1.Economics 211Principles of Microeconomics
Dr. Greg Delemeester
Summer 2011
2.Economics
Making choices under conditions of scarcity
What stocks should I buy for my portfolio?
How many Whoppers should I eat?
How many hours should I study for biology?
How many cars should I steal?
3.What Do Schoolteachers and Sumo Wrestlers Have in Common?
How Is the Ku Klux Klan Like a Group of Real-Estate Agents?
Why Do Drug Dealers Still Live with Their Moms?
Where Have All the Criminals Gone?
What Makes a Perfect Parent?
Would a Roshanda by Any Other Name Smell as Sweet?
Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?
Medium-Term Business Cycles
Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?
Macroeconomic Effects of Tax Changes
An Efficient Dynamic Auction for Heterogeneous Commodities
Asymmetric Contests with Conditional Investments
4.“Billy, you’ve been a fine son, but it’s time for a change.
I found a child overseas who can do it cheaper.”
7.Best Undergrad College Degrees by Salary
Source: www.payscale.com
8.Economic Fundamentals
Self Interest
Rationality
Purposeful behavior
Incentives matter
TANSTAAFL
Scarcity Choices Opportunity costs
There
Ain’t
No
Such
Thing
As
A
Free
Lunch
Trade-offs!
9.Soak Up the Sun (2002)
10.William installs custom sound systems in cars. If he installs 7 per day, his total costs are $300. If he installs 8 per day, his total costs are $400. William will install only 8 sound systems per day if the 8th customer is willing to pay at least:
$50
$100
$300
$400
11.Space Mountain
(Problem Set 1, #9)
You have waited 30 minutes in a line for the Space Mountain ride at Disneyworld. You see a sign that says, "From this point on your wait is 45 minutes." You must decide whether to continue in line or to move elsewhere.
On what basis do you make the decision?
Do the 30 minutes you've already stood in line come into play?
Marginal Analysis ignores sunk costs!
12.Economic Fundamentals
Unintended Consequences
CAFE (fuel economy) standards
27.5 MPG fleet average
Objective: Save energy + clean environment
Lighter + smaller cars = more dangerous cars ?
National Academy of Sciences: 1300 to 2600 extra highway deaths each year
Modes of Analysis
Positive Analysis
Normative Analysis
13.
14.Economic Model of Crime
Decision Rule
If MB > MC steal another car
Assumptions
Resale value on car = $40,000
Income = $20,000
Jail term = 5 years
Probability of Arrest = 20%
Probability of Conviction = 90%
MB = $40,000
MC = (5)($20,000)(.20)(.90)
= $18,000
Steal the car!
15.Policy Implications [How to deter crime?]
Increase jail sentence
Increase probability of arrest
Increase probability of conviction
Increase income
Economic Model of Crime
16.Which of the following will cause property crime to increase?
An increase in jail terms.
A decrease in personal incomes.
An increase in the probability of arrest.
A decrease in the expected benefit.
17.0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Guns Sold (Millions)
Gun-Related Murders (Thousands)
1965
1970
1975
1980
[What’s the Headline?]
Correlation is not causation.
18.Applications
(#3, Problem Set 1)
A few years ago, Tina ranked three available options as follows:
1st Choice: pay $21,000 tuition and finish a Master's degree in fine arts at the Ohio State University.
2nd Choice: earn $19,000 working part-time managing a small local theater and spend her spare time pursuing her theater hobby as a volunteer director of small-theater plays.
3rd Choice: earn $44,000 working full-time reviewing yellow page advertisements for Verizon.
19.$19,000
$21,000
$65,000
$84,000
What is the minimum value of Tina’s opportunity cost for pursuing her first choice?
1st Choice: pay $21,000 tuition and finish a Master's degree in fine arts at the Ohio State University.
2nd Choice: earn $19,000 working part-time managing a small local theater and spend her spare time pursuing her theater hobby as a volunteer director of small-theater plays.
3rd Choice: earn $44,000 working full-time reviewing yellow page advertisements for Verizon.
20.(#4, Problem Set 1)
The acres of grass surrounding the Taj Mahal in Agra, India, are often cut by young women who slice off handfuls with short kitchen blades. Is this a low- or high-cost way to keep a lawn mowed?
21.Maximizing the Net Benefits from Pizza
22.How many pizzas should Stephanie purchase?
One
Two
Three
Four
Five
Six
23.Rational Behavior:
Continue an activity until
MB = MC
MC
MB
TB
TC
24.Production Possibilities Frontier
Shows tradeoffs facing an economy that produces two goods
Assumptions
Resources are fixed
Land
Labor
Human Capital
Capital
Technology is fixed
Beer
Cars
A
B
C
D
E
Unattainable
Inefficient
25.Assume a concave production possibility frontier. Suppose that the society decides to increase the production of beer by 20,000 kegs, and that as a result the output of cars falls by 1000. If a further increase of 20,000 kegs of beer is sought, we can expect that the output of cars will:
fall by 1000.
fall by less than 1000.
fall by more than 1000.
increase by less than 1000.
