Indiana Wesleyan University-ADM-524 Problem Answers-Week 1 Problems Chapter 1 Problem 9 (Rational Self-Interest) Discuss the impact of rational self-interest

t on each of the following decisions: a. Whether to attend college full time or enter the workforce full time b. Whether to buy a new textbook or a used one c. Whether to attend a local college or an out-of-town college
a. Individuals will compare the expected benefits of attending college full time with the expected costs. One benefit might be that the individuals stock of knowledge and productivity will grow, and so will his or her wage. Costs include not only tuition, but also the wages that could have been earned by working instead of attending college fulltime. If the expected benefits outweigh the costs, then the rational person will choose to go to college full time. b. Individuals will compare the expected benefits of a new textbook with the higher costs of purchasing a new textbook. Benefits include not being confused by other students markings in the book and a higher resale value. However, the out-of-pocket cost of a new book will be higher than the cost of a used book. If the expected benefits outweigh the costs, then a rational person will purchase the new textbook. c. Individuals will compare the expected benefits and costs associated with both colleges under consideration and will choose the college at which the difference between benefits and costs is greater. The costs of attending an out of town college may include greater travel costs and phone bills and benefits such as learning about a different region.

Chapter 1 Appendix Problem 1 (Understanding Graphs) Look at Exhibit 5 and answer the following questions: a. In what year (approximately) was the unemployment rate the highest? In what year was it the lowest? b. In what decade, on average, was the unemployment rate highest? In what decade was it lowest? c. Between 1950 and 1980, did the unemployment rate generally increase, decrease, or remain about the same?
a. In 1931 the unemployment rate reached its highest point, 25 percent. In 1942 it reached its lowest, approximately 1 percent. b. Unemployment was the highest in the decade of the 1930s. c. Between 1950 and 1980, unemployment generally increased.

Chapter 1 Appendix Problem 3 (Slope) suppose you are given the following data on wage rates and number of hours worked:
Hourly Wage $0 5 10 15 20 25 Hours Worked Per Week 0 0 30 35 45 50

Point a b c d e f

a.

Construct and label a set of axes and plot these six points. Label each point a, b, c, and so on. Which variable do you think should be measured on the vertical axis, and which variable should be measured on the horizontal axis? b. Connect the points. Describe the resulting curve. Does it make sense to you? c. Compute the slope of the curve between points a and b. Between points b and c. Between points c and d. Between points d and e. Between points e and f. What happens to the slope as you move from point a to point f? a. It is conventional in economics to measure prices on the vertical axis. Here the wage rate is the price of an hour of labor, so it goes on the vertical axis. Hours worked is measured on the horizontal axis.

f e d c b a

b. The graph shows that at very low wage rates, the person chooses not to work at all. Its just not worth her while. However, once the wage reaches $10 per hour, she begins to offer her time in the labor market by being willing to work 30 hours per week. At higher and higher wage rates, she is willing to work more and more hours. c. The slope is measured by the vertical change that results from a given change along the horizontal axis. From point a to point b, the vertical change (wage) is 5, and the horizontal change (hours worked) is zero. Slope is 5/0 = infinity. From point b to point c, the vertical change (wage) is 5, and the horizontal change (hours worked) is 30. Slope is 5/30 = +1/6. From point c to point d, the vertical change (wage) is 5, and the horizontal change (hours worked) is 5. Slope is 5/5 = +1. From point d to point e, the vertical change (wage) is 5, and the horizontal change (hours worked) is 10. Slope is 5/10 = +1/2. From point e to point f, the vertical change (wage) is 5, and the horizontal change (hours worked) is 5. Slope is 5/5 = +1. A change in the steepness of the curve indicates a change in slope. As the curve becomes steeper, the rate of increase in hours of work (slope) is increasing. The shape of the curve indicates that as the curve flattens, the rate of increase in hours of work (slope) is decreasing.

