“Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie For each of the following activities, indicate some potential opportunity costs: ‘The opportunity cost of studying for your economies exam. (Check all that apply.) oA oe oc oo. Oe Forgone wages, Cost of an economies textbook ‘Time spent sleeping. Time spent studying for other classes. Tuition and fees. ‘The opportunity cost of buying a new car instead of keeping the old one. OA OB. oc. OD. Yearly cost of gas and oil changes. Cost of insuring the car with the same insurance policy as the old ear. Value of other goods and services that could have been purchased with the money used to purchase the ear. All of the above are opportunity costs. ‘The opportunity cost of going to graduate school OA o8. oc. op. Additional hours of sleep. Forgone salary from the job you would have obtained after your undergraduate degree. Time spent not studying. Allof the above are opportunity costs. Definition Opportunity cost: The best alternative that we give up, or forgo, when we make a choice ora decision. Page |‘Student: “Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie ‘You are an intern to the editor of a small-town newspaper in Mallsburg, Pennsylvania. ‘Your boss, the editor, asks you to write the first draft of an editorial for this week's paper. ‘Your assignment is to describe the costs and the benefits of building a new bridge across the railroad tracks in the center of town. Currently, most people who live in this town must drive 2 miles through thickly congested traffic to the existing bridge to get to the main shopping and employment center. The bridge will cost the citizens of Mallsburg $25 million, which will be paid for with a tax on their incomes over the next 20 years. ‘What are the opportunity costs of building this bridge? OA. Construction costs such as noise, additional (temporary) traffic, and other delays. OB. Revenue lost by shopkeepers near the old bridge. OC. Any economic inefficiencies associated with the new income tax. OD. The value of goods and services that the city could have purchased with the tax revenue had it not built the bridge. OE. Allof the above. ‘What are the benefits that citizens wi likely receive if the bridge is built? OA. Reduced travel time for commuters and shoppers. OB. Issues of income distribution. OC. Less pollution from idling traffic. OD. The value of the goods and services that citizens could have purchased with the additional tax burden. OE. Aand C only. Definition Opportunity cost: The value of the best alternative that we forgo, or give up, when we make a choice or a decision. Page 2“Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie Kristen and Anna live in the beach town of Santa Monica. They own a small business in which they make wristbands and pot holders and sell them to people on the beach, as shown in the table below. OUTPUT PER HOUR Product Kristen Anna Wristbands 20 18 Pot Holders 4 3 Who has the absolute advantage in wristband production? | Kristen | ‘Anna Is it possible for this same person to have an absolute advantage in pot holder production? O- Yes, O No. ‘Who has a comparative advantage in the production of wristbands? | Kristen Anna Is it possible for this same person to have a comparative advantage in pot holder production? O. Yes O No Page 3“Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie Kristen and Anna live in the beach town of Santa Monica. They own a small business in which they make wristbands and pot holders and sell them to people on the beach, as shown in the table below. OUTPUT PER HOUR Product Kristen Anna Wristbands 15 12 Pot Holders 3 2 Kristen's opportunity cost of producing one pot holder is |__| wristbands, Anna's opportunity cost of producing one pot holder is [_] wristbands. Kristen Anna Neither person has a comparative advantage in the production of pot holders, Page 4Course: ECO 2301-003, Book: CaseF: Microeconomics Ie “Assignment: HW2-1 ilOster: Principles of Kristen and Anna own a smnall business in which they make wristbands and pot holders, as shown in the following table. OUTPUT PER HOUR Product Kristen Anna ‘Wristbands 20 18 Pot Holders: 4 3 Assume that Kristen works 20 hours per week in the business. Further assume Kristen is in business on her ‘own, and she devotes half of her time (10 ‘out of 20 hours) to wristbands and half of her time to pot holders. 1.) Using the line drawing tool, graph the possible combinations of pot holders and wristbands that she could produce in a week (if'she devotes all of her resources, including time, to the production of each 200d). Properly label this 'PPF, Kristen 2.) Using the point drawing tool, indicate how many of each good she actually produces in a week given the amount of time spent on each, Label this point ‘A’. Carefully follow the instructions above and only draw the required objects. Page 5 Kristen 140. 120. 100. 80. 0. 40. 20. 100 200” 300.” 