26.Beer
Cars
A
B
C
D
Δ Beer
- Δ Cars
Slope of PPF = - Δ Cars / Δ Beer
Concave PPF implies “law of increasing opportunity cost”
(measures the Opportunity Cost)
27.Shifts in the PPF are due to:
Change in resources
Change in technology
PPF and Economic Growth
Economic Growth requires an expanding PPF
28.Examples
Cars v. Beer: more efficient brewing process
Houses v. Computers: immigration
Coffee v. Clothing: Haiti earthquake
Food v. Electronics: China’s Cultural Revolution
Production Possibilities Frontier
29.Consider the PPF depicted below. A reduction in the amount of unemployment could be described as the movement from:
A to B
B to D
D to C
B to E
30.All societies must answer basic questions:
What will be produced?
How will it be produced?
For whom will it be produced?
Allocation Mechanisms
Tradition
Plan
Market
Choices, choices, choices…
31.Gains From Trade
Trade implies mutually beneficial exchanges
Not a zero-sum game!
Comparative Advantage
David Ricardo
Lowest opportunity cost producer
Specialization and trade can allow individuals (and countries) to expand their consumption beyond their PPF constraints
32.Pizza
Pizza
Cars
Cars
100
400
50
600
50
25
200
300
∆C = 50
∆C = 25
∆P = -200
∆P = -300
Country A
Country B
Opportunity cost of 1 Car is 4 Pizzas
Opportunity cost of 1 Car is 12 Pizzas
slope = ∆P/ ∆ C = -200/50 = - 4/1
slope = ∆P/ ∆ C = -300/25 = - 12/1
Country A has the comparative advantage in producing cars.
33.Pizza
Cars
100
400
50
200
Country A
Pizza
Cars
50
600
25
300
Country B
200
0
600
0
100
500
75
25
300
50
100
600
Production
34.Problem Set 1: #14
Opportunity cost
of going to college =
$27,000
+ $900
+ $24,000
= $51,900
Sue Student
35.Problem Set 1: #13
36.10 W
2 W
1/10 S
1/2 S
+12
-24
-10
+50
+4
+10
+2
+26
US switches 1 hour of labor from steel to wheat
SK switches 4 hours of labor from wheat to steel
Trade: 50 W for 10 S
Problem Set 1: #21
37.Assume that Robinson and Crusoe live on a desert island. With a day’s labor, Robinson can produce 6 fish or 4 coconuts; Crusoe can produce 3 fish or 1 coconut. Robinson’s opportunity cost of producing 1 coconut is ____, and he should specialize in the production of ____.
1/4 fish; coconuts
1.5 fish; coconuts
3 fish; fish
6 fish; coconuts
38.Corner offices in high-rise office buildings usually cost more to rent than other offices. This best illustrates the economic principle of:
Scarce resources
Marginal analysis
Equilibrium
Opportunity costs
39.Zero—the ticket is free.
$15
$55
$40
A friend comes up to you and offers to give you a free ticket to the local professional team's baseball game that night. You decide to attend the game. It takes five hours to go to the game and costs you $15 for transportation. If you had not attended the game, you would have worked at your part-time job for $8 an hour. What is the cost of you attending the game?
40.10 million cups of tea
5 million scones
10 million scones
The answer is impossible to determine from the information given.
In the accompanying figure, Tealand is currently producing at point C on its production possibilities frontier. What is the opportunity cost in Tealand of increasing the production of tea from 20 million cups to 30 million cups?
41.International trade will increase the average income of Americans.
Higher expenditures on health care will reduce infant mortality rates.
We ought to reduce our dependence on oil imports in order to increase our national security.
Increased defense spending will lead to higher budget deficits.
Which of the following is a normative statement?
42.you will be better off if you eat one more slice.
the total cost of eating the pizza will be more than the total benefit of eating the pizza.
you will be worse off if you eat one more slice.
you will be no better off and no worse off from eating one more slice.
While eating pizza, you discover that the marginal benefit of eating one more slice is greater than the marginal cost of that slice. You then conclude:
43.Which of the graphs below shows the impact of scientists developing a more powerful fertilizer?
Figure A
Figure B
Figure C
Figure D
44.If they spend all night writing computer programs, Derek can write 10 programs while Tian can write 5. If they spend all night making sunglasses, Derek can make 6 while Tian can make 4. From this information we know that:
Tian’s opportunity cost of writing programs is less than that of Derek.
Derek’s opportunity cost of writing programs and of making sunglasses is less than that of Tian.
Tian’s opportunity cost of writing programs and of making sunglasses is less than that of Derek.
Derek’s opportunity cost of writing programs is less than that of Tian.
45.
46.“I’d like to introduce you to Marty Thorndecker. He’s an economist but he’s really very nice.”
Greg Delemeester