Eco 201 Name_______________________________ Problem Set 1 8 September 2011 Cowen & Tabarrok, Chapter 1: The Big Ideas 1. A headline in the New York Times read: “Study Finds Enrollment Is Up at Colleges Despite Recession.” How would you rewrite this headline now that you understand the idea of opportunity cost? 2. When bad weather in India destroys the crop harvest, does this sound like a fall in the total “supply” of crops or a fall in people’s “demand” for crops? Keep your answer in mind as you learn about economic booms and busts later on. 3. Who has a better incentive to work long hours in a laboratory researching new cures for diseases: a scientist who earns a percentage of the profits from any new medicine she might invent, or a scientist who will get a handshake and a thank you note from her boss if she invents a new medicine? 4. Some people worry that machines will take jobs away from people, making people permanently unemployed. In the United States, only 150 years ago most people were farmers. Now, machines do almost all of the farm work and fewer than 2 percent of Americans are farmers, yet that 2 percent produces enough food to feed the entire country while still exporting food overseas. a. What happened to all of those people who used to work on farms? Do you think most adult males in the U.S. are unemployed nowadays, now that the farm work is gone? b. Some people say that it’s okay for machines to take jobs, since we’ll get jobs fixing the machines. Just from looking around, do you think that most working Americans are earning a living by fixing farm equipment? If not, what do you think most working people are doing instead?5. Suppose that in the last few seconds you devoted to question 1 on your physics exam you earned 4 extra points, while in the last few seconds you devoted to question 2 you earned 10 extra points. You earned a total of 48 and 12 points, respectively, on the two questions, and the total time you spent on each was the same. If you could take the exam again, how—if at all—should you reallocate your time between these questions? 6. Residents of your city are charged a fixed weekly fee of $6 for garbage collection. They are allowed to put out as many bags as they wish. The average household disposes of three bags of garbage per week under this plan. Now suppose that your city changes to a "tag" system. Each bag of refuse to be collected must have a tag affixed to it. The tags cost $2 each and are not reusable. What effect do you think the introduction of the tag system will have on the total quantity of garbage collected in your city? Explain briefly. 7. You are planning a 1000-mile trip to Kansas. Except for the matter of cost, you are completely indifferent between driving and taking the bus. Bus fare is $260. 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 Total 5550 Should you drive or take the bus?8. Al and Jane have rented a banquet hall to host a party in celebration of their wedding anniversary. Fifty people have already accepted their invitation. Given that many people, the caterers will charge $400 for food and $100 for drinks. The band will cost $300 for the evening, and the hall costs $200. Now Al and Jane are considering inviting 10 more people. By how much will these extra guests increase the cost of their party? 9. A group has chartered a bus to New York City. The driver costs $100, the bus costs $500, and tolls will cost$75. The driver’s fee is nonrefundable, but the bus may be canceled a week in advance at a charge of only $50. At $18 per ticket, how many people must buy tickets so that the trip will not be canceled? 10. Instead of getting a summer job, you decide to become an entrepreneur. You have rented a plot of ground for $500, purchased green bean seeds for $50 and planted them. You now want to decide how much fertilizer to apply in order to make as much money (profit or net benefit) as possible. You can sell green beans at $8 per bushel while the price of fertilizer is $20 per unit. The following table gives the yield of green beans for each level of fertilizer application. Bags of Fertilizer Yield Bushels Total Revenue Total Cost of Fertilizer Marginal Benefit Marginal Cost Net Benefits 0 140 1 170 2 190 3 200 4 206 5 210 6 212 7 213 a. How much fertilizer should you use? Why?b. If rent that you had paid was $200 instead of $500, how would that affect the amount of fertilizer that you should apply? Explain! c. Given the original numbers, you are offered a job for the remainder of the summer but it is such that you would have to abandon your green beans enterprise. What is your reservation price (minimum salary) for the