ECO 110 – Introduction to Economics
Professor Mike Rizzo
Problem Set #2 – This is an assignment that WILL be collected but will not be graded.
I will record whether you completed all of the questions. This is also a group
assignment, but it would be prudent to work all of the problems on your own first.
Since many of these questions will be useful for you in preparing for the exam, I urge
you to take this assignment seriously despite the problems themselves not being
graded.
Assigned:
Due:
Wednesday, March 1st
Wednesday, March 8th
1. The market for buffalo wings in Danville has the following demand schedule:
Price
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
Quantity Demanded
100
95
85
70
50
25
20
15
a. Graph the demand curve.
b. Suppose that the current market price of buffalo wings is $3.00 per dozen.
Starting with the above diagram for the demand curve, please analyze (i.e.
draw the picture and describe the change in words) the effects of the
following events on the demand for buffalo wings in Danville:
i.
A scientific study is published showing that hot sauce reduces the
risk of a heart attack by 40%
ii.
The price of buffalo wings increases to $5.00 per dozen.
iii.
The price of blue cheese dipping sauce increases.
iv.
The price of hamburgers increases.
v.
The price of buffalo wings in Harrodsburg increases.
vi.
New technology is invented that allows companies to make wings
faster.
vii.
The city of Danville decides to move from being a “moist” town to
a “wet” town.
viii.
The city of Danville passes a law making it illegal to sell buffalo
wings for a price greater than $2.50.
ix.
The residents of Danville decide to cooperate more fully with one
another, and to increase the extent to which they specialize and
exchange with one another.
2. The market for buffalo wings in Danville has the following supply schedule:
Price
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
Quantity Supplied
30
35
45
60
80
105
135
175
c. Graph the supply curve.
d. Suppose that the current market price of buffalo wings is $3.00 per dozen.
Starting with the above diagram for the supply curve, please analyze (i.e.
draw the picture and describe the change in words) the effects of the
following events on the supply of buffalo wings in Danville:
x.
A scientific study is published showing that hot sauce reduces the
risk of a heart attack by 40%
xi.
The price of buffalo wings increases to $5.00 per dozen.
xii.
The cost of defeathering chickens increases.
xiii.
The price of short-order cooks decreases.
xiv.
Entrepreneurs expect the city of Danville to go from a “moist”
town to a “wet” town.
xv.
New technology is invented that allows companies to make wings
faster.
xvi.
The citizens of Danville suddenly think it’s cruel to eat buffalo
wings.
xvii.
The city of Danville passes a law making it illegal to sell buffalo
wings for a price greater than $2.50.
3. Mankiw, Chapter 5, Problem #1.
4. Mankiw, Chapter 5, Problem #4.
5. Mankiw, Chapter 5, Problem #6.
6. Mankiw, Chapter 5, Problem #9.
7. Anti-economists frequently rail against the notion of free-trade by arguing that
unless economists can “identify” the specific new jobs that will emerge to replace
jobs lost to increasing international trade, then claims that new jobs will emerge
from trading are baseless at best and misleading at worst.
I invite you to look at the different types of current jobs listed in this
Occupational Wages and Employment Survey, released in November 2004 by the
Bureau of Labor Statistics (the URL can be found at
http://www.bls.gov/news.release/pdf/ocwage.pdf). You may have to look
around the BLS webpages some more to see the very specific jobs I am
interested in. Some of these jobs were familiar to our grandparents – for
example, boilermakers, stone masons, and mail clerks. But notice how very many
of these jobs didn’t exist 100, 50, 25, or even 15 years ago. How many of these
newer jobs could possibly have been identified in advance? Provide a few
examples.
8. What is wrong with the following statement? (This was pulled from a NY Times
article several weeks ago … and is a very common argument made by writers for
that paper.)
”American economists are so inattentive to outsourcing's perils they fail to
realize the incentive that leads to outsourcing one tradable good or
service does the same for all tradable goods and services.”
9. Attorney Fudd is the most highly sought after lawyer in the state. He is also a
phenomenal typist who can do 120 words per minute. Should Fudd do his own
typing if the fastest secretary he can hire can only do 60? Prove that Fudd is
NOT twice as efficient as his secretary at typing, and that he should therefore
retain his secretary.
10. When asked if there are any substitutes for water, students often respond with,
“Yeah – death!” Explain why this answer misunderstands what economists mean
by substitutes.
