Opportunity & Economic Costs

Homework 1: Opportunity & Economic Costs ECON 102 – Macroeconomics Professor Schenk Due: January 11, 2009 January 4, 2010 1. To ensure there are no technical problems, go to the computer you’ll likely actively use throughout the semester. Go to the course website at http://www.tomschenkjr.net. Follow the instructions at the top of the page. Otherwise, let me know of any technical difficulties you encountered. 2. Go to www.politicalcompass.org/test and fill out the form. Which quandrant (square) do you belong? 3. On Tuesday, August 25th the class met for the first time. What were your alternate options instead of attending class. Assume you were able to skip class that night without incurring a penalty, what was your total opportunity cost expressed in dollars. Please note, not all opportunity costs have a price, but try to assign those items with a value. 4. Recent census estimates shows the median income for an individual with a high school diploma is $21,079. Meanwhile, the tuition for a full-time Grad View student is $18,944. (Reference: http://www.census.gov/population/socdemo/education/cps2006/tab08-1r.xls). (a) What is the accounting cost of a high school graduate attending Grand View for a year? (b) What is the opportunity cost of a high school graduate attending Grand View for a year? (c) What is the economic cost of a high school graduate attending Grand View for a year? 5. The median earnings for Bachelor’s recipients is $40,166. Students typically forgo some consumption early in life (e.g., car, clothing, etc.) for more consumption later in life. This concept is called intertemporal trade–off. Below is a table showing consumption early in life and later in life: Current Consumption 100 200 300 400 500

Future Consumption 800 750 650 500 300

(a) Draw a production possibilities frontier with current consumption on the 𝑥-axis. (b) What is the opportunity cost of moving from 100 units of current consumption to 200 units? Similarly, what is the opportunity cost of moving from 200 units to 300 units? (c) What is the slope of the production possibilities frontier when moving from 100 units of current consumption to 200? When moving from 300 to 400? 1

(d) Does the table exhibit increasing, constant, or decreasing marginal opportunity cost? 6. Suppose there are two countries—United States and Uganda—and two types of goods—textiles and computers. Below is the production schedule for each country: United States Computers Textiles 0 4,000 1 3,000 2 2,000 3 1,000 4 0

Uganda Computers Textiles 0 5,000 1 2,500 2 0 3 — 4 —

(a) Draw the production possibilities frontier for both countries with computers on the 𝑥-axis. (b) Draw the combined production possibilities frontier. (c) Which country, if any, has the comparative advantage for producing computers? Why would that country have the comparative advantage? (d) Label the point where trade will occur. Mark it was point “T”. (e) Should countries engage in trade? Why or why not? 7. Again, consider two countries producing textiles and computers with the following production schedule: United States Computers Textiles 0 4,000 1 3,000 2 2,000 3 1,000 4 0

Canada Computers Textiles 0 2,000 1 1,000 2 0 3 — 4 —

(a) Draw the production possibilities frontier for both countries with computers on the 𝑥-axis. (b) Which country, if any, has the comparative advantage for producing computers? Why or why not? (c) Should countries engage in trade? Why or why not? 8. Consider the following market supply and demand schedule:

Price 10 20 30 40

Quantity Demanded 100 75 50 25

Quantity Supplied 20 50 80 110

(a) Draw the supply and demand curves with the 𝑦-axis labelled “price” and 𝑥-axis labelled “quantity.”

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(b) What is the approximate equilibrium price? (c) Approximately how many unites will be sold at the equibilibrium price? You’re done!

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