Chapter 2 - Scarcity and the World of Trade-Offs.doc

18Miller• Economics Today, Nineteenth Edition Chapter 2Scarcity and the World of Trade-Offs19 Answers to Questions for Critical Analysis Why the “Free File” Tax Services Is Not Really “Free” (p. 30) Why might a person pay a firm at a mall to prepare her tax forms while she shops instead of allocating the same amount of time to finding a qualifying Free-File tax preparation service? For some people, the opportunity cost of spending time in finding a qualifying Free-File tax-preparation service might be higher than their opportunity cost of spending the same amount of time shopping. An Economic Explanation for Monogamy (p. 32) What must be true of the trade-off perceived by people who have multiple sex partners? For people who have multiple sex partners, their opportunity cost of the time required to maintain involvement with multiple sex partners must be smaller than the opportunity cost of devoting that amount of time to earning income or the next highest-valued activity. The Substantial Trade-off of Satisfying U.N. Development Goals (p. 34) If the U.N. follows through on a proposal to add production targets for 148 more items to its Sustainable Development Goals, why might we expect that the opportunity cost in terms of other goods and services that must be forgone could be even greater? Explain briefly. Because of the law of increasing additional cost, which means a bowed curve for the a nation’s production possibilities curve, the opportunity cost of adding production targets for more items to the Sustainable Development Goals must be even greater. The Airline Industry Confronts the Law of Increasing Additional Cost (p. 36) Why might the production possibilities curve relating the number of electronic-gadget-accessory boxes at passenger seats to the quantity of seats on a plane be bowed? Explain your reasoning. The bowed shape of the production possibilities curve reflects the fact that existing seats on a plane are specialized resources. You Are There Reducing the Opportunity Cost of Waiting in Gridlocked Traffic, at a Price (p. 42) 1. How must the dollar values of the opportunity costs of time compare for a typical purchaser of a vehicle converted by Becker Automotive, Inc., versus commuters who do not purchase them? Explain briefly. Because the prices of those converted vehicles are at least $150,000, which is higher than the price of a typical vehicle, the opportunity cost of time for Becker’s customer must be higher than that for other commuters. 2. Why do you suppose that economists have estimated the dollar value of the combined opportunity costs of time that U.S. commuters spend in gridlocked traffic to be in excess of $150 billion per year? Explain our reasoning. U.S. commuters spend a total of 7 billion hours per year in gridlocked traffic. The opportunity cost of that total amount of time can be measured by the amount of income earnings forgone. Economists can use the average wage rate per hour to arrive at the total dollar value in excess of $150 billion per year. Issues & Applications The U.S. Navy Expands Production Possibilities via a New Technology (pp. 42–43) 1. In spite of the lower opportunity cost of rail-gun projectiles instead of missiles, does the U.S. Navy continue to face an increasing additional cost, in terms of forgone ship production, to obtain additional weapons? Explain briefly. Despite the lower opportunity cost of rail-gun projectiles, the U.S. Navy’s production possibilities curve still bows outward, meaning an increasing additional cost for obtaining more weapons. 2. Could the U.S. Navy expand its production of both ships and weapons after switching from missiles to rail-gun weapons? Explain your reasoning. (Hint: Are there points along PPC2 involving combinations of both more ships and more weapons than is feasible at point A on PPC1?) Yes, the switch from the production of missiles to rail-gun weapons leaves the U.S. Navy with resources that can be used for the production of ships and weapons. The U.S. Navy’s production possibilities curve shifts outward as a result, meaning more production of both ships and weapons. Research Project 1. Learn more about the U.S. Navy’s rail-gun technology in the Web Links in MyEconLab. 2. Read about how other divisions of the U.S. military also are working on developing rail-gun technologies in the Web Links in MyEconLab. Answers to Problems 2-1. Define opportunity cost. What is your opportunity cost of attending a class at 11:00 a.m.? How does it differ from your opportunity cost of attending a class at 8:00 a.m.? The opportunity cost of attending a class at 11:00 a.m. is the next-highest-valued use of that hour of the day. Likewise, the opportunity cost of attending an 8:00 a.m. class is the next-highest-valued use of that particular hour of the day. If you are an early riser, it is arguable that the opportunity cost of the 8:00 a.m. hour is lower because you will already be up at that time, but have fewer choices compared with the 11:00 a.m. hour when shops, recreation centers, and the like are open. If you are a late riser, it may be that the opportunity cost of the 8:00 a.m. hour is higher, because you place a relatively high value on an additional hour of sleep in the morning. 