Econ Quiz 3 Ch 3

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Question 3.4 Figure 3.6 shows Alexei's indifference curves for free time and final grade. Which of the following is true?

a. Alexei prefers C to B because at C he has more free time. b. Alexei is indifferent between the grade of 84 with 15 hours of free time, and the grade of 50 with 20 hours of free time. c. Alexei prefers D to C, because at D he has the same grade and more free time. d. At G, Alexei is willing to give up 2 hours of free time for 10 extra grade points. ANSWER: b A, where Alexei has the grade of 84 and 15 hours of free time, and D, where Alexei has the grade of 50 with 20 hours of free time, are on the same indifference curve.

Question 3.8 Figure 3.10a shows Alexei's feasible frontier and his indifference curves for final grade and hours of free time per day. Suppose that all students have the same feasible frontier, but their indifference curves may differ in shape and slope depending on their preferences. Use the diagram to decide which of the following is (are) correct.

a. Alexei will choose a point where the marginal rate of substitution equals the marginal rate of transformation. b. C is below the feasible frontier but D is on the feasible frontier. Therefore, Alexei may select point D as his optimal choice. c. All students with downward-sloping indifference curves, whatever the slope, would choose point E. d. At E, Alexei has the highest ratio of final grade per hour of free time per day. ANSWER: a If Alexei were at a point on the feasible frontier where MRS ? MRT, then he would be willing to give up more of one good than would actually be necessary to get some of the other. Therefore, he will choose to do so until he reaches a point where MRS=MRT.

Look again at Figure 3.1, which depicts the annual number of hours worked against GDP per capita in the US, France and the Netherlands, between 1870 and 2000. Which of the following is true?

a. An increase in GDP per capita causes a reduction in the number of hours worked. b. The GDP per capita in the Netherlands is lower than that in the US because Dutch people work fewer hours. c. Between 1870 and 2000, French people have managed to increase their GDP per capita more than ten-fold while more than halving the number of hours worked. d. On the basis of the evidence in the graph, one day French people will be able to produce a GDP per capita of over $30,000 with less than 1,000 hours of work. ANSWER: c The GDP per capita of France increased from roughly to $2,000 to $20,000 (ten-fold) while annual hours worked fell from over 3,000 to under 1,500.

Question 3.9 The figures show Alexei's production function and his corresponding feasible frontier for final grade and hours of work or free time per day. They show the effect of an improvement in his studying technique, represented by the tilting up of the two curves. Consider now two cases of further changes in Alexei's study environment: Case A. He suddenly finds himself needing to spend 4 hours a day caring for a family member. (You may assume that his marginal product of labour is unaffected for the hours that he studies.) Case B. For health reasons his marginal product of labour for all hours is reduced by 10%.

a. For case A, Alexei's production function shifts to the right. b. For case A, Alexei's feasible frontier shifts to the left. c. For case B, Alexei's production function shifts down in a parallel manner. d. For case B, Alexei's feasible frontier rotates downwards, pivoted at the intercept with the horizontal axis. ANSWER: b & d The feasible frontier shifts to the left and intersects the horizontal axis at 20 hours, since 4 hours a day are now spent on care, so any given number of hours committed to free time per day now corresponds to fewer hours worked and thus a lower mark. The reduction in the marginal product results in a lower mark for every level of hours worked (except at zero), so the feasible frontier pivots around the intercept, rotating downwards.

Question 3.3 Figure 3.5 shows Alexei's production function, with the final grade (the output) related to the number of hours spent studying (the input). Which of the following is true?

a. The marginal product and average product are approximately the same for the initial hour. b. The marginal product and the average product are both constant beyond 15 hours. c. The horizontal production function beyond 15 hours means that studying for more than 15 hours is detrimental to Alexei's performance. d. The marginal product and the average product at 20 hours are both 4.5. ANSWER: a Because there are no previous hours to consider, the average product for the initial hour is just the improvement produced by a single hour, which in turn approximates to the marginal product from 0 to 1 hours (the precise marginal product changes over this interval, reflected in the decreasing slope of the production function).

