Econ 211

Answers to Selected Problem Set 1 Questions

1. If you view the calorie content of fatty foods as part of the "price" you pay to eat such foods, then a "low-calorie" product may be viewed as cheaper, therefore people are more likely to increase their consumption of the product. It is entirely possible that people could actually end up eating a lot more of these products--so much more that they begin to put on more weight.

2. The new law might actually encourage pregnant women and disabled individuals to increase the amount of their time spent waiting in lines since they will be able to take "cuts" into lines. Some pregnant women and disabled folks might actually sell their services as professional line waiters! In addition, some people might pretend to be pregnant or disabled in order to take advantage of the law.

3. We may safely assume that people who are "definitely" willing to spend $500 for an air bag think it might save their life in an accident. May we infer from the study cited that more than two-thirds of these people would rather die in an accident than fork over $1000? Not really. An air-bag safety system is not always a life-saving good. Most of the ones that are bought will never save a life. Those who are willing to pay $500 but not $1000 believe that the increased probability of their having an accident which they survive because of an air bag is great enought to warrant the expenditure of $500 but not great enough to justify a $1000 expenditure.

4. The relative price of gasoline had decreased from 1973 to 1979. It is not surprising then that people will buy more gasoline.

5. How would you measure the cost of cutting grass? What are the labor and capital costs involved?

6. Consider the following table. It is cheaper for low wage workers to take the bus. It is cheaper for high wage workers to take the plane. The cost of travel is the same for the $15 worker. Don't foget: Time is money!

7. Normative questions generally elicit more argument among economists. Normative: a, d. Positive: b, c, e

8. Normative: a, c, e.

9. The time already spent waiting in line shouldn't matter. The lost time represents a sunk cost--and there's not much you can do about sunk costs. People's actions are (assumed to be) based on the marginal costs and benefits of actions yet to be taken.

10. Hmm...which came first? the barbecue or the friends?

11. Rational art thief?
(a) The expected MB = $140,000; the expected MC = [($70,000)(10) + $5,000](.20)(.60) = $84,600. Since MB > MC, a rational thief would steal the painting.
(b) To find the optimal jail sentence, set MC = $140,000 (since that's the cost that would make the thief unwilling to steal the painting) and solve for J. Thus: MC = [(70,000)(J) + 5,000](.20)(.60) = 140,000 ==> J = 16.6 years.
(c) You can find the optimal fine and joint probability in the same fashion: Optimal Fine = $466,666
(d) Optimal Joint Probability = 0.198 or 19.8%.

12. Hmm...how does the change in speed limits affect driving incentives? Raising the speed limit on interstate highways might be expected to attract those drivers who like to drive fast. Thus, fewer fast drivers will be on the non-interstate highways--making these roads relatively safer.

13. When economists measure costs we not only count actual cash outlays, but also foregone opportunities. In this case, the accountant has calculated that your (accounting) profits are $300 per week. The accountant has neglected to include the cost of your time in the profit calculation--in other words, the accountant has underestimated total costs. The accountant should have included $400 (= 40 hours per week * $10 per hour) as part of your cost of doing business. What this all means is that you would make more money working for someone else than running your own business.

14. Why do people smoke cigarettes? An economist might reason that people expect to benefit from cigarette consumption. Smokers must believe that the costs of smoking are so low (and far off into the future) that the immediate benefits simply outweigh the costs. Arguments to ban smoking usually assume that smoking imposes costs on non-smokers or that smokers don't really know what's in their best interest.

15. The following table illustrates the cost of the alternatives facing Sue Student. The opportunity cost of attending college is the difference between going to college and not going to college--$36,600.

16. a) capital, b) land, c) capital, d) land, e) labor, f) capital.

17. Who ultimately pays all taxes?

18. See Chapter 2.

19. This is a very normative question. What's your opinion? What's your theory?

20. PPC (or PPF if you wish).
a) A to B: 10 units of AOG (all other goods); B to C: 20 units of AOG; C to D: 30 units of AOG; D to E: 40 units of AOG.
b) No, since this combination would put the country inside its PPC indicating some type of inefficiency (eg, unemployment).
c) Since this combination is outside the current PPC, there must've been an increase in resources or technology to allow the economy to produce such a combination.

21. While it is clear that Jennifer has an absolute advantage over Judy, you need to determine who holds the comparative advantage in preparing documents and who holds the comparative advantage in managing workers. For Jennifer, the opportuntiy cost of managing one worker is 2.5 documents. For Judy, the opportuntiy cost of managing one worker is 3 documents. Thus, Jennifer has the comparative advantage in managing workers since her opportunity cost is lower. Judy, by default, has the comparative advantage in preparing documents. [For Judy, the opportunity cost of preparing one document is managing 0.33 workers. Jennifer's opportunity cost of preparing one document is managing 0.4 workers. As you can see, Judy's opportunity cost of preparing documents is lower--therefore she has the comparative advantage in document preparation.]

22. We did this one in class.

23. Trade between US and South Korea.

a) US has absolute advantage in both goods.
b) US has comparative advantage in wheat, SK has comparative advantage in steel.
c) SK would export steel and import wheat; US would export wheat and import steel.

24. Trade depends on comparative advantage, not absolute advantage. If each country specializes in the production of those goods in which it has a comparative advantage, it will generate a surplus that it will be able to trade to other countries to obtain goods for which it doesn't have a comparative advantage. See the last table from the question above to demonstrate this point.

25. Golf balls and clubs.
a) No graph provided.
b) Yes, PPFs exhibit constant opportunity cost. In other words, they are linear PPFs.
c) Country A has an absolute advantage in producing Golf Balls and Clubs.
d) Country A has a comparative advantage in producing Golf Clubs (their opportunity cost for each Club is 4 Balls; Country B's opportunity cost for each Club is 6 Balls). Country B has the comparative advantage in Balls.
e) Country A would export Clubs and B would export Balls.