2-2. If you receive a ticket to a concert at no charge, what, if anything, is your opportunity cost of attending the concert? How does your opportunity cost change if miserable weather on the night of the concert requires you to leave much earlier for the concert hall and greatly extends the time it takes to get home afterward? The opportunity cost of attending the concert is the next-highest-value use of the time spent at the concert. If bad weather extends the amount of time spent on an evening at the concert, then there is an additional opportunity cost in the form of the next-best uses of that additional time. 2-3. You and a friend decide to spend $100 each on concert tickets. Each of you alternatively could have spent the $100 to purchase a textbook, a meal at a highly rated local restaurant, or several Internet movie downloads. As you are on the way to the concert, your friend tells you that if she had not bought the concert ticket, she would have opted for a restaurant meal, and you reply that you otherwise would have downloaded several movies. Identify the relevant opportunity costs for you and your friend of the concert tickets that you purchased. Explain briefly. The opportunity cost is the cost of the single, next-highest-valued foregone alternative to the $100 spent on the concert ticket, which for your friend was a restaurant meal she otherwise could have purchased and which for you was movie downloads that you otherwise could have bought. 2-4. After the concert discussed in Problem 2-3 is over and you and your friend are traveling home, you discuss how each of you might otherwise have used the four hours devoted to attending the concert. The four hours could have been used to study, to watch a sporting event on TV, or to get some extra sleep. Your friend decides that if she had not spent four hours attending the concert, she would have chosen to study, and you reply that you otherwise would have watched the televised sporting event. Identify the relevant opportunity costs for you and your friend for allocating your four hours to attending the concert. Explain briefly. The opportunity cost is the cost of the single, next-highest-value forgone alternative to the four hours spent attending the concert, which for your friend was time that she otherwise could have devoted to study and for you was time that you otherwise could have spent watching the sporting event on television. 2-5. Recently, a woman named Mary Krawiec attended an auction in Troy, New York. At the auction, a bank was seeking to sell a foreclosed property: a large Victorian house suffering from years of neglect in a neighborhood in which many properties had been on the market for years yet remained unsold. Her $10 offer was the highest bid in the auction, and she handed over a $10 bill for a title to ownership. Once she acquired the house, however, she became responsible for all taxes on the property and for an overdue water bill of $2,000. In addition, to make the house habitable, she and her husband devoted months of time and unpaid labor to renovating the property. In the process, they incurred explicit expenses totaling $65,000. Why do you suppose that the bank was willing to sell the house to Ms. Krawiec for only $10? (Hint: Contemplate the bank’s expected gain, net of all explicit and opportunity costs, if it had attempted to make the house habitable.) The bank apparently determined that the net gain that it anticipated receiving from trying to sell the house to someone else, taking into account the opportunity cost of resources that the bank would have had to devote to renovating the house, was less than $10. 2-6. The following table illustrates the points a student can earn on examinations in economics and biology if the student uses all available hours for study. Plot this student’s production possibilities curve. Does the PPC illustrate the law of increasing additional cost? Economics Biology 100 40 90 60 80 75 70 85 60 93 50 98 40 100 Each additional 10 points earned in economics costs 10 additional points in biology, so this PPC illustrates constant additional opportunity costs. It does not satisfy the law of increasing relative cost. 2-7. Based on the information provided in Problem 2-6, what is the opportunity cost to this student of allocating enough additional study time on economics to move her grade up from a 90 to a 100? If the student allocates additional study time to economics in order to increase her score from 90 to 100, her biology score declines from 50 to 40, so the opportunity cost of earning 10 additional points in economics is 10 fewer points in biology. 2-8. Consider a change in the table in Problem 2-6. The student’s set of opportunities is now as follows: Does the PPC illustrate the law of increasing additional cost? What is the opportunity cost to this student for the additional amount of study time on economics required to move her grade from 60 to 70? From 90 to 100? Economics Biology 100 40 90 50 80 60 70 70 60 80 50 90 40 100 Each additional 10 points earned in economics costs a greater number of biology points. For instance, the opportunity cost to the student of increasing points earned in economics from 60 to 70 is 8 points forgone in biology, but the opportunity cost of increasing economics points from 90 to 100 rises to 20 points forgone in biology. Thus, the new PPC illustrates the law of increasing relative cost. 2-9. Construct a production possibilities curve for a nation facing increasing opportunity costs for producing food and video games. Show how the PPC changes given the following events. a. A new and better fertilizer is invented. b. Immigration occurs, and immigrants’ labor can be employed in both the agricultural sector and the video game sector. c. People invent a new programming language that is much less costly to code and is more memory-efficient. d. A heat wave and drought result in a 10 percent decrease in usable farmland. 