Homework Set 1

1. Competing "10-10" long-distance carriers advertise different pricing schemes. One service offers calls up to 20 minutes for only $1, with additional minutes at 7 cents per minute. Another service charges only 3 cents per minute, but charges a 49-cent connection fee for all calls.

Would you expect the average length of calls to be longer on the first service, shorter on the first service, or about the same regardless of the service used? Why?

2. As I noted in class, the United Nations Environment Program has, for some years, been seeking a world-wide ban on the use of the pesticide DDT. Years ago, when DDT was sprayed indiscriminately, it was shown to be quite harmful to birds and some animals. However, DDT has also proven to be quite effective in killing mosquitoes, and hence in preventing malaria, when sprayed on the interior walls of houses. What is the opportunity cost of allowing such treatment of interior walls with DDT? What would be the opportunity cost of prohibiting such usage?

3. In his last week in office, President Clinton signed a presidential order prohibiting mineral extraction on more than a million acres of federally owned land in the West and Alaska. He did this, he said, to protect the wilderness environment. Was this an economic decision? If there are costs involved, what are they? Who bears these costs (if such costs exist)?

4. Suppose everyone in the United States goes to school, studies hard and learns a lot, then goes to college and does the same. That is, everyone in the country becomes highly educated and capable of doing highly challenging and rewarding work as scientists, engineers, writers, lawyers, doctors, economics professors ... all those wonderful, sexy occupations that we dream about. With all that education and technological know-how, we will be able to produce unbelievable quantities of goods and services - and unbelievable quantities of garbage.

a. Who will haul away the garbage?

b. What will the remainder of the highly educated people in the society have to do to persuade some other educated folks to volunteer to haul away the garbage?

c. Explain why any educated folk would agree to haul garbage. (Answers such as "Some people don't like to work in offices" won't cut it. Not all educated people work in offices. Nor do I want to see anything about importing people - Mexicans for example - to do the dirty work. I'm assuming that some highly educated Americanos are going to do it.)

5. "A market is an institution that enables people to interact successfully." What, pray tell, does this mean?

6. Using the logic of the circular-flow model, answer this question: Can the people in a country, as a group, afford to purchase all the goods and services they produce in a period? Explain.

7. Answer questions a through d on the basis of the PPF below.

a. What explains the curvature of the PPF?

b. What is the opportunity cost to society of moving from point A to point B?

c. What is the opportunity cost to society of moving from point C to point B?

d. What would have to occur for the economy to produce at point X? Is this the only way the economy could consume the combination of goods represented by point X? Explain.

8. North and South each produce steel and textiles. In North, 100 workers can produce either 20 tons of steel per hour or 400 pairs of shoes. In South, 100 workers can produce either 10 tons of steel or 300 pairs of shoes. The PPFs in both countries are linear.

9. Explain why economies with concave PPFs would not completely specialize in the production of either good on their PPFs. (By complete specialization, I mean producing only one good and trading for the other.)

10. Does the standard of living in an economy depend on the number of workers in the economy? On the size of the money supply? On the productivity of its workers? Be able to explain your answers.

11. The high schools here in Bloomington-Normal charge adults $3.00 to attend basketball games. However, when the IHSA playoffs roll around at the end of the season, the price of a ticket rises to $4.00. Yet it is quite obvious to those who attend high school basketball games that attendance at regional and sectional tournament games is considerably higher than at ordinary games. Use the demand and supply model to explain this result. (While you're at it, think carefully about what the "supply curve" looks like in this case. Is the price, whether $3.00 or $4.00, an "equilibrium price," in the standard sense?)

12. In The Wealth of Nations (1776), one of the most important books on economics ever written, Adam Smith said that, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity, but to their self-love, and never talk to them of our own necessities but of their advantages." What did he mean by that? Which of our ten principles appears to underlie Smith’s statement?

13. "Everyone in society should be guaranteed the best health care possible."

a. Is this a positive statement or a normative statement?

b. If the U.S. government were to adopt this as a policy goal, how would it change the behavior of health-care providers?

c. How would it change the behavior of Americans seeking health care?

d. What unintended consequences might such a policy produce?

14. A common assumption in economics is that the products of different firms in the same industry are indistinguishable. For which of the following industries is such an assumption reasonable? For which is it unreasonable?