Youngberg
Econ 163—Bethany College
HOMEWORK 02
Answer all the following on a typed, stapled (if applicable) separate sheet of paper. You
do not need to type equations and graphs. I charge 25 cents to staple your homework.
Make sure that you justify your answers, use your own words, and show your work. All
questions are equally weighted.
1. Give an example of when you purchased a product and received consumer
surplus. Numerically estimate how much consumer surplus you received. Justify
your answer.
2. Illustrate the following effects on the market for tea. Make sure to illustrate each
effect on separate diagrams. Briefly justify your answer.
a. The price of coffee falls. Note tea and coffee are substitutes.
b. A drought ensures the tea crop will be poor.
c. A study suggests drinking tea regularly will help prevent cancer.
d. The US—where drinking tea is the sophisticated thing to do—falls into a
recession.
e. The price of driving range memberships falls; assume farmland used to
grow tea would also make good driving ranges and vice versa.
3. For the following pairs of jobs, indicate which one should have a higher pay using
the theory of compensating differentials. Briefly justify your answer.
a. A nurse in a nursing home vs. a nurse in a mental institution
b. A physicist doing research in California vs. a physicist doing research in
Antarctica
c. Road construction in the flat state of Kansas vs. road construction in the
mountainous state of West Virginia (assume weather conditions are the
same)
d. Reporting the weather in sunny California vs. reporting the weather in
hurricane-prone Florida
e. Being a firefighter before it became a particularly heroic occupation vs.
after it became so heroic
4. “Talk is cheap” is one way to summarize why college leads to a higher income
and greater chance of employment. Why?