2-10. During a debate on the floor of the U.S. Senate, Senator Creighton states, “Our nation should not devote so many of its fully employed resources to producing capital goods because we already are not producing enough consumption goods for our citizens.” Compared with the other labeled points on the diagram, which one could be consistent with the current production combination choice that Senator Creighton believes the nation has made? Point C 2-11. In response to Senator Creighton’s statement reported in Problem 2-10, Senator Long replies, “We must remain at our current production combination if we want to be able to produce more consumption goods in the future.” Of the labeled points on the diagram, which one could depict the future production combination Senator Long has in mind? Point D 2-12. Senator Borman interjects the following comment after the statements by Senators Creighton and Long reported in Problems 2-10 and 2-11: “In fact, both of my esteemed colleagues are wrong, because an unacceptably large portion of our nation’s resources is currently unemployed.” Of the labeled points on the diagram, which one is consistent with Senator Borman’s position? Point A 2-13. A nation’s residents can allocate their scarce resources either to producing consumption goods or to producing human capital—that is, providing themselves with training and education. The table at the top of next column displays the production possibilities for this nation: a. Suppose that the nation’s residents currently produce combination A. What is the opportunity cost of increasing production of consumption goods by 10 units? By 60 units? b. Does the law of increasing additional cost hold true for this nation? Why or why not? Units of Production Consumption Units of Combination Goods Human Capital A 0 100 B 10 97 C 20 90 D 30 75 E 40 55 F 50 30 G 60 0 a. If the nation’s residents increase production of consumption goods from 0 units to 10 units, the opportunity cost is 3 units of human capital forgone. If the nation’s residents increase production of consumption goods from 0 units to 60 units, the opportunity cost is 100 units of human capital. b. Yes, because successive 10-unit increases in production of consumption goods generate larger sacrifices of human capital, equal to 3, 7, 15, 20, 25, and 30. 2-14. Like physical capital, human capital produced in the present can be applied to the production of future goods and services. Consider the table in Problem 2-13, and suppose that the nation’s residents are trying to choose between combination C and combination F. Other things being equal, will the future production possibilities curve for this nation be located farther outward if the nation chooses combination F instead of combination C? Explain. No, because combination F entails production of less human capital than combination C, so choosing combination F today would result in a smaller output shift in the production possibilities curve than would be experienced if combination C were chosen instead. 2-15. You can wash, fold, and iron a basket of laundry in two hours and prepare a meal in one hour. Your roommate can wash, fold, and iron a basket of laundry in three hours and prepare a meal in one hour. Who has the absolute advantage in laundry, and who has an absolute advantage in meal preparation? Who has the comparative advantage in laundry, and who has a comparative advantage in meal preparation? Because it takes you less time to do laundry, you have an absolute advantage in laundry. Neither you nor your roommate has an absolute advantage in meal preparation. You require 2 hours to fold a basket of laundry, so your opportunity cost of folding a basket of laundry is 2 meals. Your roommate’s opportunity cost of folding a basket of laundry is 3 meals. Hence, you have a comparative advantage in laundry, and your roommate has a comparative advantage in meal preparation. 2-16. Based on the information in Problem 2-15, should you and your roommate specialize in a particular task? Why? If so, who should specialize in which task? Show how much labor time you save if you choose to “trade” an appropriate task with your roommate as opposed to doing it yourself. Yes, you and your roommate should specialize in the task in which each of you has a comparative advantage. You should specialize in folding laundry and your roommate in preparing meals. If you fold a basket of laundry, you must forgo the time that it would take to prepare two meals. For your roommate to fold a basket of laundry, the time that it takes to prepare three meals must be given up. Suppose that you “trade” folding a basket of laundry for preparing 2.5 meals. You gain 0.5 meals, which is equivalent to one-half hour of meal preparation time. Hence, you save one-half hour for every basket of laundry you fold for your roommate in exchange for an hour of meal preparation time. 2-17. Using only the concept of comparative advantage, evaluate this statement: “A professor with a Ph.D. in physics should never mow his or her own lawn, because this would fail to take into account the professor’s comparative advantage.” It may be that the professor is very proficient at doing yard work relative to teaching and research activities, so in fact the professor may have a comparative advantage in doing yard work. 2-18. Country A and country B produce the same consumption goods and capital goods and currently have identical production possibilities curves. They also have the same resources at present, and they have access to the same technology. a. At present, does either country have a comparative advantage in producing capital goods? Consumption goods? b. Currently, country A has chosen to produce more consumption goods, compared with country B. Other things being equal, which country will experience the larger outward shift of its PPC during the next year? a. If the two nations