11. “According to the law of demand, the lower the price of meals, the more meals
I’ll eat. But I always eat three meals a day. Obviously the law of demand
doesn’t apply to me.” Has this person found an exception to the law of demand?
12. The contention that certain goods are “basic human needs” carries a strong
suggestion that access to those goods should be a matter of right, not of
privilege. But the assertion of rights logically entails the assertion of obligations
(remember, there’s no such thing as a free lunch except in the land of unicorns
and tooth fairies). Your right to vote, for example, entails the obligation of
elected officials to accept and count your ballot; your right to use your own
umbrella implies an obligation on the part of others not to borrow it without your
permission.
i.
Many pundits and activists claim that “health care is the right of everyone.”
What quantity and quality of health care do you suppose “they” are talking
about? Is a liver transplant, for example, a right of everyone with a diseased
liver?
ii.
If “health care is the right of everyone,” who has the obligation to provide
health care to everyone? Who currently accepts the obligation to provide
people with health care? How are they persuaded to accept these
obligations?
iii.
Here are three news items relating to the cost of medical care: (a) use of
primary care services at a leading HMO fell 11% when when the HMO
imposed a $5 charge per office visit. (b) University researchers found that
disability claims for lower-back pain rose or fell with the local jobless rate.
(c) When Sweden’s welfare system reduced sick leave insurance benefits
from 100% of pay to 75% of pay for the first three sick days and from
90% for each day thereafter, the number of sick-leave days fell nearly
20%. What does all this suggest about the “need” for health care?
13. Is it strictly true that a change in the price of a good causes a change in the
quantity of a good demanded, but not a shift in the demand curve for that good?
a. What effect do you suppose the large increases in the price of gasoline in
the 1970’s had on the demand curve for fuel efficient cars?
b. What effect did this have after several years on the original demand
curve for gasoline?
c. How did the huge increase in the price of home heating oil during 2003
affect the demand for housing insulation? How did this eventually shift
the demand for heating oil?
d. Can you think of similar processes through which changes in the price of
a good would lead, over time, to shifts in the demand for the good?
e. If the price of a good returned to its previous level after a time, but the
quantity demanded did not, would this be evidence that the demand had
changed in the interim.
14. If customers always want to purchase less at higher prices, why would any seller
publicize the fact that its prices are high?
a. The advertising slogan of Maker’s Mark Bourbon is: “It tastes expensive
… and it is.” Isn’t the firm foolish to advertise its high price? Or will
people buy more bourbon if they think if Maker’s Mark is more expensive
than other bourbons? If so, does this contradict the law of demand?
b. A waiter at Jean-Louis, a restaurant in Washington, DC, often patronized
by prominent politicians, says: “It is good to be known as expensive.
People know they can impress their guests here.” What does he think
people are purchasing when they go to Jean-Louis for dinner?
c. Robert Cialdini reports the following event in his book Influence: The
Psychology of Persuasion. The owner of an Arizona jewelry store was
unable to move some fine-quality turquoise jewelry that was selling at
low prices in the height of the tourist season. So, she instructed her
assistant to cut the prices in half just before leaving on a business trip.
But the assistant misunderstood and doubled the prices. When the
owner returned a few days later, every piece had been sold. Can you
explain this in a way that does not contradict the law of demand?
15. What makes demand curves elastic or inelastic?
a. How do you think e-mail has affected the elasticity of demand for snail
mail provided by the U.S. Postal Service? Do you think the postal service
is pleased by the results?
b. The demand for aspirin at currently prevailing prices seems to be highly
inelastic. What do you think would happen to the elasticity of demand if
the price of aspirin relative to everything else were 5 times as high? Fifty
times as high? Why?
c. Is the demand for prescription drugs elastic or inelastic? Why? Do you
agree with the statement sometimes made that the prices charged for
prescription drugs can be freely set by the manufacturers, since people
must buy whatever the doctor prescribed?
16. A friend of mine that is notoriously unsympathetic to the ideals of free societies,
attacked me for being a so-called “market environmentalist.” See if you can
clarify the errors in this attack/analysis on me: “If half of our forests were
destroyed in a fire, the value of the remaining lumber would be greater than the
value of all the lumber in the country before the fire. This absurdity – that the
whole is worth less than the half – shows that values are distorted in a market
economy.”