ECON 104 -Macroeconomic Analysis (Homework Ch. 01)

A+ Solutions

1. Understanding opportunity cost

You work as an assistant coach on the university basketball team and earn $11 per hour. One day, you decide to skip the hour-long practice and go to the county fair instead, which has an admission fee of $10.

The total cost (valued in dollars) of skipping practice and going to the fair (including the opportunity cost of time) is ____

2. 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 marked-up price of $100 for the suit:

Juanita makes $56 an hour at work. She has to take time off work to purchase her suit, so each hour away from work costs her $56 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.

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 _______

3. Equality versus efficiency

Match each definition to its appropriate concept.

All societies face a trade-off between equality and efficiency.

If the United States government raises the income taxes on the wealthiest Americans, while increasing welfare payments to the poorest Americans, the result will likely be _______ in efficiency and ______ in equality in the United States.

4. A decision at the margin

Ana is a hard-working 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.

Use the table to answer the following questions.

The marginal, or additional, gain from Ana’s second hour of work, from 9:00 AM to 10:00 AM, is ____ problems.

The marginal gain from Ana’s fourth hour of work, from 11:00 AM to noon, is  ______ problems.

Later, the teaching assistant in Ana’s chemistry course gives her some advice. “Based on past experience,” the teaching assistant says, “working on 25 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

2 hours working on problems, 2 hours reading

3 hours working on problems, 1 hour reading

5. Changes in incentives

Because of the violent nature of the sport, professional American football players are at risk of suffering concussions (or brain injuries) during the violent collisions that occur between players during the game. Violent collisions involving hits to the head are particularly risky.

Suppose the commissioner of the National Football League (NFL) institutes a rule requiring players to wear a new, lighter helmet that is designed to reduce head trauma during collisions between players on the field.

While the new helmets ____ the probability of a concussion resulting from each individual collision, at the same time the new helmets could also give football players an incentive to play more _____, which could potentially _____ the amount of violent collisions and thus the number of concussions suffered by NFL players, all else equal.

6. Scarcity, opportunity cost, and marginal analysis

Juanita is training for a triathlon, a timed race that combines swimming, biking, and running.

Consider the following sentence: Juanita has only 20 hours this week that she can devote to training. Each hour she spends swimming is an hour that she can’t spend biking or running.

Which basic principle of individual choice do these statements best illustrate?

Juanita can use time most efficiently by spending the same amounts of time on swimming, biking, and running.

People usually exploit opportunities to make themselves better off.

People face trade-offs.

Juanita has an incentive to spend more time on swimming than on biking or running.

7. The interaction of individual choices

People in the U.S. state of Iowa eat both corn and potatoes. It is technically possible for farmers to grow both corn and potatoes in Iowa, yet almost no farmers grow potatoes. Instead, every year, Iowa exports corn and imports potatoes from the U.S. state of Idaho, where farmers specialize in potatoes.

Which of the following principles of economic interaction best describes this scenario?

When markets do not achieve efficiency, government intervention can improve overall welfare.

Trade can make everyone better off.

There is a tradeoff between equality and efficiency.

All costs are opportunity costs.

8. Property rights and market failures

Loggers are much ____ likely to supply wood to the market if property rights are not enforced.

In the presence of market failures, public policy can improve economic efficiency.

Classify the source of market failure in each case listed.

9. Factors that influence standard of living

Which of the following factors played the biggest role in the slow growth of average incomes in the United States during the 1970s and 1980s?

Increased competition from India

Disinflation of the dollar

Slow growth in productivity

Increased competition from Japan

10. Inflation and unemployment

Suppose that, in an attempt to combat severe unemployment, the government decides to increase the amount of money in circulation in the economy.

This monetary policy    the economy’s demand for goods and services, leading to    product prices. In the short run, the change in prices induces firms to produce goods and services. This, in turn, leads to a    level of unemployment.

In other words, the economy faces a trade-off between inflation and unemployment: Higher inflation leads to unemployment.