Key to Test 1 Study Problems (Corrected)

Here is the key to the study problems for the first test. A copy of the problems is available from my I-drive.

1-C, 2-A, 3-C, 4-D, 5-A, 6-C, 7-B*, 8-C,
9-B, 10-B, 11-A, 12-B, 13-C, 14-B, 15-B,
16-A, 17-B, 18-A, 19-A, 20-B, 21-A,
22-D, 23-B, 24-B, 25-D*, 26-B, 27-B, 28-D,
29-C, 30-C, 31-C, 32-B, 33-C, 34-C

If you got any of these wrong you should try to figure out why. If you really think one of my answers is wrong, let me know. (I may be wrong. It's happened before.)

*Corrections:

Problem 7. Originally listed as C. Correct response is obviously B. (Thank you Christine Adams for point out this error.)

Problem 25 originally reported alternative A as the answer (complementary goods). If the price of good X falls leading to less Y sold, that means people are buying more X and less Y. They are substitutes. (Thanks to Tim McCracken for bringing that to my attention.)

Honestly, I'll be much more careful with the key for the test. (I usually have a check mechanism in place for tests.)

One problem many of you will find challenging is number 20. To answer this please be aware of what you need to compare:

Initially, they are producing at points A on their PPFs.
When they trade, you must figure out how much of the good (in which they have the comparative advantage) is produced under complete specialization. Then make the trade as indicated in the problem. You can call this point B and plot it on their diagrams if you want. Finally, figure out how extra of one or the other (or both) goods they have after this trade compared to point A.

Watch this space for any changes, updates, or other important communications.

I will be available in my office on Thursday (9/22) 10:30-noon and 1:00-3:00 p.m.

Good luck.

Comments on Problem Set #1

I’ve received a few inquiries regarding the homework and I’d like to share what I’ve shared with everyone else concerning a few of the problems.

Problems 1 and 2:

“How much should we write?” A few sentences each should be suffice. One sentence probably won’t cover the necessary details. Five sentences would be saying too much.

Problem 3:

“I saw how you did the Gilligan and Mary Ann example in class but I’m not sure how to answer this problem.”

First, find the opportunity cost of producing one unit of each good. The “cost” is in terms of the other good. The following example applies to Tivoli. You’re given that in one month they can produce either 30 pounds of spaghetti (no meatballs) or 50 pounds of meatballs (no spaghetti). You can find the opportunity cost by starting with the equation:

30 lbs spaghetti = 50 lbs meatballs

To get the opportunity cost of spaghetti in terms of meatballs, solve the above equation for 1 lb of spaghetti. That is, divide both sides by 30. So

30 lbs/30 = 50lbs/30 or 1 lb spaghetti = 5/3 lbs meatballs.

Similarly, the opportunity cost of a pound of meatballs can be found by dividing both sides by 50. So 30 lbs/50 = 50 lbs/30 or 1 lb meatballs = 3/5 spaghetti.

Do the same for Frivoli. When you have calculated the opportunity costs for both goods in both tribes, you can then compare who has the lowest opportunity costs and, hence, comparative advantages.

“Do we have to do a trade?” Well, I think part C just asks if they could gain from a trade. The answer ought to be obvious. Also, if you think “hmm, what is a good trade”, you ought to conclude that a price of 1 lb meatball for 1 lb of spaghetti ought to be a mutually advantageous trade. You can probably show trading some amount of meatballs for spaghetti at this price will allow each tribe to consume outside their PPF.

Problem 4:

You should be able to use the “trick” above. You can set each person’s batting average to their free throw percentage. Then solve each for 1. You’ll be able to rank the best hitters, in terms of foregone free throw percentage. The top two hitters in terms of opportunity cost will be the worst two free throw shooters, relatively speaking. (Solving for best free throw shooters, you’ll find the ranking then is opposite.) Be careful, the argument is on relative ability to hit/shoot, not absolute ability to hit/shoot.

I hope this helps. Good luck.

First Assignment

Taking Stock in America

Resiliency, Redundancy and Recovery in the U.S. Economy

Federal Reserve Bank of Dallas, 2001 Annual Report

W. Michael Cox and Richard Alm

The article may be found at the following link: http://www.dallasfed.org/fed/annual/2001/index.html

This article is viewable in *.html or *.pdf formats. You are advised to download the *.pdf format as it contains many photos, diagrams, and tables that are missing from the *.html document. The relevant pages of the report are pages 3-24.