Kaplan University
Graduate School of Business and Management
GB540 Economics for Global Decision Makers
Unit 1 Assignment

3/25/2014

Problem #1: Using either a graph or table (Refer to pages 11-15 for help with graphs and tables) use two goods to construct a production possibilities curve. Clearly explain what a variety of different points on the curve mean. What would make the curve expand or contract? Why is efficiency lost at the extremes, as when substantially more of one good and very little of another is produced? Production Types | Production Alternatives | | A | B | C | D | E | F | Cars | 12 | 9 | 7 | 5 | 3 | 0 | Gasoline | 0 | 2 | 3 | 4 | 5 | 6 |
A
A
Car Production (Thousands)
0
Car Production (Thousands)
0
12
11
10
9
8
7
6
5
4
3
2
0
12
11
10
9
8
7
6
5
4
3
2
0

B
B
C
C

D
D
E
E

F
F

0 1 2 3 4 5 6
Gasoline Production (thousands of Barrels)
0 1 2 3 4 5 6
Gasoline Production (thousands of Barrels)

In this scenario, two goods can be produced, cars and gasoline. Each point in the production possibilities curve is a reprehensive of the output of both products when resources are skewed towards either method. Understanding this, if more resources are utilized towards production of cars, then there is less that can be used for gasoline, resulting in the decrease of output. Anything within the curve is attainable at full employment and anything outside is not. The shape of the curve is affected by the law of increasing opportunity costs. “As the production of a particular good increase, the opportunity cost of producing an additional unit rises” (McConnell et al, 2012) resulting in the bowing of the curve out. At the extremes, all of the resources are utilized for one product leaving nothing available for the other.
Problem #2 Part A: Go to the internet auction site eBay® at www.ebay.com and select the category Jewelry and Watches, followed by Loose Diamonds and Gemstones, and then Diamonds, Natural. How many natural diamonds are for sale at the moment? Note the wide array of sizes and prices of the diamonds. In what sense is there competition among the sellers in this market? How does that competition influence prices? In what sense is there competition among buyers? How does that competition influence prices?
When checking EBay, there were 140,108 diamonds for sale under the category of Diamonds (Natural). In examining the section, the diamonds came in many different ways from bulk lots to loose diamonds, and were competitively positioned against each other based on price for various size in carats, weight, clarity and condition of item. The market seemed to be flooded by entrants, but considering that there is no real barrier for the internet site, some may not even be real retailers, there is not much that can be done. The price seems low on most items, but the fact that there is so many sellers in the market could be the reason could drive the price down. When you consider that the site uses an auction system for selling, the buyer is influencing the price of not only the items they are bidding on, but like items of the same variety. I think that competition affects the prices by using the buy it now option, in a sense setting a price floor for the diamond. In a consumer’s eye, this can create a false sense of quality, “Why is this diamond set with a minimum and these others not? Is there something wrong with them?”
Problem #2: Part B) Describe what would happen if an outside agency determined the prices eBay could charge. Essentially, if an outside agency came in and set a price that they could charge, they would directly affect competition. In a site like this, their main method of being competitive is price, as they are not advertising like true brick and mortar retailers or even wholesale retailers like Diamond International. Depending on if they set a price ceiling that limits what they could sell, some retailers may not be able to make the margins they need and will leave the market. If they set a floor on what can be charged, they could drive away business. The price is lower on EBay, but that is because the consumer is assuming risk by purchasing a product sight unseen.
Problem #3: Read the “LAST word” feature on markets for human organs on Pages 62–63 of your text. Next, select a social problem where free markets are not allowed to function and describe how free market features could be introduced to help alleviate the problem. As part of your answer also include a discussion of the risks of introducing market mechanisms in situations where ethical issues are present. Currently, we are in an age where in most states prostitution is illegal. When you consider it at its bare bones, prostitution is the exchange of a service for money. Socially, it is deemed illegal as it is perceived as morally wrong. However, one would not question a person who takes a date out for a dinner at a nice restaurant and then a movie and who has sex with that date. There is a market that exists for individuals that don’t want to deal with the rituals of dating and who may be socially inept at doing so. There is a substantial lack of free market, save in Nevada, which drives most of this business towards street dealings and other black market avenues. Due to the service moving to such an unregulated environment, lack of screening and testing, there is more risk of disease spreading in essence creating an unsafe environment for the consumer and the supplier.
A free market system, could create an avenue in which the safety of both the supplier and consumer is made paramount. Sufficient testing and screening of both suppliers and consumers could eliminate a large portion of those currently spreading disease. In addition, it could be a source of tax revenue in a market that is tax free currently. The opposition would be that it is morally wrong, however, a free market system would at least provide controls on a market that has been in existence since the beginning of time. Many of these men and women that provide the service don’t have other means of making money to better themselves and providing a legal venue to do so could provide them an outlet to better their own lives. | | |

References
McConnell, C., Brue, S., & Flynn, S. (2012). Economics. 19th ed. McGraw-Hill.