computing the opportunity cost

1) Eileen is a hard-working college sophomore. One Tuesday, she decides to work nonstop until she has answered 250 practice problems for her physics course. She starts work at 8:00 AM and uses a table to keep track of her progress throughout the day. She notices that as she gets tired, it takes her longer to solve each problem.

Time	Total Problems Answered
8:00 AM	0
9:00 AM	100
10:00 AM	175
11:00 AM	225
Noon	250

Use the table to answer the following questions.

The marginal, or additional, gain from Eileen’s second hour of work, from 9:00 AM to 10:00 AM, is

 

problems.

The marginal gain from Eileen’s fourth hour of work, from 11:00 AM to noon, is

 

problems.

Later, the teaching assistant in Eileen’s physics course gives her some advice. “Based on past experience,” the teaching assistant says, “working on 87.5 problems raises a student’s exam score by about the same amount as reading the textbook for 1 hour.” For simplicity, assume students always cover the same number of pages during each hour they spend reading.

Given this information, in order to use her 4 hours of study time to get the best exam score possible, how many hours should she have spent working on problems, and how many should she have spent reading?

0 hours working on problems, 4 hours reading

1 hour working on problems, 3 hours reading

2 hours working on problems, 2 hours reading

4 hours working on problems, 0 hours reading

 

 

2) Juanita is deciding whether to buy a skirt that she wants, as well as where to buy it. Three stores carry the same skirt, but it is more convenient for Juanita to get to some stores than others. For example, she can go to her local store, located 15 minutes away from where she works, and pay a marked-up price of $102 for the skirt:

 

Store	Travel Time Each Way	Price of a Skirt
	(Minutes)	(Dollars per skirt)
Local Department Store	15	102
Across Town	30	85
Neighboring City	60	76

Juanita makes $42 an hour at work. She has to take time off work to purchase her skirt, so each hour away from work costs her $42 in lost income. Assume that returning to work takes Juanita the same amount of time as getting to a store and that it takes her 30 minutes to shop. As you answer the following questions, ignore the cost of gasoline and depreciation of her car when traveling.

Complete the following table by computing the opportunity cost of Juanita’s time and the total cost of shopping at each location.

Store	Opportunity Cost of Time	Price of a Skirt	Total Cost
	(Dollars)	(Dollars per skirt)	(Dollars)
Local Department Store		102
Across Town		85
Neighboring City		76

Assume that Juanita takes opportunity costs and the price of the skirt into consideration when she shops. Juanita will minimize the cost of the skirt if she buys it from the   .

 

 

3) The Social Security system provides income for people over age 65. If a recipient of Social Security decides to work and earn some income, the amount he receives in Social Security benefits is typically reduced.

The provision of Social Security gives people the incentive to save ________   while working. Moreover, the reduction in benefits associated with higher earnings gives people the incentive to __________   past age 65.

4) A 1996 bill reforming the federal government’s antipoverty programs limited many welfare recipients to only 2 years of benefits.

This change gives people the incentive to find a job ______   quickly than if welfare benefits lasted forever.

The loss of benefits after 2 years will result in the distribution of income becoming _______   equal. In addition, the economy will be __________   efficient because of the change in working incentives.

 

 

5) Explain whether each of the following government activities is motivated by a concern about equality or a concern about efficiency.

Activity	Equality	Efficiency
Regulating cable TV prices
Providing some poor people with vouchers that can be used to buy food
Prohibiting smoking in public places
Breaking up Standard Oil (which once owned 90% of all oil refineries) into several smaller companies
Imposing higher personal income tax rates on people with higher incomes
Instituting laws against driving while intoxicated

6) Which of the following statements support the reality that your standard of living is different from that of your parents or grandparents when they were your age? Check all that apply.

Many families have at least two cars per household, whereas having a vehicle was a luxury in the early 20th century.

A cutting-edge television comes with HD, 3D, and SmartTV technology, while your grandparents likely enjoyed a black-and-white television in the early years.

In the United States, the average person’s life expectancy was roughly 78 years old in 2010, but only 70 years old in 1960.

True or False: Labor unions are the primary reason the standard of living in the United States has changed over time.

True

False

 

7) During the Revolutionary War, the American colonies could not raise enough tax revenue to fully fund the war effort; to make up the difference, the colonies decided to print more money. Printing money to cover expenditures is sometimes referred to as an inflation tax.

Who is being taxed when more money is printed?

Banks only

Families of soldiers in active duty

Anyone who is holding money