400 ‘Weistbands“Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie Kristen and Anna live in the beach town of Santa Monica. They own a small business in which they make wristbands and pot holders and sell them to people on the beach, as shown in the table below. OUTPUT PER HOUR Product Kristen Anna Wristbands 20 18 Pot Holders 4 3 Suppose that Kristen and Anna can sell all their wristbands for $2.00 each and all their pot holders for $5.50 each. If each of them worked 20 hours per week, how should they split their time between wristbands and pot holders? (Assume Kristen and Anna each specialize in the production of the good in which she has a comparative advantage. Both goods will be produced.) Kristen should spend [__] hours on pot holder production. Anna should spend |_| hours on pot holder production. ‘Their maximum joint revenue is $|_] per week. Page 6“Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie Briefly describe the trade-offs involved in the following decision. Specifically, what are the opportunity costs associated with the decision? Pay particular attention to the trade-offs be and future consumption. After a stressful senior year in high school, Sherice decides to take the summer off instead « going to college. OA. She sacrifices the value of goods and services that could have been purchased with tk in order to obtain more leisure today. OB. To the extent that this income will need to be replaced to finance her education, she s for present consumption (of leisure) _——— — es OC. She sacrifices leisure today in order to purchase more goods and services with the ine o = eee OD. Aand Bonly. Definition Opportunity cost: The value of the alternative that you forgo, or give up, when you make a choice or a decision. Page 7“Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie 8 The countries of Figistan and Blah are small countries in the South Pacific. Both produce Figistan and Blah and timber. Each island has a labor foree of 1 The table below gives production per month worker in each country. It represents the productivity of one worker for one month. A: productivity is constant and identical for eac! worker in each country, Baskets of Board F Fruit of Timl Figistan workers 12 6 Blah workers 30 10 Which country has a comparative advantage 0°48 i216 20 24 26 a2 Neither country Baskets of fit thousands) Figistan Blah Which country has a comparative advantage Figistan ‘Neither country | Blah production of timber? Use the table to sketch the PPFs for both cou Using the line drawing tool, sketch separate production possibilities frontiers for both cov Properly label each PPF. Carefully follow the instructions above and « draw the required objects. Page 8“Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie Related to the Economics in Practice: Frozen Foods and Opportunity Costs An analysis of a large-scale survey of consumer food purchases by Mark Aguiar and Erik Hurst indicates that retired people spend less for the same market basket of food than working people do. Use the concept of opportunity cost to explain this fact. OA. The opportunity cost of time for retired people is identical to the opportunity cost of time for working people, because each minute is equally valuable regardless of ‘one's employment status. OB. The opportunity cost of time for retired people is lower than the opportunity cost of time for working people, so retirees choose to spend more time shopping for lower-priced items compared to people who are still working. OC. The opportunity cost of time for retired people is higher than the opportunity cost of time for working people, so retirees choose to search longer for bargains for the items they buy. OD. The opportunity cost of time for retired people is lower than the opportunity cost of time for working people, so retirees spend more time pursuing their favorite leisure activities and less time shopping for necessities. Economies in Practice Frozen Foods and Opportunity Costs In 2012, $44 billion of frozen foods were sold in U.S. grocery stores, one quarter of it in the form of frozen dinners and entrées. In the mid-1950s, sales of frozen foods amounted to only S1 billion, a tiny fraction of the overall grocery store sales. One industry observer attributes this growth to the fact that frozen food tastes much better than it did in the past. Can you think of anything else that might be occurring? ‘The growth of the frozen dinner entrée market in the last 50 years is a good example of the role of opportunity costs in our lives. One of the most significant social changes in the U.S. economy in this period has been the increased participation of women in the labor force. In 1950, only 24 percent of married women worked; by 2013, that fraction had risen to 58 percent, Producing a meal takes two basic ingredients: food and time. When both husbands. and wives work, the opportunity cost of time for housework— including making ‘meals—goes up. This tells us that making a home-cooked meal became more expensive in the last SO years. A natural result is to shift people toward labor-saving ways to make ‘meals. Frozen foods are an obvious solution to the problem of increased opportunity costs. Another, somewhat more subtle, opportunity cost story is at work encouraging the consumption of frozen foods. In 1960, the first microwave oven was introduced. The spread of this device into