Chapter 2 Problem 13

(Opportunity Cost) You can either spend Spring Break working at home for $80 per day for five days or go to Florida for the week. If you stay home, your expenses will total about $100. If you go to Florida, the airfare, hotel, food and miscellaneous expenses will total about $700. Whats your opportunity cost of going to Florida? The opportunity cost is the total cost of going to Florida and includes dollar costs incurred as well as the forgone opportunity of working. Assuming you would work for 5 days if you stayed home,, the cost would total $1000: the $700 cost of going to Florida plus the net value of what you could have earned $300 ($400 in earnings less expenses of $100) if you stayed home.

Chapter 2 Problem 14 (Comparative and Absolute Advantage) You have the following information concerning the production of wheat and cloth in the United States and the United Kingdom:
Labor Hours Required to Produce One Unit United Kingdom United States 2 1 6 5

Wheat Cloth

a. What is the opportunity cost of producing a unit of wheat in the United Kingdom? In the United States? b. Which country has an absolute advantage in producing wheat? In producing cloth? c. Which country has a comparative advantage in producing wheat? In producing cloth? a. Which country should specialize in the producing wheat? In producing cloth? a. In the United Kingdom, the opportunity cost of one unit of wheat is 1/3 unit of cloth (producing one unit of wheat takes 2 hours, the time that would allow you to produce only 1/3 of a unit of cloth, in the United States, the opportunity cost of one unit of wheat is 1/5 unit of cloth (producing one unit of wheat takes 1 hour, the time that would allow you to produce only 1/5 unit of cloth). b. The United States has an absolute advantage in both goods; it is able to produce both products in less time than the United Kingdom requires. c. The United States has a comparative advantage in wheat because it has the lowest opportunity cost of producing (one-fifth cloth versus one third cloth for the United Kingdom), while the United Kingdom has the comparative advantage in cloth. (The opportunity cost of cloth in the United States is 5 wheat. The opportunity cost of cloth in the United Kingdom is 3 wheat.) d. The United States should specialize in wheat, and the United Kingdom should specialize in cloth. The country with the lower opportunity cost of producing a good should specialize in producing that output.

Chapter 3 Problem 15 (Evolution of the Household) Determine whether each of the following would increase or decrease the opportunity costs for mothers who choose not to accept work outside the home. Explain your answers. a. Higher levels of education. b. Higher unemployment rates for women. c. Higher average pay levels for women. d. Lower demand for labor in industries that traditionally employ large numbers of women.

c. d.

a. Opportunity costs rise as higher levels of education increase the level of earnings available to women working outside the home. b. Opportunity costs fall as there are fewer chances for working outside the home. Opportunity costs rise as women forgo higher earnings if they do not work outside the home. Opportunity costs fall as there are fewer employment opportunities for women in these traditional industries.

Chapter 3 Problem 17
(Government) Complete each of the following sentences: a. When the private operation of a market leads to overproduction or underproduction of some good, this is known as a(n) _________________. b. Goods that are nonrival and nonexcludable are known as __________________. c. ________________ are cash or in-kind benefits given to individuals as outright grants from the government. d. A(n) ________________ confers an external benefit on third parties that are not directly involved in a market transaction. d. __________________ refers to the governments pursuit of full employment and price stability through variations in taxes and government spending. a. b. c. d. e. Market failure Public good Transfer payments Positive externality Fiscal policy

Chapter 4 Problem 19 (Equilibrium) Consider the following graph in which demand and supply are initially D and S, respectively. What are the equilibrium price and quantity? If demand increases to D', what are the new equilibrium price and quantity? What happens if the government does not allow the price to change when demand increases?

P S1
$12 10

D
100 175 250 400

The initial equilibrium price and quantity are $10 and 175 units, respectively. After demand increases, the equilibrium price and quantity are $12 and 250 units, respectively. If the government does not allow the price to rise, then the quantity demanded rises to 400 units while the quantity supplied remains at 175 units, creating a shortage of 225 units.