Lecture Extender Examples 1
Lecture Extender Examples
Chapter 1 The Nature of Economics
When Is It Rational to Learn a New Technology?
An important characteristic of young people is their eagerness to learn new things. This is especially true for new electronic technologies or upgrades to new technologies such as cell phones with each new feature that is added, for computers and interactive computer games, multimedia, and surfing the Internet. They not only embrace these technologies, but they also invest a significant amount of time becoming very proficient with them. Older people do not learn these new technologies as readily and when they do, they are not as skilled at using them. Is it possible that both of these behaviors as rational?
Yes. If you are young and you learn a new skill, you will be able to gain returns from your investment in learning over many decades. If you are in your 60s by contrast, and invest the same amount of time and effort learning the same new skill, you will reap any returns for a much shorter time. Thus both young and older peoples’ behavior is rational in the economist’s sense.
Student Printing in the University
Most universities allow students to use university network printers in student labs when they are working on the university network as part of their tuition or computer use or technology fees charged to students when they register for classes. The average school spends several thousand dollars per month for this service. This service is expensive because students print personal jobs unrelated to academics such as downloads from entertainment Web sites and photos of friends and family. Winthrop University in South Carolina decided to charge students a $10 printing fee that allows them to print 250 pages per semester on University network printers. After that the students are charged $0.04 for each additional page that they print. Assuming students are rational, what do you predict happened to Winthrop’s printing costs after they implemented this charge? Why?
Winthrop’s printing costs declined by about one-half. Students were printing some pages that had little additional value to them because those pages were essentially free. Once each page cost something to print, rational students printed those pages that were worth the price charged to them.
Chinese Smuggling
Recently, China’s leaders announced the formation of a new anti-smuggling police force to try to stop the annual flow of tens of billions of dollars in contraband. One type of contraband is cigarettes. Taxes on cigarettes are so high that many Chinese cigarette manufacturers export half of their output, which they then smuggle back into China.
Why does China need an anti-smuggling police force when it already has an army of border guards and customs inspectors? The answer is that the returns to smuggling are so high that many existing border guards and customs inspectors have become smugglers themselves. Thus the government feels that new police are needed in part to watch over the existing cadre of “law enforcers.”
What could the government do to end the incentives to smuggle cigarettes? (1) Significantly increase the salaries of border guards and customs inspectors so that the opportunity costs of being caught and losing their jobs is increased. (2) Lower taxes on cigarettes. (3) Increase the penalties of being caught smuggling.
Are Economics Students Rational?
If you did a survey in your economics class, not all students would agree with the statement “I am rational.” In an attempt to show that the rationality assumption is accurate nonetheless, an increasing number of economists are doing the same kinds of experiments that are used in the physical sciences. One researcher, David M. Grether, ran some experiments at the University of California at Los Angeles in the early 1980s. His experiment involved separating students as volunteers into two groups. One group was paid the same, $7, no matter how it performed. The second group was paid less for poor performance and more for better performance. This group was paid either $5 or $25, depending on the level of performance. Performance was measured by how well students were able to pick gambles that had the greatest probability of winning. Students had to do some relatively complicated math calculations to make the best guess.
The results were consistent with the rationality assumption. One-third of the students in the group that
was paid regardless of performance picked all of the gambles correctly. In the second group, for which performance was distinctly rewarded, two-thirds of the students had no errors in making their calculations.
Does the experiment prove that economics students are rational? Why or why not? The experiment does
not prove that economics students are rational, only that the rationality assumption predicts better than the alphabetical one. Note that one-third of the students in the better-rewarded group did no better than did the majority of the uniformly paid group.
Chapter 2 Scarcity and the World of Trade-Offs
Fast Lanes for a Fee
In recent years highway planners in most large urban areas have added high occupancy vehicle lanes or HOV lanes. During rush hours only cars carrying two (or in some places three) persons are allowed to
use these lanes. In 1996 to the present San Diego has been allowing drivers to pay a fee to drive in the HOV lanes during rush hours. The price was initially $50 per month. Currently it is possible to place
a transponder in your car and a fee is charged on a per trip basis.
Why would a person be willing to pay a fee to drive by him- or herself, when all that he/she needs to do
to drive in the HOV lane for free is to arrange to carpool with one or two other persons? (Hint: Is there
an opportunity cost of time?) A person who is willing to pay to drive alone in the HOV lanes will place
a high value on his/her time. The need to find and pick up a carpool companion or companions will take more time just as driving in the regular traffic lanes at rush hour does. If the person values the time saved by using the HOV lanes by more than the fee or the time spent picking up carpool companions, then he/she will pay the fee.
