Homework 1:

Opportunity Costs, Supply & Demand

ECON 102 – Macroeconomics

Professor Schenk
Due: July 8, 2010

1. Go to www.politicalcompass.org/test and fill out the form. Which quadrant (square) do you
belong? Did this surprise you? Include a copy of the results.

2. Six key macroeconomic variables were identified last class: gross domestic product,
unemployment, inflation, interest rates, level of the stock market, and exchange rates. Search for
newspaper articles between June 28th and July 7th and find three articles that discuss one or more
of the above topics. Briefly summarize—no more than two paragraphs each—on what the article
discusses and its importance to the current economy. Include a copy of the articles as well.

3. On Monday, June 28th the class met for the first time. What were your alternative options instead
of attending class? Assume you were able to skip class that night without incurring a penalty, what
was your total opportunity cost expressed in dollars? Please note, even though activities do not
have an explicit monetary value, try to assign a dollar amount by estimating how much you would
pay to do the activity (e.g., spend time with family).

4. Recent Census estimates show the median income for an individual with a high school diploma is
$21,079. Meanwhile, the tuition for full-time Grand View students is $18,944
(Reference: http://www.census.gov/population/socdemo/education/cps2006/tab08-1r.xls).
a. What is the accounting cost of a high school graduate attending Grand View for a year?
b. What is the opportunity cost of a high school graduate attending Grand View for a year?

5. The median earnings for Bachelor’s recipients is $40,166, compared to $21,079 for high school
graduates. College students typically forgo current income to attend college in order to earn higher
income in the future. This concept is called intertemporal trade-off. Below is a table showing
current income and income later in life. The table represents a hypothetical trade-off between
earning more now (and spending less time in college) and future income.

Current Income Future Income

$10,000 $80,000
$20,000 $75,000
$30,000 $65,000
$40,000 $50,000
$50,000 $30,000

a. Draw a production possibilities frontier with current income on the x-axis.

b. What is the marginal opportunity cost of moving from $10,000 in current income to
$20,000? Similarly, what is the marginal opportunity cost of moving from $40,000 to
$50,000 in current income?
c. Does the table exhibit increase, constant, or decreasing marginal opportunity cost? How
do you know?

1
6. Consider the following supply and demand schedule:

Price Quantity Demanded Quantity Supplied

$10 100 20
$20 75 50
$30 50 80
$40 25 110

a. Draw the supply and demand curves with the y-axis labeled “price” and x-axis labeled
“quantity”.
b. What is the approximate equilibrium price?
c. Approximately how many units will be sold at the equilibrium price?

7. Assume the demand curve from Question 6 shifts. One the same graph from the previous question,
plot the following points:
Price Quantity Demanded
$10 125
$20 100
$30 75
$40 50

a. Did demand increase or decrease?

b. What was the change in quantity supplied? What was the change in supply?
c. Did price increase or decrease?

8. At an Iowa State football game 40,000 tickets were sold at $30 apiece. The game was sold out and
3,500 people did not receive tickets, although they were willing to pay the entrance fee.
a. Were the ticket prices at equilibrium, below equilibrium, or above equilibrium? How do
you know?
b. What could Iowa State’s athletic office do to prices to reduce the shortage of tickets?

9. In 1990 the United Nations (UN) placed trade sanctions on Iraqi oil. In 1996, Iraq was allowed
limited exports of oil as a part of war reparations. What was the predicted effect on the
equilibrium price and quantity of oil?
a. Price fell initially, then rose; quantity fell and then rose.
b. Price fell initially, then rose; quantity rose and then fell.
c. Price rose initially, then fell; quantity fell and then rose.
d. Price rose initially, then fell; quantity rose and then fell.

10. When the UN allowed Iraq to export some oil, was it a change in demand or quantity demanded?
Was it a change supply or quantity supplied?

11. Presume the market demand curve can be written:

p
Q d =10−
2
where Qd is the amount demanded at price p. Also, let the supply curve be:
Qs =−5+2 p
where Qs is the amount supplied at price p.
a. Draw the demand curve for prices between $0 and $10.
b. Draw the supply curve for prices between $0 and $10.
c. What is the equilibrium price?
d. How many goods will be sold at that price?

2
You’re Done!