Econ 172

Homework 1

Due Monday, Jan 24

Part I Subscribe to class listserv:

Joining the list:
In order to be a part for the discussion, you need to join the econ172
mailing list. To do this, send email to and place
a subscribe command, sub econ172 your_name_here, in the body of the message.
Replace "your_name_here" with your first and last name, for example:
sub econ172 Mary Smith

Part II For Chapter 1, do questions

1.7

The text starts with the premise that you spend two years getting your MBA. The explicit cost of tuition is $50,000 and you give up two years of $40,000/year earnings for a total of $80,000 in lifetime lost earnings. The MBA increases your lifetime earnings (presumably the present discounted value) by $60,000. You should not get the MBA because the expected costs ($130,000) are greater than the expected benefits ($60,000).

If you are robbed of $5,000, that should not affect your decision. The theft is a sunk cost. It does not change the incremenetal cost or benefits of getting the MBA.

1.8

If you win $50 in the state lottery, that also should not affect your decision . It does not affect your future salary or the cost of the MBA.

1.11 Change Teaching numbers to 0, 50, 90, 125, 155, 180 , 200

a.

A / B / C / D / E / F / G
Research / 900 / 750 / 600 / 450 / 300 / 150 / 0
Teaching / 0 / 50 / 90 / 125 / 155 / 180 / 200
Opportunity cost of one more unit of research; that is, how much teaching do you have to give up to get 1 more unit of research
3.00 / 3.75 / 4.29 / 5.00 / 6.00 / 7.50

So the answer is that research production exhibits increasing per unit opportunity costs. When the university went from G to F, it got 150 more units of research at a cost of 20 fewer units of teaching for a cost of 7.5 units of research per unit of teaching. By the time you get to point B and move to A, the university is giving up 50 units of teaching to get the same additional units of research, or 3 units of research per unit of teaching. So research gets more and more costly as you do more of it.

b. It’s easy to use Excel’s graphing capability to do a scatterplot for this question.

c. If the university is at point B (750 R and 50 T) but would like to go to point C (600 R and 75T), the opportunity cost of producing 25 more units of teaching is giving up 150 units of research. The question asked for the per teaching unit opportunity cost, so for every additional unit of teaching, you give up 6 units of research.

d. If the university is at point C but would like to go to point B, the per research unit opportunity cost of producing the extra research is? This is just the reverse of question c. To gain 150 units of research, the university has to give up 25 units of teaching. So to produce one more unit of research costs 25/150 = 1/6 unit of teaching.

e. If the main laboratory burns down, the Research axis intercept will shift inward. There will be less research that can be done, but there will be no change in the amount of teaching.

f. If all the campus resources are cut in half (starting at the initial PPF):

g. The president wants to move to point B because at B total output is greater than at point C. You can’t add teaching and research to get total output. If Teaching was cars and Research was popsicles, it would be clear that it makes no sense to add to dissimilar things. They have different values. The question is how much value does the university, or the president, put on teaching vs research. Each point on the PPF is efficient. Neither is “better” than another.

1.12

Prep time for meals has fallen from 2.5 hours in the early 1960s to 15 minutes today. And companies have produced “lunch kits” to replace brown bag lunches (the kind I still use!). How can you use opportunity cost to explain these phenomenon?

As real wages have risen, the opportunity cost of “leisure” time has risen. By leisure time, I mean all time not devoted to paid work. So it has become much more expensive to produce meals at home. The result is that people spend less time producing meals at home. You can buy meals, like lunch kits, or buy prepared foods for dinner (frozen food, microwave food, food kits, semiprepared food, etc).

Now here’s a question for you: Why have shopping carts in grocery stores gotten bigger over the past decades?

1.13

The money that Motorola invested in Iridium is a sunk cost. The satellits are in orbit, so the only relevant question for Motorola and its investors is whether the additional cost of maintaining the system is less than the additional revenues that they can earn from selling satellite phone service.

