Unit 1: Introduction to Microeconomics – Problems
1.1: What is economics about?
CORE PROBLEMS
Problem 1
Would each of the following be characterized as microeconomics or macroeconomics?
a. Why the growth rate of the American economy slowed during the 1980s.
b. How consumers decide whether to rent or buy a home
c. An analysis of Dell’s market share for personal computers d. Reasons why the interest rate in Africa is higher than in the US
Problem 2
Characterize the following assertions as positive, normative, or containing elements of both.
a. An increase in the tax rate will slow the growth rate of the economy. b. An increase in the tax rate is unfair to business owners.
c. The goal of economic policy should be to increase the living standards of a country’s poorest citizens.
1.2: How economists think
CORE PROBLEMS
Problem 1
The state of California recently instituted a “three strikes and you’re out” rule, which requires a mandatory sentence of life in prison for any offender convicted of a third felony. Some police officials have complained that this law has increased the level of violence associated with third felony offenses. Why might this be the case?
Problem 2
1.3: Fundamentals of economic reasoning
CORE PROBLEMS
Problem 1
Suppose that the annual out-of-pocket costs for attending a 4-year public college are as follows.
Tuition and fees $5100
Books and supplies $1300
Room and board $6600
Transportation and other expenses $2400
Additionally, the student foregoes income of $16,200 in order to attend college for 9 months.
a. Suppose that the student receives free room and board at home, at no opportunity cost to the parents. What is the opportunity cost of a year in college?
b. Suppose that the student has to pay for his room and board, but receives an academic scholarship covering all tuition and fees. What is the opportunity cost of a year in college? c. Suppose that the student can work half-time while at school, but pays for everything else.
What is the opportunity cost of a year in college?
Problem 2
Michael Jordan takes a year off from his consulting business to play basketball in Switzerland for a year. Which of the following should be included in the opportunity cost of his decision?
a. The money he has to spend on his basketball uniform
b. The money he spent on his golf membership he won’t be able to use because he’ll be in Switzerland
c. The wages he gives up from his consulting business d. The cost of food for the year that he plays basketball
Problem 3
You intend to open a pretzel stand at the Macy’s Thanksgiving Day Parade. You paid $2000 for the license. However, you later realize that you foolishly bought the wrong license, with no chance for a refund. The correct license would cost an additional $3000.
a. What is the opportunity cost of licensing the pretzel stand at this point?
b. If you will make $3500 of profit from running the pretzel stand (not counting the licensing costs), is it worth getting the correct license?
Problem 4
You are planning a 1000-mile trip to Florida. Except for the matter of cost, you are completely indifferent towards driving and taking the bus. The bus fare is $260. You determine that the costs of operating your car during a typical 10,000-mile driving year are as follows.
Insurance $1000
Interest $2000
Fuel and oil $1200
Tires $200
License and registration $50
Maintenance $1100
Problem 5
The CDC is considering what percentage of the population it should vaccinate against a new disease. The table below shows the number of lives that would be saved by the vaccine, in addition to the number of deaths due to side effects from the vaccine.
Percent
Vaccinated Lives Saved
Deaths due to side effects
0 0 0
10 20 4
20 40 10
30 60 18
40 80 33
50 100 50
60 120 74
a. Compute the marginal benefit and marginal cost associated with each additional increment of vaccination.
b. What percentage of the population would you recommend vaccinating against the disease?
SUPPLEMENTARY PROBLEMS
Problem 6
You bought a $50 ticket to a Britney Spears concert. You can’t get a refund for the ticket, but you could resell it on EBay for $35. After you buy the ticket, you realize that the Spanish National Orchestra is in town on the same night as the Spears concert. The concerts are at the same time and you cannot see both. The Spanish National Orchestra concert is free, and your benefit from attending that concert would have been $10.
Problem 7
A group has chartered a bus to New York City. The driver costs $100, the bus costs $500 and the tolls will cost $75. The driver’s fee is nonrefundable, but the bus can be cancelled with a cancellation charge of $50. The tolls only have to be paid if the trip is actually made.
a. What is the sunk cost associated with the bus at this point?
b. If the fee is $18 per ticket, how many tickets need to be sold in order that the trip should not be cancelled?
Problem 8
There is a famous problem in economics called the “broken window fallacy”. The idea is that, when a criminal breaks a window, it creates jobs and a market for materials in replacing the window. Therefore, economists should suggest breaking the windows intentionally in order to stimulate the economy. Do you see a problem with this reasoning? (Many journalists actually made arguments like this in the aftermath of 9/11, arguing that it might actually help the economy).
Problem 9
