Homework #1

1.  Development is often used interchangeably with growth.  How are they similar or different concepts?  Be sure to define both.

Development and growth are similar in that frequently one causes the other to occur.  Although, it is both possible to have growth without development and it is possible to have development without growth.  Of the two, growth has a clearer definition.  Growth is the percentage change in real gdp or in real gdp per capita.  Development, however, is a broader topic and can not be as easily defined.  This is evident from the unfocussed discussion in the text.  In the variety of definitions provided all refer to structural change.  The type is not clear.  I suggest that development may be defined as a structural change in a community that may include modification of factors of production, better utilization of institutions, or changes in the attitudes and values of the population that will increase the well being of the community.  As I have defined it, improvements in development explicitly increase well being and while growth implicitly increases well being, it is not guaranteed.

2.  Why is the concept of equity important in community economic development?

Equity is a concept based on fairness.  Undergraduate economics tends to shy away from equity because it is a normative concept.  What is equitable can be defined differently by each individual based on the individual's norms.  In spite of that difficulty, one must recognize that any action to improve community economic development will affect groups differently.  Therefore we need to be cognizant the community's differing views of equity. 

3.  Describe your paradigm of community economic development.  How does your answer relate to the reasons you are taking this class.

Several asked about this question and several tried to related the answer back to the star.  The star serves example or model of the author's instruction of community economics.  I hope that you provided a model or example of a potential methodology of addressing economic development.  I understand that most will not use this in their future jobs and I understand that even if you will use this, some of this you probably do not care.  I will, however, try one more time.  There are problems in the world, country, state, city, etc and I believe that reflection on this question worth at least a couple minutes of your time.

4.  What is the goal of the consumer?  What factors prevent the consumer from receiving an infinite level from their goal?

The goal is to maximize utility or their economic well-being.  Consumers are unable to get an infinite level of utility because all resources are scarce and; therefore, have a price and we have limited income based on the limits of our own resources.

5.  What is the mathematical equation that represents the equilibrium in a two-good consumer model?

There are several way to express the equilibrium.  The one in our book is the marginal rate of substitution, MRS_1,2, is equal to the price ratio P₁/P₂.

6.  How can your answer in problem #5 be expressed with marginal utility?

The answer in #5 can be modified because MRS_1,2 is equal to the ratio of marginal utilities MU₁/MU₂.   You could set that ratio equal to the price ratio, but I prefer MU₁/P₁ = MU₂ /P₂   or the reciprocal.

7.  What is the intuition behind problem #6?

The intuition of the above equation is that the opportunity cost of all goods consumed must be equal in equilibrium when we are maximizing our utility.  If one good had a lower opportunity cost, we would be able to redistribute between goods and increase our level of utility.  Another method to look at the problem is to take the reciprocal of both sides.  This way we could describe it as "bang for your buck."

8.  What is the goal of the producer?

To maximize profit.  Note in advanced classes we can prove that you must minimize costs to max profit.

9.  What is the mathematical equation that represents the equilibrium quantity needed to maximize profit?

Just like in 202, we set MR = MC to find the level of Q.

10.  Illustrate the answer to problem #9 with a graph.

A partial example is on page 12.

11.  What is the intuition behind the answer to problem #9?

At low levels of output, the additional revenue from producing one more good is greater than the cost.  We, therefore, should increase output because it will increase our profit.  And we should continue to increase until MR=MC.

12.  What rule should a company follow when deciding whether to hire another worker?

The marginal revenue product of labor should equal the wage rate.  MRPN = w

13.  Explain the intuition behind the answer to problem #12.

The addition revenue from selling the addition product manufactured by the last worker hired should equal their wage rate.  If not, we can increase profit by either hiring or firing a worker.

14.  What rule should a company follow when deciding the fix of capital and labor in the production process?

The marginal rate of technical substitution MRTS must equal the ratio of the input prices, w/r.

15.  What is the intuition behind the answer to problem #14?

Again, I prefer to rewrite the equation to MP_L / w = MP_K / r.  Or take the reciprocal of both sides.  The intuition of the modified equation is that the additional output produced by all inputs divided by its price must be equal in equilibrium when we are minimizing costs (max profit).  If one input had a lower cost, we would be able to redistribute between inputs and increase our profit.  Another method to look at the problem is to take the reciprocal of both sides.  This way we could describe it as "bang for your buck."