MicroEcon. Assignment 1
MicroEcon. Assignment 1 Econ 2304 - Microeconomic Principles
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This 9 page Class Notes was uploaded by Sarah Brucker on Friday September 2, 2016. The Class Notes belongs to Econ 2304 - Microeconomic Principles at University of Houston taught by W. Alexander in Fall 2016. Since its upload, it has received 375 views. For similar materials see Econ 2304 in Microeconomics at University of Houston.
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Date Created: 09/02/16
Micro Economics Homework 1 Understanding opportunity cost Before you started applying for college, a job recruiter offered you a fulltime cashier position at a local retail store earning an aftertax salary of $24,000 per year. However, you turn down this offer and attend your first year of college. The additional monetary cost of college to you, including tuition, supplies, and additional housing expenses, is $38,000. Answer: $62,000 Explanation: The total cost of a choice includes both the actual monetary amount paid and the opportunity cost of your time incurred by making that choice over another. By turning down the cashier job (and going to college), you forgo earning your annual salary of $24,000, so this is the opportunity cost of your time from attending your first year of college. You also choose to pay $38,000 for tuition, supplies, and additional housing expenses. So your total cost of attending your first year of college is $62,000 ($24,000+$38,000). Nevertheless, you decide to attend college, so the value of the benefits must exceed the cost. Determining opportunity cost Juanita is deciding whether to buy a suit that she wants, as well as where to buy it. Three stores carry the same suit, but it is more convenient for Juanita to get to some stores than others. For example, she can go to her local store, located 15 minutes away from where she works, and pay a markedup price of $103 for the suit: Travel Time Each Way Price of a Suit Store (Minutes) (Dollars per suit) Local Department Store 15 103 Across Town 30 85 Neighboring City 60 63 Juanita makes $16 an hour at work. She has to take time off work to purchase her suit, so each hour away from work costs her $16 in lost income. Assume that returning to work takes Juanita the same amount of time as getting to a store and that it takes her 30 minutes to shop. As you answer the following questions, ignore the cost of gasoline and depreciation of her car when traveling. Complete the following table by computing the opportunity cost of Juanita's time and the total cost of shopping at each location. Opportunity Cost of Time Price of a Suit Total Cost Store (Dollars) (Dollars per suit) (Dollars) Local Department Store 16.00 103 119.00 Across Town 24.00 85 109.00 Neighboring City 40.00 63 103.00 Explanation: The opportunity cost of driving to each location is what Juanita gives up to make the trip. Getting to the local store takes her 15 minutes, and returning to work takes her 15 minutes (a total of 30 minutes). Shopping takes her another 30 minutes. Since she loses $16 per hour by not working, the opportunity cost of her time is (2 x 15) + 30 = 1 hour = $16. Because the price she pays at this store is $103, she faces a total cost of $119 ($16 x $103). If Juanita buys her suit at the store across town, the opportunity cost of her time is 90 minutes—30 minutes each to drive there, shop, and return to work. The price she pays is $85, so she faces a total cost of $109 ($24 + $85) . Finally, if Juanita buys her suit at the store in the neighboring city, the opportunity cost of her time is 2.5 hours—60 minutes to drive there, 30 minutes to shop, and 60 minutes to return to work. The price she pays is $63, so she faces a total cost of $103 ($40 + $60). Assume that Juanita takes opportunity costs and the price of the suit into consideration when she shops. Juanita will minimize the cost of the suit if she buys it from the: Answer: Store in the neighboring city Explanation: Juanita will base her decision on the total cost of the suit, including the opportunity cost of the time required to obtain the suit and the price of the suit. In this scenario, she incurs the lowest total cost if she buys her suit from the store in the neighboring city. A decision at the margin Kate is a hardworking college sophomore. One Sunday, she decides to work nonstop until she has answered 100 practice problems for her chemistry course. She starts work at 8:00 AM and uses a table to keep track of her progress throughout the day. She notices that as she gets tired, it takes her longer to solve each problem. Time Total Problems Answered 8:00 AM 0 9:00 AM 40 10:00 AM 70 11:00 AM 90 Noon 100 Use the table to answer the following questions. The marginal, or additional, gain from Kate’s second hour of work, from 9:00 AM to 10:00 AM, is: Answer: 30 The marginal gain from Kate’s fourth hour of work, from 11:00 AM to noon, is: Answer: 10 Explanation: By 9:00 AM, Kate has answered 40 problems. By 10:00 AM, Kate has answered 70 problems. So the marginal, or additional, gain from her work between 9:00 AM and 10:00 AM is 30 problems (70 – 40). By 11:00 AM, Kate has answered 90 problems. By noon, Kate has answered 100 problems. So the marginal gain from the fourth hour, 11:00 AM to noon, is 10 problems (100 – 90). Later, the teaching assistant in Kate’s chemistry course gives her some advice. “Based on past experience,” the teaching assistant says, “working on 35 problems raises a student’s exam score by about the same amount as reading the textbook for 1 hour.” For simplicity, assume students always cover the same number of pages during each hour they spend reading. Given this information, in order to use her 4 hours of study time to get the best exam score possible, how many hours should she have spent working on problems, and how many should she have spent reading? 