The Saving Rate in the U.S.
From late 2005 through 2006 the saving rate of the household sector of the U.S. was negative. At the same time foreigners, especially Asians were lending funds to the U.S. largely as a result of large surpluses of U.S. dollars earned from selling more goods to the U.S. than they purchased from the U.S. The U.S. economy and investment continued to grow during this period. At the time there was a talk among economists and others of a glut of savings in the global economy. Yet the trend of saving a percent of world GDP has been declining since about 1970, according to the World Bank.
Assuming that the U.S. saving rate remained unchanged from 2006, what would happen to the U.S. production possibilities curve if foreigners decided to use their savings to finance investment in their own countries instead of lending them to the U.S.? Why? If the U.S. saving rate was negative, then investment would be negative and the capital stock would decrease. The production possibilities curve would shift to the left.
How is it possible for a country such as the U.S. to consume more than it produces which is what a negative saving rate means? The U.S. would have to purchase goods produced by foreigners.
Drilling in the Arctic National Wildlife Refuge (ANWR)
From 2001 to 2003 there was a proposal by the Bush administration to open up the ANWR to oil exploration as part of the president’s energy policy to promote less dependence on imported oil. Environmentalists argued that opening up the refuge to oil exploration and drilling would damage the fragile arctic environment and possibly injure the diversity of arctic species. The administration argued that there were an estimated 5.7 to 16 billion barrels of oil in the ANWR and that only a small amount of land in the reserve would
be used for drilling and damage to the environment and wildlife would be very small. In early 2003 the Congress defeated a bill that would have permitted oil exploration and development in the ANWR.
What is the opportunity cost to the economy of the decision to prohibit development of oil reserves in the ANWR? The opportunity cost to the economy is the 5.7 to 16 billion barrels of oil.
Continued Life versus the Environment
In the 1990s it was discovered that taxol, a chemical found in the bark of Pacific yew trees in the Pacific Northwest, was effective in treating ovarian cancer, which afflicts an additional 10,000 women each year. It takes the bark of about 150,000 yew trees per year to extract enough taxol to treat these women, many of whom would otherwise die. The problem is that yew trees are slow growing and are mostly in old growth forests that have taken hundreds of years to develop. Taxol has recently been found to be effective on a number of other cancers such as lung cancer. This has increased the demand for it and thus results in more trees being required. Even the development of a semi-synthetic version of taxol does not completely solve the problem. Complete synthesis is not yet economic. Environmentalists point out that heavy logging of old growth forests can damage other trees and the environment generally. Until scientists develop new sources of taxol, there will continue to be a trade-off: saving women with ovarian cancer and persons with other types of cancer or saving Pacific yew trees.
What is the opportunity cost of saving yew trees? What is the opportunity cost of saving the lives of the women suffering from ovarian cancer who could be treated with taxol? The opportunity cost of saving yew trees is the costs associated with the early death of women from ovarian cancer. The opportunity cost of saving those lives is the loss of yew trees and damage to old growth forests. Since the number of Pacific yew trees is finite and limited to a small area, the yew trees could become extinct.
Do all environmentalist attempts at saving plants or animals involve an opportunity cost? Yes, all environmental attempts to save plants and animals involve an opportunity cost because resources must
be used to save them or some resources may not be used if the plant or animal is to be saved. In all cases resources have alternative uses. Those that are used to save a plant or animal cannot be used for something else. If a resource cannot be used so that a plant or animal can be preserved, then we must give up the highest valued alternative thing for which it could have been used.
The Opportunity Cost of Going to College
What is the cost of going to college? The obvious costs are the costs of tuition, fees, and textbooks. The obvious costs of going to college do not include room and board because these costs will be incurred no matter what you do—go to work or go to school. The biggest cost of going to college is forgone income. This is to say that going to college usually means sacrificing a full-time salary. In the case of a typical
18-year-old, the opportunity cost of going to college may be $15,000 to $20,000 per year. The cost to a performer such as Eminem last year would have been over $19 million. For Britney Spears it would have been $9.1 million. For the successful musician, actor, or model, the old saw “Get all the education you
can get” doesn’t make much sense.