School Year / UVM Tuition in State / CPI 1982-84 = 100
1980 / $1,500 / 82.4
1985 / $2,550 / 107.6
1990 / $3,650 / 130.7
1995 / $6,210 / 153.6
2000 / $7,464 / 172.2
2005 / $9,088 / 189.4

For these questions you should use Excel

1. Calculate the real UVM tuition in 2005$ and 1980$ for each year.

2. Calculate the percentage change over each 5 year period for

a. Tuition

b. CPI

c. Real tuition in 2000$

3. Create a tuition index (with 1980=100)

4. Rebase CPI to 1980= 100

5. Express tuition index in real terms. You are given columns A-C:

A / B / C / D / E / F / G
School Year / UVM Tuition in State / CPI 1982-84 = 100 / CPI Rebased to 1980 = 100 / CPI Rebased to 2005 = 100 / UVM Tuition in 2005$ / UVM Tuition in 1980$
1980 / $1,500 / 82.4 / 100.0 / 43.5 / $3,448 / $1,500
1985 / $2,550 / 107.6 / 130.6 / 56.8 / $4,489 / $1,953
1990 / $3,650 / 130.7 / 158.6 / 69.0 / $5,289 / $2,301
1995 / $6,210 / 153.6 / 186.4 / 81.1 / $7,657 / $3,331
2000 / $7,464 / 172.2 / 209.0 / 90.9 / $8,210 / $3,572
2005 / $9,088 / 189.4 / 229.9 / 100.0 / $9,088 / $3,954
A / H / I / J / K / L
School Year / Percentage Change in Tuition per 5 year period (nominal) / CPI Change / Real Tuition Change / Tuition Index / Real Tuition Index
1980 / 100.0 / 100.0
1985 / 70.0% / 30.6% / 30.2% / 170.0 / 130.2
1990 / 43.1% / 21.5% / 17.8% / 243.3 / 153.4
1995 / 70.1% / 17.5% / 44.8% / 414.0 / 222.1
2000 / 20.2% / 12.1% / 7.2% / 497.6 / 238.1
2005 / 21.8% / 10.0% / 10.7% / 605.9 / 263.6
1. Calculate the real UVM tuition in 2005$ and 1980$ for each year.
The easiest way to do this is to first recalculate the CPI using 1980 as the base year and then 2005 as the base year. This is done in columns D and E. To do this for 1980, divide the CPI in 1980 by itself 82.4/82.4 and then multiply by 100. To do it for 1985, divide the index for 1985 by the index for 1980 or 107.6/82.4. Then to get real tuition for 1985 in 1980 $, divide the nominal tuition by the new index value (130.6) to get $1.953. Do a similar exercise for 2005 to get all tuitions expressed in 2005 dollars. What this tells us is that UVM's tuition in 1980 was $3,448 in current day dollars. So real tuition has gone up more than 2.5 times.
2. Calculate the percentage change over each 5 year period for
a. Tuition / See column H
b. CPI / See column I
c. Real tuition in 2000$ / See column J
3. Create a tuition index (with 1980=100) / See column K
4. Rebase CPI to 1980= 100 / See column D
5. Express tuition index in real terms / See column L

Note that these above questions, especially the last one, are time consuming. You should have learned how to calculate index numbers and deal with CPI indexing in your principles of macro class. The point of this question was to show you that relative prices are important, not absolute. And we can calculate any price relative to all other prices by using the CPI. This is similar to the question I asked in class about gas being cheap or expensive at 80 cents a gallon in 2005 vs 1968.

Part III. Chapter 2 do questions 2.6, 2.7, 2.9

These questions should all be review from your basic knowledge of microeconomics and Supply and Demand knowledge from Econ 11 and 12:

2.6 A shortage occurs when there is not enough of a good or service to satisfy the demand at the going price. That is, at the current price, the quantity demanded exceeds the quantity supplied. There should not be shortages in non regulated competitive markets, although ocassionally we do see them in short run situations—there is a shortage of batteries when the power goes out for an extended period, for example. But the shortage will be eliminated once demanders and suppliers react to the new reality. Non economists use the term to mean when something is more expensive than it usually is. That’s a sign of increased scarcity, not of a shortage.

2.7 Boy, is this statement wrong. If the supply decreases, the price will rise and people will be less, so the quantity demanded will decline (not the demand, which is the entire curve). That’s the end of the story. There is no change in demand, only of quantity demanded.