have the same production possibilities, then they face the same opportunity costs of producing consumption goods and capital goods. Thus, at present neither has a comparative advantage in producing either good. b. Because country B produces more capital goods today, it will be able to produce more of both goods in the future. Consequently, country B’s PPC will shift outward by a greater amount next year. 2-19. Suppose that in Figure 2-1, a student currently is allocating her study time in such a way that she is earning a C in mathematics and a C in economics. What is the opportunity cost, measured in terms of the resulting grade change, if this student wishes to reallocate her study time in order to raise her mathematics grade by one letter, from a C to a B? According to the figure, if the student makes the required reallocation of study time to earn a B in mathematics, then she will earn a D in economics. Thus, the student’s opportunity cost of raising her grade by one letter grade, from a C to a B, is a one-letter grade drop in her economics grade, from a C to a D. 2-20. Suppose that in Figure 2-1, a student currently is allocating her study time in such a way that she is earning a C in mathematics and a C in economics. If the student desires to boost her economics grade to an A, how must she alter the number of hours per week that she studies economics? How must she alter the number of hours per week that she studies mathematics? The student currently is allocating 3 hours per week of study time to mathematics and 3 hours per week of study time to economics. To boost her grade in economics from a C to an A, she must devote all 6 hours of available study time to economics, so she must increase the amount of time she spends studying economics by 3 hours per week. To attain a grade of A in economics, she can devote none of her weekly study hours to mathematics, so she must decrease the amount of time she devotes to studying mathematics by 3 hours per week. 2-21. Suppose that in Figure 2-2, the nation currently is producing combination D in the table and on the graph of the production possibilities curve. What is the opportunity cost of producing 5 million more smartphones and moving to production combination C? To move from combination D to combination C and produce 5 million more smartphones, instead of producing 30 million tablet devices at point D, at point C the nation is capable of producing only 20 million tablets. Thus, in order to move to point C, the nation must give up production of 10 million tablets (30 million tablets – 20 million tablets = 10 million tablets). The opportunity cost of the additional 5 million smartphones, therefore, is 10 million tablets. 2-22. Suppose that in Figure 2-2, the nation currently is producing combination D in the table and on the graph of the production possibilities curve. What is the opportunity cost of producing 20 million more tablet devices and moving to production combination F? To move from combination D to combination F and produce 20 million more tablet devices at point F, instead of producing 45 million smartphones at point C, at point F the nation is capable of producing only 22.5 million smartphones. Thus, in order to move to point F, the nation must give up production of 17.5 million smartphones (45 million smartphones – 22.5 million smartphones = 17.5 million smartphones). The opportunity cost of the additional 20 million tablets, therefore, is 17.5 million smartphones. 2-23. Suppose that in Figure 2-4, the nation currently has sufficient resources to produce combinations located along only the innermost production possibilities curve. In addition, suppose that the nation’s residents have determined that smartphones function mainly as consumption goods while tablet devices function primarily as capital goods. If the nation produces no additional tablets this year, will the intermediate-shifted PPC resulting from minimal economic growth or the farthest-shifted PPC caused by more significant economic growth be more likely to apply next year? The nation is said to have determined that tablet devices are capital goods that can be used to produce more items in the future, whereas smartphones are consumption goods that cannot. Consequently, by producing no additional tablets this year, the nation has chosen to produce no new capital goods. Its economic growth will be minimal, so the intermediate-shifted PPC will result. 2-24. Suppose that in Figure 2-4, the nation with otherwise the same background conditions as in Problem 2-23 currently has sufficient resources to produce combinations located along only the innermost production possibilities curve. If the nation produce s no additional smartphones this year, will the intermediate-shifted PPC resulting from minimal economic growth or the farthest-shifted PPC caused by more significant economic growth be more likely to apply next year? The nation is said to have determined that tablet devices are capital goods that can be used to produce more items in the future, whereas smartphones are consumption goods that cannot. Consequently, by producing no additional smartphones this year, the nation has chosen to produce as many tablets—that is, capital goods—as feasibly can produce. Its economic growth will be substantial, so the farthest-shifted PPC will result. Selected References Fellner, William, The Emergence and Content of Modern Economics, New York: McGraw-Hill, 1970. Friedman, Milton, Free to Choose, New York: Harcourt, Brace, Jovanovich, 1980. Friedman, Milton, Capitalism and Freedom, Chicago: University of Chicago Press, 1962. Schotter, Andrew, Free Market Economics: A Critical Appraisal, New York: St. Martin’s Press, 1985.