Question 3.6 You are a taxi driver in Melbourne who earns A$50 for a day's work. You have been offered a one-day ticket to the Australian Open for A$40. As a tennis fan, you value the experience at A$100. With this information, what can we say?

a. The opportunity cost of the day at the Open is A$40. b. The economic cost of the day at the Open is A$40. c. The economic rent of the day at the Open is A$10. d. You would have paid up to A$100 for the ticket. Check my answers ANSWER: c The economic rent of an action is its benefit minus its economic cost (out-of-pocket plus opportunity costs). Therefore, the economic rent is A$100 - A$40 - A$50 = A$10.

Question 3.5 What is the marginal rate of substitution (MRS)?

a. The ratio of the amounts of the two goods at a point on the indifference curve. b. The amount of one good that the consumer is willing to trade for one unit of the other. c. The change in the consumer's utility when one good is substituted for another. d. The slope of the indifference curve. ANSWER: b & d This is the definition of the marginal rate of substitution. The slope of the indifference curve represents the marginal rate of substitution: the trade-off between two goods that keeps utility constant.

Question 3.10 Figure 3.15 depicts your budget constraint when the hourly wage is $15. Which of the following is (are) true?

a. The slope of the budget constraint is the negative of the wage rate (-15). b. The budget constraint is a feasible frontier with a constant marginal rate of transformation. c. An increase in the wage rate would cause a parallel upward shift in the budget constraint. d. A gift of $60 would make the budget constraint steeper, with the intercept on the vertical axis increasing to $300. ANSWER: a & b For every additional hour of free time, you have $15 less to spend on consumption, so the slope of the budget constraint is −15. The budget constraint is the feasible frontier of the available combinations of free time and consumption. Its slope is constant, so the MRT is constant.

Question 3.11 Figure 3.20 depicts a model of labour supply and consumption for the US in 1900 and 2013. The wage rate is shown to have increased between the two years. Which of the following are true?

a. The substitution effect corresponds to the steepening of the budget constraint. This is represented by the move from point A to point D. b. The income effect corresponds to the parallel shift in the budget constraint outwards due to the higher income. This is represented by the move from point A to C. c. As shown, the income effect dominates the substitution effect, leading to a reduction in the hours of work. d. If Americans had had different preferences, they might have responded to this wage rise by reducing their free time. ANSWER: b, c, d The income effect is the effect of a higher income on the choice of free time, which is shown by the parallel shift outwards of the budget constraint, and thus a move from A to C. With the indifference curves shown, the income effect of the wage increase is greater than the substitution effect, so overall free time increases and hours of work fall. With different indifference curves, the substitution effect could have dominated the income effect, leading to a reduction of free time between 1900 and 2013.

Question 3.7 Look at Figure 3.5 which shows Alexei's production function: how the final grade (the output) depends on the number of hours spent studying (the input). Free time per day is given by 24 hours minus the hours of study per day. Consider Alexei's feasible set of combinations of final grade and hours of free time per day. What can we conclude?

a. To find the feasible set one needs to know the number of hours that Alexei sleeps per day. b. The feasible frontier is a mirror image of the production function above. c. The feasible frontier is horizontal between 0 and 10 hours of free time per day. d. The marginal product of labour at 10 hours of study equals the marginal rate of transformation at 14 hours of free time. ANSWER: b & d Given that the production function is just the feasible frontier except that it takes negative free time (hours of study) as its input, the former is simply the latter mirrored across the horizontal axis and shifted horizontally. 10 hours of study is equivalent to 14 hours of free time given a 24-hour day, and the marginal product of labour (additional output per labour hour) is the same as the marginal rate of transformation (trade-off between extra output and labour), so these two values are equal.

Question 3.1 Currently you work for 40 hours per week at the wage rate of £20 an hour. Your free hours are defined as the number of hours not spent in work per week, which in this case is 24 hours × 7 days − 40 hours = 128 hours per week. Suppose now that your wage rate has increased by 25%. If you are happy to keep your total weekly income constant, then:

a. Your total number of working hours per week will fall by 25%. b. Your total number of working hours per week will be 30 hours. c. Your total number of free hours per week will increase by 25%. d. Your total number of free hours per week will increase by 6.25%. ANSWER: d The new wage rate is £20 × 1.25 = £25 per hour. Your original weekly income is £20 × 40 hours = £800. Therefore, your new total number of working hours is £800/£25 per hour = 32 hours. Then your free time is now 24 × 7 - 32 = 136 hours per week, an increase of (136 - 128)/128 = 6.25%.