#### Answers to Selected Problem Set 1 Questions

1. If you view the calorie content of fatty foods as part of the "price" you pay to eat such foods, then a "low-calorie" product may be viewed as cheaper, therefore people are more likely to increase their consumption of the product. It is entirely possible that people could actually end up eating a lot more of these products--so much more that they begin to put on more weight.

2. The new law might actually encourage pregnant women and disabled individuals to increase the amount of their time spent waiting in lines since they will be able to take "cuts" into lines. Some pregnant women and disabled folks might actually sell their services as professional line waiters! In addition, some people might pretend to be pregnant or disabled in order to take advantage of the law.

3.  \$51,900 (= \$27,000 + 900 + \$24,000).  The other expenses are fixed costs that have to be paid whether Joe goes to college or not.

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5.  The cost of traveling by air is: C = 150 + 1W.  The cost of traveling by bus is: C = 50 + 5W.  The wage that makes the person indifferent between traveling by air or bus is found by setting the two equations equal and solving for W (the wage rate).  In this case, W = 25.

6.   When economists measure costs we not only count actual cash outlays, but also foregone opportunities. In this case, the accountant has calculated that your (accounting) profits are \$300 per week. The accountant has neglected to include the cost of your time in the profit calculation--in other words, the accountant has underestimated total costs. The accountant should have included \$400 (= 40 hours per week * \$10 per hour) as part of your cost of doing business. What this all means is that you would make more money working for someone else than running your own business.

7. How would you measure the cost of cutting grass? What are the labor and capital costs involved?

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9. The time already spent waiting in line shouldn't matter. The lost time represents a sunk cost--and there's not much you can do about sunk costs. People's actions are (assumed to be) based on the marginal costs and benefits of actions yet to be taken.

10. Hmmm...how does the change in speed limits affect driving incentives? Raising the speed limit on interstate highways might be expected to attract those drivers who like to drive fast. Thus, fewer fast drivers will be on the non-interstate highways--making these roads relatively safer.

11.    Why do people smoke cigarettes? An economist might reason that people expect to benefit from cigarette consumption. Smokers must believe that the costs of smoking are so low (and far off into the future) that the immediate benefits simply outweigh the costs. Arguments to ban smoking usually assume that smoking imposes costs on non-smokers or that smokers don't really know what's in their best interest.

12. Rational computer thief?
(a) The expected MB = \$350,000; the expected MC = [(\$80,000)(10) + \$5,000](.25)(.80) = \$161,000. Since MB > MC, a rational thief would steal the computers.
(b) To find the optimal jail sentence, set MC = \$350,000 (since that's the cost that would make the thief unwilling to steal the computers) and solve for J. Thus: MC = [(80,000)(J) + 5,000](.25)(.80) = 350,000 ==> J = 21.8 years.
(c) You can find the optimal fine and joint probability in the same fashion: Optimal Fine =
(d) Optimal Joint Probability =

13. Napolean Dynamite
a)  Marginal benefits: 30, 25, 20, 15, 10, 5, 3, -1
b)
c)
d)  3 times
e)  7 times

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17.  Normative questions generally elicit more argument among economists. Normative: a, d. Positive: b, c, e

18.    Normative: a, c, e.

19.    a) capital     b)    land    c)    capital    d)    labor    e)    capital

20.    Circular flow diagram shows how money flows between producers and consumers in two markets: goods market and factor market.

21. Macro: c, e.  Micro: a, b, d

22.    PPF
a) A to B: 10 units of AOG (all other goods); B to C: 20 units of AOG; C to D: 30 units of AOG; D to E: 40 units of AOG.
b) No, since this combination would put the country inside its PPC indicating some type of inefficiency (eg, unemployment).
c) Since this combination is outside the current PPC, there must've been an increase in resources or technology to allow the economy to produce such a combination.

23. While it is clear that Selena has an absolute advantage over Justin, you need to determine who holds the comparative advantage in preparing drinks and who holds the comparative advantage in preparing dinners. For Selena, the opportunity cost of preparing one more dinner is 2.5 drinks. For Justin, the opportunity cost of preparing one more dinner is 3 drinks. Thus, Selena has the comparative advantage in preparing dinners since her opportunity cost is lower. Justin, by default, has the comparative advantage in preparing drinks. [For Justin, the opportunity cost of preparing one drink is preparing 0.33 dinners. Selena's opportunity cost of preparing one drink is preparing 0.40 dinners. As you can see, Justin's opportunity cost of preparing drinks is lower--therefore he has the comparative advantage in serving drinks.]

24. Golf balls and clubs.
a) No graph provided.
b) Yes, PPFs exhibit constant opportunity cost. In other words, they are linear PPFs.
c) Country A has an absolute advantage in producing Golf Balls and Clubs.
d) Country A has a comparative advantage in producing Golf Clubs (their opportunity cost for each Club is 4 Balls; Country B's opportunity cost for each Club is 6 Balls). Country B has the comparative advantage in Balls.
e) Country A would export Clubs and B would export Balls.

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27. Trade between US and South Korea.

 Output per Hour Opportunity Cost of ... Country Tons of Steel Bushels of Wheat 1 ton of steel 1 bushel of wheat US 6 60 10 bushels of wheat 1/10 ton of steel South Korea 3 6 2 bushels of wheat 1/2 ton of steel

a) US has absolute advantage in both goods.
b) US has comparative advantage in wheat, SK has comparative advantage in steel.
c) SK would export steel and import wheat; US would export wheat and import steel.

 US South Korea Steel Wheat Steel Wheat Production Change: -6 +60 +12 -24 Trade: +10 -50 -10 +50 Consumption Change: +4 +10 +2 +26

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