Econ 211
Problem Set 1
1. Proctor and Gamble will soon market a product called Olestra, which can
be used in place of fat in cooking, but is very low in calories. Thus it
will be possible to make low-calorie hamburgers, french fries, milkshakes,
and so forth. True or false: The average American will weigh less after
this product appears on the market.
2. In the early 1980s, when the Polish people had to stand in long lines
in order to purchase most consumer goods, the government ordered that
every third place in line be reserved for pregnant women or disabled
persons. This was presumably done to reduce their discomfort. Do you
think it resulted in less standing in line by pregnant women? Do you
suppose any women became pregnant in order to be able to cut into the long
lines?
3. According to a National Automobile Safety Study conducted by
Northeastern University and reported on by the Wall Street Journal in
February 1986, 16 percent of all surveyed consumers said they would
"definitely buy" an air-bag safety system for their
automobiles if one were available for $500. Only 5 percent of them would
"definitely buy," however, at a price of $1000. What does this imply
about the "need" for air-bags on the part of those people who are
convinced that air-bags will work? What does the study suggest in
general about the "need" for life-saving goods?
4. A front-page article in The Wall Street Journal of May 13, 1980, was
headlined: "Europe's Drivers Don't Reduce Gasoline Use Despite Soaring
Prices." In the continuation of the story on a back page, the reporter
revealed that pump prices had increased 120 percent in Great Britain from
1973 to 1979 while the general price level had risen by about 140 percent.
How would you criticize the headline?
5. Explain the following statement by a military recruiter: "There's
nothing like a good recession to cure our recruiting problems."
6. When Mother Teresa accepted the Nobel Peace Prize in 1979 and decided
to use the $190,000 award to construct a leprosarium, was she acting in
her own interest? Was she behaving selfishly?
7. Evaluate the following statement: "Increasing the speed limit has, to
some degree, compromised highway safety on interstate roads but enhanced
safety on non-interstate roads."
8. In 1967 the president of the American Medical Association was quoted as
saying that medical care was a privilege and not a right. Today the AMA
officially proclaims that "health care is the right of everyone." What
quantity and quality of health care do you suppose they're talking about?
Is a liver transplant, for example, the right of everyone with a diseased
liver?
9. It is well documented in scientific research that smoking is harmful to
our health. Smokers have higher incidences of coronary disease, cancer,
and other catastrophic illnesses. Knowing this, about thirty percent of
young people begin smoking and abo ut twenty-five percent of the US
population smokes. Are the people who choose to smoke irrational? What do
you think of the argument that we should ban smoking in order to protect
these people from themselves?
10. Economists would be more likely to agree on the answers to which of
the following questions? Why?
a) Should tax rates be lowered for the rich?
b) How would lowering tax rates for the rich affect economic
output?
c) How would an increase in the price of VCRs affect purchases of
VCRs?
d) Should government defense expenditures be reduced?
e) How would an increase in military spending affect employment?
11. Are the following statements normative or positive?
a) The government should provide free tuition to all college
students.
b) An effective way to increase the skills of the work force is to
provide free tuition to all college students.
c) The government must provide job training if we are to compete
with other countries.
d) The North American Free Trade Act will increase the skill
requirements of workers in the US.
e) The North American Free Trade Act should not be supported
because it will take jobs away from the US.
12. Determine in which factor-of-production category --land, labor, or
capital-- each of the following items belongs.
a) A new office building.
b) A deposit of coal.
c) The inventory of auto supplies in an auto supply store.
d) Land reclaimed from the sea in Holland.
e) A trained mechanic.
f) An automated computer system.
13. Char Cole bought four steaks at the butcher shop on Friday afternoon.
Later that evening three friends came over for a barbecue. Do you suppose
her purchase of the steaks caused the friends to come over? How can you
decided which event was more like ly the cause and which the effect? If
you read that the crime rate increased in a certain city during a time
when the purchase of handguns had also increased, would you suspect a
causal connection? Which would be more likely the cause and which the
effect? How does theory shape your answer?
14. The following table gives a relationship between X and Y:
Value of X: 1 2 3 4 5
Value of Y: 4 6 8 10 12
Plot the coordinates of X and Y on a graph, and draw a line
through the points to show the relationship between the two
variables.
a) Indicate whether the graph you have drawn shows a positive or
negative relationship between X and Y.
b) Calculate the slope of the line you have drawn.
