Scarcity
1.  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. 

2. 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 operating 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? 

3. 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.

4. 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 time   Economics Grade  Biology Grade
on 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. 

5. 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. 

Supply and Demand
6. What is the effect of each of the following events on the equilibrium
price and quantity of personal computers in the US market? 
a) The price of microprocessor chips decreases. 
b) The price of monitors increases. 
c) The government restricts the entry of foreign-made computers into the
U.S. 
d) The government reduces income taxes for all consumers. 
e) The price of printers decreases and plastic becomes less expensive. 
f) The price of software increases and the government imposes a tax on all
computer manufacturers. 

7. Consider the market for gasoline in the US.  Determine what happens to
the equilibrium price and quantity of gasoline under each of the following
situations: 
a) price of oil rises.  
b) automobile prices decrease. 
c) the economy enters a recession; consequently, incomes are dropping. 
d) several new petroleum firms enter the US market. 
e) it's the middle of summer and people are on vacation and a huge oil
field is discovered off the coast of Cleveland. 
f) environmentalists put pressure on oil companies to shut down the
Alaskan pipeline and consumers expect the price of gasoline to fall next
month.

8. The number of compact discs sold in markets has more than quadrupled
over the past three years. The average price of a compact disc, however,
has fallen. Use supply and demand analysis to explain this phenomenon. 

9. The number of doctors in the US has decreased over the last decade. 
The wage rate of doctors has increased over the same time period. Use
supply and demand analysis to explain this phenomenon. 

10. Which of the following statements uses incorrect terminology? Explain. 
a) "The recent fare war among the major airlines has increased the demand
for air travel." 
b) "The recession of 1990-1992 has caused the demand for air travel to
fall." 

11. Suppose that the market price for personal computers has fallen over
the course of a year from $1500 to $1300. At the same time, the number of
computers bought has risen from 5 million to 6.5 million.  Suggest an
explanation for this data using supply and demand. 

12. Distinguish between a change in demand and a movement along a given
demand curve.  Explain the chief causes of each.  Now distinguish between
a change in supply and a movement along a given supply curve.  Explain the
chief causes of each. 

13. When the price of water in southern California rose, some analysts
attributed the change to the drought, others attributed it to more people
living in southern California, and those people who live there buying
bigger swimming pools. Since both the drought and the influx of people
who are getting richer occurred simultaneously, how would you determine
which set of analysts had described the dominant cause of the price
increase? 

14. True or false: Some cities raise revenue by levying a tax on employers
equal to a certain number of dollars per employee per year. This is a good
thing for workers, because workers are not taxed. 

15. Far fewer babies are currently offered for adoption in the United
States than couples want to adopt.  Would you call this a shortage?  Why
doesn't the price of an adopted baby rise?  By what criteria are the
scarce babies rationed to demanders? 

16. "If the DEA intercepts 100 tons of cocaine, the supply of cocaine will
fall. This will cause the price to rise, which will increase the supply
back to its original position". True, false, or uncertain. Explain. 

17. Assume that the demand for heroin is inelastic, and assume further
that users get the funds to pay for heroin by stealing. Suppose the
government increases penalties on heroin suppliers and thereby reduces
supply. What will happen to the price of heroin? What will happen to the
amount of crime committed by heroin users?

Market Failure
18. An environmentalist argues that all pollution must be eliminated. How
would you try to convince her that her position is both unreasonable and
impractical?

19. Take a perfectly competitive firm that produces external benefits for
the community. Is this firm producing too much or too little?

20. Airport noise is certainly a negative externality. Why would people
choose to live near airports? 

21. Fishermen who use nets to catch tuna also sometimes net dolphins,
which, because they are mammals, drown before they can be released.
Currently, the price and quantity of tuna determined by the market does
not take into account the cost to society of killing the dolphins
(marginal external cost). Listed below are market demand and supply
schedules for tuna as well as the marginal external social costs
associated with dolphins killed in the process of catching tuna. All costs
and values are listed in terms of dollars per pound of tuna. 

a) What output and price would the free market generate? Why? 
b) What is the socially optimal output and price? Why?
c) In order to obtain the socially optimal equilibrium, what would the
appropriate per-pound tax on suppliers need to be? Of this tax, how much
would consumers end up paying?

22. "Monopoly is good for producers but bad for consumers. The gains
of the former offset the losses of the latter. On balance, there is no
reason to think that monopoly is bad for the economy." Evaluate.

23. Is price discrimination harmful to the US economy? Explain why or why
not. What three conditions are necessary for successful price discrimination?

24. Which of the following are monopolists: (a) your local newspaper, (b)
the Cleveland Indians, (c) General Motors, (d) the US Postal Service, (e)
Michael Jackson, (f) the American Medical Association? Explain why or why
not.

25. A price discriminating seller will charge a higher price to those
market segments which have the relatively more inelastic demand. For each
of the markets below, indicate which segment you think will be charged the
higher price. Explain why you think that segment has a lower elasticity of
demand.  
a) Sales of new boats to those who presently own a boat, or those
who do not own a boat.  
b) Sales of movie tickets to children or adults. 
c) Sales of airline tickets to business travelers or a couple on vacation. 
d) Sales of cosmetic surgery to the poor or the rich. 

26. It has been argued that the development of the railroad in the middle
of the nineteenth century substantially reduced the market power of many
American manufacturing firms. Explain.

27. If an organization like the Mafia effectively monopolized illegal
activity, would you expect to observe less crime than under competitive
free entry into this "industry"?