Opportunity cost has something to do with the decision by Britney Spears and Eminem to not attend college while they are under 25. Between the ages of 17 or 18 and 25 the opportunity cost of going to college for stars in the popular music industry is very high.
What is the opportunity cost of leaving college early for student athletes who join professional teams prior to graduation? The opportunity cost of leaving college early is the forgone education. If at the end of a professional career the athlete does not have a degree, then his or her best income alternatives will usually be much lower than for an athlete who did get a degree.
Chapter 3 Demand and Supply
Congestion Pricing for San Francisco
San Francisco, among other cities, is examining congestion pricing as a way to reduce traffic congestion that has been successfully used in European and Asian cities. In London for example drivers were initially charged an $8 fee that has since increased to $14 every time they enter London’s central business district. Before the congestion fee was implemented, traffic congestion was a major problem in central London. The effect of the congestion fee was to reduce traffic congestion by nearly a third in three years as measured by traffic speeds. Traffic speed has nearly doubled from about 5 mph during business and rush hours to about 10 mph as a result of a decrease in the number of motor vehicles entering central London. Use of public transportation into the area increased significantly after the fee went into effect.
Does the decrease in the number of vehicles entering central London represent a decrease in demand or
a decrease in quantity demanded for the use of central London’s streets? It is a decrease in the quantity demanded because the price of using the streets has risen from $0 to $14. Thus there has been a movement along the demand curve for the use of the streets for driving in a motor vehicle.
U.S. Agricultural Subsidies and Globalization
The U.S. government began subsidizing U.S. cotton farmers in the 20th century to allow them to stay in business. The purpose was to insulate them from fluctuating market prices that could bankrupt cotton farmers as a result of world market conditions beyond their control. The farm lobby has made sure that cotton remains a subsidized product protecting to some extent cotton farmer income.
U.S. (and other developed countries) cotton subsidies are alleged to be a major reason why cotton farmers in India are experiencing declining income and many are being forced out of farming. The world price of cotton has fallen by more than 33 percent since the mid-1990s. The Indians blame the U.S. and other developed countries’ subsidies for these lower prices. Thus a program aimed at helping U.S. farmers is driving Indian farmers out of business.
Are the Indian farmers right to blame the cotton subsidies for their plight? Yes. U.S. and developed country subsidies increase the world supply of cotton and decrease its price other things constant.
Is Dental Care Becoming an Inferior Good?
A British health minister once claimed that the demand for health care is infinite because everyone is in
a losing battle against death. This is not so for American dentistry, however. As aggregate U.S. income levels have risen during the last 25 years, overall spending on dental care services has declined.
It isn’t that fewer Americans are seeing dentists each year. They just do not require as many fillings or extractions. As incomes rose, people purchased more expensive and effective toothpastes. More towns, cities, and counties began to fluoridate their water as the relative price of this anticavity agent declined,
so changing relative prices have played a role. The higher incomes of their residents have permitted more municipalities to purchase fluoridation systems. At every age, the average American now has two more teeth than 25 years ago.
Many fledgling dentists have begun specializing in “cosmetic dentistry” desired by clients with healthy but less than beautiful teeth. Compared to traditional dental care services, is cosmetic dentistry more or less likely to be a normal good? Cosmetic dentistry is more likely to be a normal good. As incomes rise, people are likely to wish to improve their appearance because they can afford the expense.
Is Dental Care Becoming an Inferior Good?
A British health minister once claimed that the demand for health care is infinite because everyone is in a losing battle against death. This is not so for American dentistry, however. As aggregate U.S. income levels have risen during the last 25 years, overall spending on dental care services has declined.
It isn’t that fewer Americans are seeing dentists each year. They just do not require as many fillings or extractions. As incomes rose, people purchased more expensive and effective toothpastes. More towns, cities, and counties began to fluoridate their water as the relative price of this anticavity agent declined,
so changing relative prices have played a role. The higher incomes of their residents have permitted more municipalities to purchase fluoridation systems. At every age, the average American now has two more teeth than 25 years ago.
Many fledgling dentists have begun specializing in “cosmetic dentistry” desired by clients with healthy but less than beautiful teeth. Compared to traditional dental care services, is cosmetic dentistry more or less likely to be a normal good? Cosmetic dentistry is more likely to be a normal good. As incomes rise, people are likely to wish to improve their appearance because they can afford the expense.