15. Weekly sales of personal computers are unaffected by the temperature
of the outside air. Draw a curve that shows the relationship between
temperature and sales of PCs. Let the Y-axis be PC sales, and let the
X-axis be temperature. What is the slope of the curve? Redraw the graph
where Y is the temperature and X is the sales of PCs. What is the slope of
the curve?
16. In 1963 an average car cost about $2000; in 1991 an average car cost
about $17,000. But on the average, what cost $100 in 1963 cost about $390
in 1991. Did the relative price of a car increase or fall compare to most
goods and services?
17. Indicate whether you expect positive or negative correlation for the
following pairs of variables. What is required to show causation?
a) Sunrise and crowing roosters.
b) Price of theatre tickets and number of theatregoers.
c) Purchases of candy and purchases of Valentine's Day cards.
18. Interpret the data on housing spending in the table below by filling
in the blanks.
Year GDP($B) Spending on Housing Overall Housing Relative
Housing as Share Price Price Housing
of GDP Price
--------------------------------------------------------------------------
1960 513.4 48.2 0.260 0.287
1970 1,010.7 94.0 0.352 0.349
1980 2,708.1 255.2 0.717 0.638
1990 5,522.2 547.5 1.132 1.153
a) What has happened to housing spending as a share of GDP over
this 30-year period? How does this differ from the figures for
health care in Tables 1.1 and 1.2 in the text?
b) What has happened to the relative price of housing over this
period? How does this compare to the change in the relative price
of health care over this period?
19. The following table shows the number of ear infections treated by
doctors at an HMO with three different-size clinics: small, medium, and
large. The larger the clinic, the more patients the doctors can handle.
Cases per Cases per Cases per Number of
Small Clinic Medium Clinic Large Clinic Doctors
-------------------------------------------------------------------------
0 0 0 0
20 30 35 1
28 42 49 2
35 53 62 3
40 60 70 4
a) Show the relationship between doctors and ear infections
treated with three curves where the number of doctors is on the
horizontal axis and the number of ear infections treated is on the
vertical axis.
b) Describe how the three relationships compare with each other.
c) Is a change in the number of doctors a shift or a movement
along the curve?
d) Is a change in the size of the clinic a shift or a movement
along the curve?
20. Suppose you own and run a small business. You spend 40 hours per week
managing the operation. By managing the business, you forgo your next best
alternative, which is working at a job for someone else that pays $10 per
hour. An accountant calculates all the money costs and revenues from the
business and tells you you're making a $300 profit per week. However, the
accountant doesn't include the opportunity cost of your time as part of
the money costs because you don't incur any cash outlay to pay for your
time. Does it make sense for you to continue in business? Explain your
answer.
21. Janine is an accountant who makes $30,000 a year. Robert is a college
student who makes $8,000 a year. Ceteris paribus, who is more likely to
stand in a long line to get a concert ticket? Explain.
22. Have you ever noticed how few gasoline stations are found in the
center of large cities? With such heavy traffic one ought to be able to
do an excellent business. Why then are there so few?
23. The acres of grass surrounding the Taj Mahal in Agra, India, are often
cut by young women who slice off handfuls with short kitchen blades. Is
this a low- or high-cost way to keep a lawn mowed?
24. By taking an airplane one can go from D to H in one hour. The same
trip takes five hours by bus. If the air fare is $90 and the bus fare is
$30, which would be the cheaper mode of transportation for someone who
could earn $6 an hour during this time ? For someone who could earn $30
an hour? $15 an hour? 25. You have waited 30 minutes in a line for the
Space Mountain ride at Disneyworld. You see a sign that says, "From this
point on your wait is 45 minutes." You must decide whether to continue in
line or to move elsewhere. On what basis do you make the decision? Do the
30 minutes you've already stood in line come into play?
26. Suppose that you are an otherwise law-abiding college professor
earning $55,000 a year. Suppose further that you are confronted with the
opportunity to steal a Garoza painting worth an estimated $100,000. The
painting can be sold for $60,000 on the black market. You know full well
that if you get caught and convicted, you could face a prison sentence of
20 years plus a fine of $15,000. The estimated arrest rate in your state
for such crimes is 15% while the conviction rate is around 30%.
a) Calculate your E(B) and E(C). Would you steal the painting?
b) What would the jail sentence have to be to make you indifferent
between stealing the painting and not? What would be the fine
have to be?
