EC 201 Wednesday Section, Assignment #1

Metropolitan State University

ECON 201-4 (Wednesday) Fall 2004

Assignment #1, due 9/1

The first four questions are required. The other questions are for your own amusement, thought and practice.

1. Jeff and Ted are assistant professors in an economics department somewhere. They have two duties, teaching (T) and research (R ). In a year, they are each required to do three units of teaching. After finishing teaching, they want to get as much research done as possible because they’re hoping to get tenure. In a year each of them can do the following amounts of teaching or research, or any linear combination of the two:

Teaching / Research
Jeff / 4 / 8
Ted / 6 / 10

A. For each person, calculate the opportunity cost of one unit of teaching and one unit of research. Who has a comparative advantage in teaching? In research?

B. If each of them does three units of teaching, how much research can each one get done? What is the total amount of research?

C. If they specialize (and do a combined total of six units of teaching) what is the maximum amount of research they can do? What is the gain from specializing and trade in terms of the extra research that gets done?

2. The book discussed the tradeoff between efficiency and equity that generally seems to exist. As an example of this, consider the question of whether the person who cooks dinner in a family should also be responsible for cleaning up the kitchen. Explain why it is more equitable or ethical for the cook to also clean up or for someone else to clean up and why.

3. Imagine a production possibilities frontier with consumption goods (donuts, cigarettes, gasoline, etc.) on one axis and investment goods (machinery, computers, factories, etc.) on the other axis. How will the choice that a society makes about which point on the frontier it chooses today affect the position of the frontier next year?

4. Read the chapters from Eat the Rich discussing the U.S. and Albania.

A. Explain why financial markets such as are found on Wall Street and the New York Stock Exchange are critical for the efficient functioning of an economy.

B. What is the important difference between the good capitalism of the U.S. and the bad capitalism of Albania?

Happy Fun Questions

A. George has a variety of thing he can do on Saturday evening. He can stay at home and do his economics problem set, go to a hockey game with his buddies or take a bike ride out to the river and back. His ranking of these options puts the hockey game first, the bike ride second and, not too surprisingly, economics third. What is his opportunity cost of going to the hockey game?

B. What is the opportunity cost of living in a house that you own?

C. Family owned businesses often have family members working there as employees in part because family members will work for no pay if it is a family owned business. However, this argument is silly. What is the opportunity cost of having a family member working for the family business?

D. Consider Minnesota and Florida. It is technically possible to grow both oranges and corn in both states, but Minnesota tends to specialize in corn while Florida specializes in oranges. However, because of the weather in Florida, a typical piece of Florida farmland could produce more corn or more oranges than can a typical acre in Minnesota. If Florida is better at both crops, why does Florida bother to trade with Minnesota at all?

E. For those of you who are interested in environmental questions, here's one that gets to the heart of most environmental problems. You, and a person very similar to you, live in separate apartments and you each spend about $30/month on hot water.

A. If you decide to share an apartment, will your combined hot water bill be greater than $60, less than $60 or very close to $60?

B. How does your answer change if you marry this person?

C. What does this have to do with the environment?

Hint: Answers involving added efficiencies in living together or even in showering together are interesting, but not the point of this question. If you like, consider the extreme example of sharing accommodations with 1,000 people as I did in a dormitory.

F. The book discussed the tradeoff between efficiency and equity that generally seems to exist. As an example of this, consider the question of whether the person who cooks dinner in a family should also be responsible for cleaning up the kitchen. Explain why it is more equitable or ethical for the cook to also clean up or for someone else to clean up and why.

G. A fun story about Finland is that if a doctor there wants a new deck on his house, he’ll take a couple of weeks off of work to build it himself rather than keep working and hire a professional carpenter to do it for him. It just so happens that Finland has relatively high income taxes.

A. Use the idea of opportunity cost to explain why people, even skilled, highly paid professionals, tend to do a lot of their own home improvements in countries that have high income taxes.

B. What does this have to do with the tradeoff between efficiency and equity?

H. Imagine a production possibilities frontier with consumption goods (donuts, cigarettes, gasoline, etc.) on one axis and investment goods (machinery, computers, factories, etc.) on the other axis. How will the choice that a society makes about which point on the frontier it chooses today affect the position of the frontier next year?

I. Offer an example of a scarce resource that is not allocated through a market process and offer an explanation as to why it is not allocated that way.

J. Explain why the “bowed-out” shape of the production possibilities frontier is consistent with the law of increasing costs.

K. One of the most important economic decisions a family makes is whether or not to have children and how many children to have.

A. In a society where women are responsible for child care, what is the opportunity cost of having children?

B. How does this cost change as women gain opportunities to work outside of the home and earn high wages?

C. What is the implication for public policies to reduce population growth?