0 hours working on problems, 4 hours reading 1 hour working on problems, 3 hours reading 3 hours working on problems, 1 hour reading 4 hours working on problems, 0 hours reading Explanation: Kate should make her decision at the margin. Each hour, she should select the option that will improve her exam grade by the largest amount. If she can do more than 35 problems in an hour, working on problems will help raise her grade more for that hour than reading would. The marginal gain from the first hour is 40 problems. She will stop there, because she will get only 30 problems done if she spends the second hour working on problems. Therefore, she should stop working on problems after 1 hour and spend her remaining time reading. Scarcity, opportunity cost, and marginal analysis Ana is training for a triathlon, a timed race that combines swimming, biking, and running. Consider the following sentence: Because her pool sessions are helping her swim more quickly, Ana plans to reduce by 1 hour per week the time she spends training on the bike and increase by 1 hour the time she spends in the swimming pool; however, her husband says that she should stop doing any biking and running and spend all 20 hours per week in the pool. Which basic principle of individual choice does Ana's plan illustrate that her husband's advice does not? Resources are scarce. All costs are opportunity costs. Many decisions are made on the margin. People usually exploit opportunities to make themselves better off. Explanation: Ana's decision about pool time versus bike time is a howmuch decision. Both bike time and pool time can help reduce her race time. Because pool time seems to be having a greater effect at the moment, it makes sense for her to spend a bit more time in the pool and a bit less time on the bike. However, this does not mean that it makes sense for her to spend all her time in the pool and no time on the bike. If she cut out all training on the bike, the value of a little bit of bike training might be higher than the value of the last hour of pool training. Ana does not treat biking versus swimming as an allornothing decision. She makes small changes at the margin in the number of hours spent training for each activity. Kevin is training for a triathlon, a timed race that combines swimming, biking, and running. Consider the following sentence: Each hour he spends swimming is an hour that he can't spend biking or running. Which basic principle of individual choice does this sentence best illustrate? All choices have opportunity costs. People usually exploit opportunities to make themselves better off. Kevin has an incentive to spend more time on swimming than on biking or running. Kevin can use time most efficiently by spending the same amounts of time on swimming, biking, and running. Explanation: All choices have opportunity costs. If Kevin decides to swim, he forgoes the time that he could have spent biking or running. So the opportunity cost of an hour of swimming is an hour of biking or an hour of running, whichever is the highestvalued alternative Kyoko must sacrifice in order to spend an additional hour swimming. There is no information on the effectiveness of an extra hour of swimming as compared to that of an extra hour of biking or running. Therefore, you don't know whether Kevin has an incentive to spend more time on swimming. Similarly, you don't know whether it is most efficient for Kevin to spend the same amount of time on each of the three activities. Teresa is training for a triathlon, a timed race that combines swimming, biking, and running. Consider the following sentence: Teresa has only 20 hours per week that she can devote to training for her race. Which basic principle of individual choice does this sentence best illustrate? People usually exploit opportunities to make themselves better off. Many decisions are made on the margin. Resources are scarce. All costs are opportunity costs. Explanation: Teresa faces limited choices due to time constraints. If she had an unlimited amount of time, she would spend many more hours training for the triathlon. However, time, the key resource for her training, is scarce, and Teresa has only 20 hours to spend. Distribution systems and incentives Suppose that in the hypothetical country of Trashland, garbage cans are distributed based on government policy. This distribution rule gives the residents of Trashland an incentive to: Answer: Spend time lobbying government officials. Explanation: Economists study the choices that people make as they seek to obtain the greatest benefits at the least possible costs. If owning a good will maximize people’s benefits in this sense, they will choose to do things to help them obtain that good. As a result, the way that goods are distributed influences how people act. If the distribution of goods is according to government policy, people have an incentive to spend time influencing policy by lobbying government officials. Different rules for distributing goods will change individuals’ incentives. For example, if a good is given to the person willing to pay the most, then people have an incentive to earn money so that they can purchase the goods that they desire. Similarly, if the next person in line will be awarded a good, people have an incentive to hold their place in the line. The interaction of individual choices Neha has opened a new startup company in web design. Within the first month of business, the startup agrees to maintain an accounting firm’s website in exchange for someone doing their tax returns. Which of the following principles of economic interaction best describes this scenario? Trade can make everyone better off. All costs are opportunity costs. When markets do not achieve efficiency, government intervention can improve overall welfare. Markets allocate goods effectively. Explanation: When tasks are divided according to who can provide them at the lowest cost, specialization occurs— which can lead to greater output. Economists refer to this concept as gains from trade. Inflation and unemployment Suppose that the government believes the economy is not producing goods and services at its optimal level. In an attempt to stimulate the economy, the government increases the quantity of money in the economy by printing more money. This monetary policy increases the economy's demand for goods and services, leading to higher product prices. In the short run, the change in prices induces firms to produce more goods and services. This, in turn, leads to a lower level of unemployment. In other words, the economy faces a tradeoff between inflation and unemployment: Higher inflation leads to lower unemployment. Explanation: When the government uses monetary policy to increase the quantity of money, then the demand for goods and services increases. This change in the demand will lead to higher prices, causing firms to produce more goods and services—which requires more workers. Therefore, higher prices lead to lower unemployment levels in the short run. In the long run, however, an increase in the quantity of money will lead only to an increase in the price levels but will have no effect on the unemployment level. The economy faces a tradeoff between inflation—an increase in the overall price levels—and unemployment in the short run. In particular, higher inflation rates usually correspond to lower unemployment levels, while lower inflation rates correspond to higher levels of unemployment. Material taken from Aplia assignment 1
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