27. Consider the PPC given by the following data:
Combination Health Care All Other Goods
A 0 100
B 25 90
C 50 70
D 75 40
E 100 0
a) Plot the PPC with Health Care on the horizontal axis and AOG on
the vertical axis.
b) Calculate the opportunity cost of Health Care for each
combination.
c) If this economy produced 75 units of Health Care and 30 units
of All Other Goods, would it be solving the how problem
efficiently?
d) If at some later date this economy produced 75 units of Health
Care and 45 units of All Other Goods, what would you conclude has
happened?
28. Bill can prepare 50 hamburgers per hour or wait on 25 tables per hour.
Mike can prepare 20 hamburgers per hour or wait on 15 tables per hour. If
Bill and Mike were to open a hamburger stand, who would be the cook? Who
would be the waiter? Would Bill do both? Explain.
29. You and Friday are on a desert island, each receiving 20 quail and 200
manna. You like manna a lot better than quail and are willing to give up
1 quail in exchange for 2 manna. Friday likes quail more than manna and
is willing to give up 20 manna for 1 quail. Is there a voluntary exchange
in which you and Friday can exchange 1 quail for some manna? What are the
limits to the number of manna exchanged; that is, for 1 quail, what are
the maximum and minimum number of manna that might be exchanged?
30. Everyone knows that attending college is expensive. But this cost
frequently is calculated incorrectly and, as a result, is understated.
The following paragraph describes the financial situation of a student
attending a college. In terms of dollars, what is the opportunity cost
of attending college for the year?
Sue Student, an aspiring scholar at Marietta College, pays $13,000
in tuition to her school. She lives on campus and pays $7,000 for food
and rent to her college. Sue also spends $2,500 on other activities, such
as pizza, parties, and parking her car. She buys $600 of textbooks per
year and makes car payments of $3,800 in a year. Sue is not working this
year while in college; but if she did not go to college, she had a job
lined up that would have paid her $18,000. If she worked this year, she
would have spent $7,000 on food and rent, as well as an additional $2,500
on other expenses. Sue would, of course, have made her car payments of
$3,800 even if she did not go to college.
31. Many Americans today seem to be much more "pressed for time" than were
their grandparents. This is rather odd in view of the fact that today's
homes and workplaces are full of so many time-saving devices to which our
grandparents had no access. How would you account for this? If you
can't think of an explanation, ask yourself what causes anyone to feel
"pressed for time." What happens to the cost of engaging in an activity,
whether it's for business or for pleasure, when attractive alternative
opportunities suddenly present themselves?
32. Is it more expensive to build dams with lots of direct labor and
little machinery or with lots of machinery and little labor? Why will the
answer vary from country to country?
33. Suppose you must divide your time between studying for economics and
studying for biology. To make things simple, suppose that there are only
two choices. Suppose that the time and the grades on the finals are as
follows:
Fraction of Economics Biology
Time on Grade Grade
Economics
---------------------------------------------------------
100 100 0
90 99 20
80 97 40
70 94 60
60 90 75
50 85 85
40 75 90
30 60 94
20 40 97
10 20 99
0 0 100
a) Draw the PPC for the economics grade versus the biology grade.
Plot the economics grade on the horizontal axis and the biology
grade on the vertical axis.
b) What is the opportunity cost of increasing the time spent on
economics from 90 percent to 100 percent? From 60 percent to 70
percent?
c) Are there increasing opportunity costs from spending more time
studying economics? What about biology? Explain why this is the
case using examples from your own experience.
34. Suppose that 1 unit of labor in Asia can be used to produce 10 units
of food or 5 units of clothing. Also suppose that 1 unit of labor in
South America can be used to produce 4 units of food or 1 unit of
clothing.
a) Which country has an absolute advantage in food? In clothing?
b) What is the relative cost of producing food in Asia? In South
America?
c) Which country will export food? Clothing?
d) Draw the PPF for each country if Asia has 10 units of labor and
South America has 20 units of labor.
e) What is the range for the final terms of trade between the two
countries?