America's kitchens was rapid. The microwave tured out to be a quick way to defrost and cook those frozen entrées. So this technology lowered the Page 9“Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie (cont.) opportunity cost of making frozen dinners, reinforcing the advantage these meals had over home-cooked meals. Microwaves made cooking with frozen foods cheaper once opportunity cost was considered while home-cooked meals were becoming more expensive, The entrepreneurs among you also might recognize that the rise we described in the ‘opportunity cost of the home-cooked meal contributed in part to the spread of the microwave, creating a reinforcing eyele. In fact, many entrepreneurs find that the simple tools of economics—like the idea of opportunity costs—help them anticipate what products will be profitable for them to produce in the future. The growth of the two-worker family has stimulated many entrepreneurs to search for labor-saving solutions to family tasks. The public policy students among you might be interested to know that some researchers attribute part of the growth in obesity in the United States to the lower opportunity costs of making meals associated with the growth of the markets for frozen foods and the microwave. (See David M.Cutler, Edward L. Glaeser, and Jesse M. Shapiro, "Why Have Americans Become More Obese?" Journal of Economic Perspectives, Summer 2003, 93-118.) Definition Opportunity cost: The best alternative that we give up, or forgo, when we make a choice or a decision. Page 10‘Student: “Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie 10, [Related to the Economics in Practice in this section] High school football is arguably ‘more popular in West Texas than in any other region of the country. During football season, small towns scem to shut down on Friday nights as local high school teams take to the field, and for the following week the results of the games are the talk of cach town, Taking into consideration that many of these towns are one hundred or more miles away from any medium-sized or large cities, what might be an economic explanation for the extreme popularity of high school football in these small West Texas towns? OA. Few entertainment substitutes are available. OB. Opportunity costs are relatively low. OC. Only a small share of household budgets are expended on the games. OD. All of the above are plausible. OF. Aand B only. Econ in Practice Trade-Offs among the Rich and Poor Inall societies, for all people, resources are limited relative to people's demands. There are, however, quite large differences in the kinds of trade-offs individuals face in rich versus poor countries. In 1990, the World Bank defined the extremely poor people of the world as those earning less than $1 a day. Among development economists and policy makers, this figure continues to be used as a rough rule of thumb. In a recent survey, Abhijit Banerjee and Esther Duflo, two MIT economists, surveyed individuals living at this level in 13 countries across the world.' What did they learn about the consumption trade-off faced by these individuals versus consumers in the United States? Tt should not surprise you to learn that for the extremely poor, food is a much larger component of the budget. On average over the 13 countries, between 56 percent and 78 percent of consumption was spent on food. In the United States, just under 10 percent of the average budget goes to food. Even for the poorest consumers, however, biological need is not all determining. The Banerjee and Dutflo study finds that in Udaipur, India, almost, 10 percent of the typical food budget goes to sugar and processed foods rather than more nutritionally valuable grains. So even at these very low levels of income, some choice remains. Perhaps more interestingly, almost 10 percent of the budget of those surveyed goes to weddings, funerals, and other festivals. In societies with very few entertainment outlets, Banerjee and Duflo suggest we may see more demand for festivals, indicating that even in extremely poor societies, household choice plays a role. " Abpijit Banerjee and Esther Duflo, "The Economie Lives ofthe Poor,” Journal of Economie Perspective, Page I‘Student: Dat Time: 10, (cont.) IL “Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie Winter 2007, 141-167. ‘The nation of Rougarou is able to produce turnips and potatoes in combinations represented by the data in the following table. Each number represents thousands of bushels. A BC OD &§& Tumips 100 «90~=O704CO Potatoes 010203040 Explain why the data shows that Rougarou experiences increasing opportunity costs. OA. For every bushel of potatoes it produces, it must give up increasing amounts of turnips. OB. Potatoes must be given up to produce turnips. OC. Resources are scarce, OD. All of the above. Page 12“Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie production possibilities specialization and trade production The process of converting inputs into useful output is called natural resources These inputs are also known as P the factors of production key inputs Which of the following is not included in this list of