Olmsted Econ 5: Answer Key for Problems:
1. a.
Graph the PPC for this coconut and bread economy.
b. What is the opportunity
cost of going from 20 to 60 loaves of bread? 50 coconuts
c. Show graphically and explain
the economic implications if this country is observed producing 80 coconuts
and 15 loaves of bread. The country is inefficient. Not all resources are being used.
d. In the case where 80 coconuts
and 15 loaves of bread are being produced, what will be the impact of the
discovery of a new technology which allows workers to pick coconuts faster?
Explain carefully. The PPC will rotate out along the coconut axis. The
impact on actual production is not clear.
Most likely the number of coconuts produced will increase, but economy
still may be below PPC, since it was inefficient to start with.
2. True/False explain.
The cross price elasticity of
computer keyboards and computer screens will be positive.
False. Computer keyboards and screens are
complementary goods. When the price of keyboards goes up, the demand for
screens should go down. Hence the cross price elasticity will be negative.
3. An analyst explains that
the price of cotton rose in England because the Queen of England set a new
trend by wearing a cotton dress (in the past she had only worn silk) in
public. This, he argued, occurred at the
same time that the cotton gin (a machine which improves cotton production) was
being introduced.
a. Do you find his analysis
convincing? Why or why not? See hand-out outside my door for graph. His
analysis is not convincing. Although the impact of the Queen wearing a cotton
dress will positively affect the Demand and thus push up the price of cotton,
the impact of the cotton gin is to increase Supply, which will drive down
the price of cotton.
b. Draw a PPC with cotton on
one axis and all other goods on the other.
Show the impact on England’s economy of the introduction of the cotton
gin. Explain.
See hand-out outside my
door for graph. The invention of the cotton gin will increase productivity
of cotton production, rotating the PPC outward.
4.
b. Explain what will happen
to the market for pizza if the government decides to protect the pizza industry
by placing a price floor of $25. Show
on your graph and explain verbally. See hand-out outside my door for graph.
A price floor will lead to a Qs of 80 and a Qd of 50.
Thus there will be a surplus.
c. From the information you
gained from parts a and b, can you tell whether demand is elastic or inelastic
at this point? Explain. Using the TR method, before, p*q = 20*60 =
1200, after p*q = 25*50 = 1250. Demand is inelastic, since TR went up.
d. Does your answer to part c
seem realistic, given what you know about the market for pizza? In other words, do you think the demand for
pizza is likely to be elastic or inelastic. Given that pizza has lots of substitutes
and is not a necessity, this seems unrealistic, since the demand for goods with
lots of substitutes and that are not necessities are usually elastic.
e. Draw another graph representing the market for
hamburgers. Explain what the impact
of the price floor imposed on the pizza market is likely to have on the hamburger
market.
See hand-out outside my
door for graph. Since hamburgers are a substitute for pizza, raising the price
of pizza will lead to an increase in the demand for hamburgers.
f. Draw another graph
representing the pizza workers labor market.
Explain what the impact of the price floor will be on the pizza labor
market.
See hand-out outside my
door for graph. Since the number of pizzas being produced has gone up, the
number of workers in the pizza industry has also risen.
5. Thirsty and Munch are
entering a gluttony contest. Thirsty can drink 1 glass of milk in a minute,
while Munch can drink 2. Thirsty can eat 1 piece of cake in a minute, while
Munch can eat 3.
a. Graph both Thirsty and
Munch's PPCs on the same graph.
b. Identify who has the
absolute and comparative advantage in food and drink. Explain.
Munch has the absolute
advantage in cake and milk, since she can consume both more quickly.
Each glass of milk
consumed costs Thirsty 2 pieces of cake, and Munch 3 pieces of cake. Thus
Thirsty has the comparative advantage in milk, because it is less costly for
her to consume milk. Munch thus has the comparative advantage in cake.
c. If each specializes in
his/her comparative advantage, will they be able to beat the reigning
champions, Greed and Sneed, who can consume 5 glasses of milk and 10 cookies in
5 minutes? Thirsty will consume 5 cups of milk, while Munch consumes 15
pieces of cake. So yes, they will be able to defeat the reigning champs
(although they may get sick later…)
6. Explain the notion of
caring labor and discuss why standard labor market analysis does not adequately
account for caring labor. Caring
labor refers to the work that is done taking care of children and the elderly
and often is unpaid. Women do most of
the caring labor in the economy. Since
standard labor analysis only allows for leisure and paid work, unpaid labor is
categorized as ‘leisure,’ which it is not!
This is problematic, since it means that policy makers ignore the
important contribution unpaid labor makes to the paid economy, as illustrated
by cake theory. Since most caring labor
is not paid, women are at a disadvantage in the economy for two reasons – one they
are doing work that does not involve income, and yet is very important to the
functioning of the economy and two because they do unpaid work, it is more
difficult for them to do paid labor.
Women who combine both paid and unpaid labor face a double burden. Women also face an increased risk of poverty.