheat Sheet

Less money in the banks means that the demand for loanable funds will increase.

Both, supply decreasing and demand increasing raises the RIR (real interest rate).

If demand increases then the banks raise interest rates to deal with the increased demand.

Answer -  (a) i

(a)

   (ii) If there is an increase in Japan's deficit, again,, they must borrow funds from the public. This lowers the supply of loanable funds and because the government has borrowed funds from the public demand increases. Real Interest Rates increase, with higher rates of interest less people can afford to invest.

From the Fiscal Policy Cheat Sheet

Answer (a) ii

If the Real Interest Rate increases due to the borrowing by the government then what happens to the supply of Euros and the price of Yen to Euro.

Ok, so if the RIR (real interest rate) increases in Japan, people from the Euro Zone will want to deposit money into the Japanese banks to take advantage of the high interest rates.

So the supply of Euros (money)  traveling to Japan will increase as people are searching for a higher return on their investment.

From the FOREX Cheat Sheet

If the RIR in Japan increases there will be a rush by Euro zone citizens to deposit money and buy financial assets in Japanese banks to gain the higher interest rates. That means that the supply of Euros in the FOREX market will increase. A larger supply will decrease the value of the Euro relative to the Yen.  The value of the Euro compared to the Yen will start to decrease in value as there is a larger and larger supply in the FOREX market.

Supply increases, value decreases

The opposite happens with the Yen,

As more and more Euros flow into the FOREX market to purchase the Yen  needed to buy these financial products the Yen will become relatively more valuable.  As the Yen becomes more valuable it will take less and less Yen to buy a Euro.

Again, as the supply of Euros increases, the value of the Euro decreases,,, as more people need to buy Japanese financial products they have to exchange their Euros for Yen increasing the demand for Yen, driving up the value of the Yen.

The graph above shows that as the Euro's supply increases it takes less and less Yen to buy a Euro.

If the European Central bank buys the Euro it will reduce the supply of Euros in the FOREX market increasing the value of the Euro relative to the Yen.

Wauffle Production

Wauffle Production 

We spent a couple of days working on total production, average and marginal and blending those understandings into cost curves. Diminishing marginal returns sets in very quickly with just one waffle maker (fixed capital).

Thank-you Tim and Justin

2005 #51 (Output & Costs) Multiple Choice Question

2005 #51 (Output & Costs) Multiple Choice Question

So, was looking at questions with students and had a good time talking about this one.

Answer - (B) Spreading fixed costs over a larger output, and eventually diminishing returns.

Often, I explain the U-shaped curve as a reflection of Diminishing Marginal Returns and then stop but this question caused me to think about not only the rise in cost but the fall in costs.

If we look at a graph of the Average cost curves we see ATC with its U-Shape and we see AVC with its U-shape but AFC tends to decrease with more output.

This is because as output increases the average of the total fixed costs, per-unit decreases.

If your total fixed costs are $100 (rent) and you sell 1 unit, (wauffle), your total fixed costs are still $100 but

your Average fixed costs are $100 (OK be patient)

But if you sell a second waffle

then your Average Fixed costs are now $50

TFC/Q (output) = Average Fixed Costs, so $100/ 2(output) = $50

This decreasing AFC pulls down the ATC curve. 

Lets use some numbers - ATC(5) = AVC (3) + AFC (2)

If average fixed costs decreases (as output increases) then ATC (4) = AVC (3) + AFC (1)

AFC decreases and therefore ATC has to decrease,, thus the falling of the curves.

  

ATC Curve  is pulled down by the effect of AFC decreasing as output increases and pulled up as diminishing returns sets in.

Output & Costs & Revenues (Google Doc) with Videos

Output & Costs & Revenues (Google Doc) with Videos

Here is a google doc that I created to help students with tracking videos with the topic they are studying.

Output and Costs - Google doc with videos

Nominal vs. Real (Wages, Income)

Nominal vs. Real (wages, income)

To understand Nominal and Real we must first understand the concepts of Inflation and Purchasing Power

Inflation is an increase in the average price level of goods and services in a nation over time.

(If the price of apples is increasing, and the reason is because of a flood or a drought, then this is not spoken of as inflation as the cause is specifically from a flood/draught) If the price of all goods in the country are rising then we have Inflation. (Often caused by increases in the supply of a country's currency)

Purchasing Power is the number of goods or services that can be purchased with a unit of currency.

Nominal wages = current wages    

Nominal wages (Income) is the amount of money I am paid at a certain period of time.  If I'm paid $12 an hour, then my nominal wage is $12 dollars and hour. A nominal wage is expressed in the country's currency.  If apples cost $1 each, then I have the ability (purchasing power) to buy 12 apples. 

Time Passes, (let's say a year) and Inflation occurs, Apples have risen in prices to $2 each. 

I'm in the US and my wage is $12 an hour, that is my nominal wage (income), and the purchasing power of my nominal wage is 6 apples at a cost of $2 each. Due to inflation my hourly wage of $12 has been reduced. I use to be able to purchase 12 apples for an hour's work but now I can only buy 6. My purchasing power has been reduced by 50%.

Real Wage = (purchasing power of wages, what it will buy, nominal wages adjusted for inflation)

• If your income stays the same and inflation (price level rises) occurs,  then your real wage has decreases. 
• If your income stays the same and instead of inflation there is deflation (price level falls), then your real wage has increased.
• If your income stays the same and there is no inflation, then your real wage is your nominal wage

Nominal Wages = Real Wages  (if there is no inflation = 0%)

If your wage (income) is $12 an hour, and there is no inflation (price level=no change) then $12 is your real wage.

Real Wages = Nominal Wages - Inflation

If your nominal wage is $12 an hour and inflation is 50% then your real wage would be equal to $6 an hour. A 50% increase in inflation will cause ones real wage to be 50% lower than the nominal wage.

So, lets look at this 2010 problem. If the workers nominal wage increased from $10 to $12 then the wage increased by 20%. Yet, at the same time inflation (price level) increased by 10%.

So, wages increased by 20% and inflation increased by 10%.

IF you gain 20% and inflation (eats) ten of that 20%, you are left with 10%, the answer is C.

Nominal Wages = Real Wages (Inflation = 0%)

                                                               $10 = $10

Real Wages = Nominal Wages - Inflation

                $9 = $10 - $1 (Inflation increased by 10%, this equals $1 of a $10 wage)

Real Wages = Nominal Wages - Inflation

                $8 = $10 - $2 (Inflation increased by 20%, this equals $2 of a $10 wage)

Real Income video - mjmfoodie