Homework 1 Answers

Economics 101-300 Winter, 2008 Homework Problem Set #1 Problems: 1) Using an understanding of economic method, explain why toilet paper is or is not scarce. Economic scarcity is a question of the availability of a good relative to people?s wants for that good. Anything that has a positive price is considered to be scarce because if there were enough to satisfy everyone?s needs a good would be free. 2) Here is an example of how a topic addressed in the previous question might be presented as a multiple choice problem: Is toilet paper scarce? a) No, because you can buy it at any supermarket. b) Yes, because there?s only a limited supply compared to people?s wants for it. c) No, because toilet paper is plentiful and cheap. d) Yes, because there?s only so much toilet paper in existence. e) It is impossible to determine the answer to this question. 3) Suppose Caitlin has a chance to spend a 3-day weekend in New York with her best friend. To do that, she will have to get 3 days off work as a waitress--her next best alternative?where she makes $100 a day, and she will miss a concert that she thought about going to instead of work. She had already decided against going to the concert, but she already bought the ticket. The price of the concert ticket was $60. What is her opportunity cost to go to New York for a 3-day weekend? The concert information is what we call nuisance information. The question stated that working was her next best alternative. An opportunity cost is defined as the value of the best forgone alternative that was not chosen. In this case, the best alternative to going to NYC for the weekend is to stay in town and work. Thus, the opportunity cost of the trip is the value of waitressing for the weekend: the amount of money Caitlin would have made at her job, in this case, $300. 4) Sei-Woon gets a weekly stipend of $100 from the economics department. He spends his money only on floppy disks and beach movies. The price of a floppy disk is $2 and the price of a (rented) beach movie is $4. a) Set up the table of choices between floppy disks and beach movies available for Sei-Woon to spend his $100. Make sure it is clearly labeled. Choice Floppy disks (COST) Beach movies (COST) A 0 25 (=$4*25) B 1 (=$2*1) 24.5 (=$4*24.5) C 2 (=$2*2) 24 (=$4*24) ?.then skipp ing by 10 floppy disks ?. ?. E 10 (=$2*10) 20 (=$4*20) F 20 (=$2*20) 16 (=$4*15) G 30 (=$2*30) 10 (=$4*10) H 40 (=$2*40) 5 (=$4*5) I 50 (=$2*50) 0 b) Write out the budget constraint equation. 50 ? 2*BM = FD (or, BM = 25 ? ½ FD; or 4BM + 2FD = 100) c) Draw the budget constraint on an appropriately labeled graph. d) Show (on the graph) how the budget constraint will change when the price of a floppy disk increases to $4. beach movies floppy disks 50 25 e) Redraw the graph with its original budget constraint. Show how the budget constraint will change when Sei-Woon?s stipend is increased to $120. 5) Here is an example of how a topic addressed in the previous question might be presented as a multiple choice problem: Sei-Woon gets a weekly stipend of $100 from the economics department. He spends his money only on floppy disks (FD) and beach movies (BM). The budget constraint is 50 ? 2*BM = FD. If Sei-Woon buys 10 floppy disks, how many beach movies can he buy if he?s rational? a) 50 b) 5 c) 10 d) 20 e) 90 beach movies floppy disks 50 25 30 60 beach movies floppy disks 50 25 25 6) Here is an example of how a topic addressed in the previous question might be presented as a multiple choice problem: Consider Sei-Won?s problem above. Look at the graph below. The filled line shows the budget constraint when floppy disks are $2 each and beach movies are $4 each. Which of the dotted lines shows the budget constraint when floppy disks are $4 each and the price of beach movies remains the same at $4? a) line A b) line B c) line C d) line D e) none of the dotted lines 7) Describe your opportunity costs if you study economics for each of the following times each day: one hour, two hours, three hours, four hours. Each person?s answer will be different. What matters is that the concept of opportunity cost has been used correctly. 8) When you study economics for one hour a day, you don?t miss much of anything important. However, when you study economics for two hours a day, you miss some television shows you like. When you study economics for three hours a day, not only do you miss more television you like, but you also miss dinner and sleep. When you study for four hours a day, not only do you miss even more television, more sleep, and both dinner and breakfast, but you begin losing friends as well, because you never have time to see them. This is an example of: a) Constant Marginal cost. b) Division of labor. c) Increasing opportunity costs. beach movies floppy disks 50 25 A B C D d) Comparative advantage. e) Sunk cost. Sherrie A. Kossoudji Economics 101-300