inputs? OA. Energy. O® Capital Oc. Land. OD. Labor. Definition Inputs: Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants, Definition Output: Goods and services of value to households ‘Suppose that your grade point average and academic record are the most important thing to you. ‘What is the opportunity cost of spending 2 hours studying for a biology exam? OA. Your lost income from not working, OB. Time spent bowling with friends. OC. Basic leisure time. OD. Time spent studying for one of your other classes. Page 13“Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie 14, ‘Suppose that a simple society has an ‘economy with only one resource, labor. PPE Labor can be used to produce only two i 1 commodities =Y, a necessity good (food), and ¥, a luxury good (music and 1.0 merriment). Suppose that the labor force consists of 100 workers, One laborer can produce either 5 units of necessity per ‘month (by hunting and gathering) or 10 units of luxury per month (by writing songs, playing the guitar, dancing, and so on). Using the line drawing tool, draw this, economy's Production Possibilities Frontier (PPE) (Be sure that the PPF intersects both the Y-axis and the X-axis.) (© 190 260 300 40 580 600 700 800 Necessity (X) Carefully follow the instructions above and only draw the required object. ‘What is the meaning of the X- and intercepts? OA. These points demonstrate an inefficient use of resources. OB. These points show the preferred amount of goods and ¥ that a society will produce. OC. These are the limits of production if all resources are used to produce both goods. OD. These are the limits of production if all resources are used to produce only one good. ‘Suppose the economy produced at a point inside the PPF. Why would an economy produce at this point? Page 14“Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie 14, COA. Unemployment or underemployment, (cont) OB. Lack of the best possible technology. OC. Inefficient production at full employment. OD. Allof the above. Suppose you succeeded in lifting your economy to a point on its PPF. What point ‘would you choose? How might your small society decide the point at which it wanted tobe? OA. This depends on the value the society places on necessities and luxuries. OB. The society will choose a ‘combination that includes more luxuries than necessities. OC. The society will choose a combination that includes the same amount of necessities and luxuries. OD. Aand C only. Definition Production Possibilities Frontier (PPF): A graph that shows all the combinations of goods and services that can be produced if all of society's resources are used efficiently. 15. Which of the following would an economist classify as capital? OA. a guitar used by a musician OB. a$50 bill OC. a corporate bond OD. apost office employee Page 15“Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie The concept of trade-offs would become irrelevant if OA. we were dealing with a very simple, one-person economy. OB. capital was eliminated OC. poverty was eliminated. OD. scarcity was eliminated, The table below represents the output of Poems or TV Commercials per day by two authors: Krystal or Mark: Krystal Mark Writing Poems 8 12 ‘riting TV Commercials 2 4 For Krystal, the opportunity cost of writing one TV commercial is OA. 1/4 of a poem. 8. 2 poems. © 4 poems. OD. 6 poems. The table below represents the output of Poems and TV Commercials per day by two authors: Krystal or Mark: Krystal Mark Writing Poems 8 12 Writing TV Commercials 2 4 ‘To maximize total production, OA. Mark should specialize in writing TV commercials and Krystal should specialize in writing poems. OB. Krystal should write poems and write TV commercials, but Mark should only write poems OC. Krystal should specialize in writing TV commercials and Mark should specialize in writing poems, OD. Krystal and Mark should both split their time between writing poems and writing, TV commercials. Page 16“Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie 19, ‘Someone has a comparative advantage in producing a good if they can produce that good OA. ata lower opportunity cost OB. using more capital and less labor. OC. in greater quantities. ©. with more labor and less capital 20. Refer to the information provided in the figure at right to answer the question that follows, According to the figure, as the economy moves from Point 4 to Point E, the opportunity cost of motorcycles, measured in terms of hybrid cars, Hybrid cars OA. remains constant. OB. increases. Ol. decreases. OD. initially increases, then decreases Mororeyeles Page 17Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics He “Assignment: HW2-1 Yes. No. Kristen 40. 120. Pot holders 0 10 200" 900° 400" 800, Wristbands ANSWERS - Page |“Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics Ie FFigistan and Blah 0°46 12 16 20 28 2832 36 40 Baskets of fruit (thousands) production the factors of production A D ANSWERS - Page 2“Assignment: HW2-1 Course: ECO 2301-003, Book: Case/Fair/Oster: Principles of Microeconomics He 15. 18. Luxury (¥) poo PPE 100- PPF (© 180 260 300 400 600 600 700 800 900 1,400 Necessity (X) ANSWERS - Page 3