Choices of how you allocate your time are never easy, but you need to make those choices if you are to be successful in your studies at URI. Consider the plight of BOB, a student dealing with the choice of allocating his time between studying Math and Demographics. The situation facing BOB could be represented by which of the following 'grade possibility curves' where we measure grades in Demographics on the horizontal axis and the grades in Math on the vertical axis. Use this diagram to answer the following questions.
1. The decision to lower total time spent studying without any reduction in time spent studying Demographics.
If we lower time it is a movement in while the decision not to lower time spent on studying Demographics means that we cannot move to the left. This will have to be a move from B to D
2. The decision to allocate more time to studying and less time to TV.
If we allocate more time to studying, this is an increase in resources which would be an outward shift in the curve.
3. The decision to maintain the time spent studying, but increase the time spent studying math.
If we do not lower time spent studying, but increase the time spent studying math, we will stay on the curve and move up (more M).
Which of the following diagrams would best represent the situations described below in the hypothetical surveys?
4. The results of a survey of students in introductory economics courses which found a positive relationship between the scores on a math pretest (X) and their grade in economics (y).
a. A b. B c. C d. D e. E
A positive relationship so the scatter should look like a positively sloped line - graph #2
5. A review of the post WWII data reveals that real interest rates (y) tend to be high when inflation rates (x) are low.
a. A b. B c. C d. D e. E
A negative relationship so the scatter should look like a negatively sloped line - graph #3
6. A survey of college students attitude toward welfare reform was recently conducted. In that survey students at 50 universities were asked whether they supported welfare reform. One of the findings of the survey was that there appeared to be no evidence of a relationship between median family income of the students (y) and the percentage of the school's students who reported that they supported change in welfare policy (x)-that the percentage of support tended to be the same at all of the schools.
a. A b. B c. C d. D e. E
If we look at the first part we would tend to support graph #1 - no relationship. When we look to the end of the question we find that the value of x remains fairly constant which means that the points should lie around a vertical line - graph #5
7. One of the issues that the authors of your text highlight is the inflation-unemployment tradeoff. There seems to be evidence that there is a negative relationship between the level of unemployment (y) and the inflation rate (x): as the inflation rate increases we see a decrease in the unemployment rate. This result would best be represented in which of the scatter diagrams.
a. A b. B c. C d. D e. E
A negative relationship so the scatter should look like a negatively sloped line - graph #3
Use the Supply and Demand Graphs below to answer the following questions. Note: Given the questions which I fielded in class, there is still a problem for many with supply and demand. The key is going back to the cookbook approach. you need to ask who is directly impacted by the event. If someone is only influence by the change in price, then the curve representing them does not shift.
8. The crisis is Southeast Asia has forced many investors to reconsider their investment decisions. What impact will the financial crises in Asia have on the market for stock in Asia?
a. A b. B c. C d. D e. E
The bad news could be expected to reduce investors' demand for stock in Asia because of the gretaer risk involved with investments there. We have no reason to believe that the firms issuing stock will change their behavior. The decrease in demand will be shown with a shift back of the D curve. Graph #2
9. Gold has long been recognized as a hedge against inflation - as the asset that people prefer when inflation rises - and in recent days we have seen the price rise on new fears of inflation.
a. A b. B c. C d. D e. E
The inflation news could be expected to increase investors' fear of inflation which raises their demand for gold as they attempt to hedge agaianst inflation. We have no reason to believe that the firms mining gold will change their behavior. The increase in demand will be shown with a shift out of the D curve. Graph #3
10. There is a new technology in window washing-now competing with the scaffolding that can cost $20,000 we have single seats that look like swings and cost only $500. What will this new technology do to the price of washing windows on our cities' skyscrapers?
a. A b. B c. C d. D e. E
New technology should be an indicator that we are talking about supply and that a change in technology will change the supply curve. The decrease in cost of window washing will be shown with an outward shift in the supply curve. Graph #4
11. The impact on the market for electric cars of a new, cheaper battery.
a. A b. B c. C d. D e. E
New technology should be an indicator that we are talking about supply and that a change in technology will change the supply curve. The decrease in cost of batteries will result in a lower price of cars which will be shown with an outward shift in the supply curve. Graph #4
12. The impact on the market for apartment rentals in the Kingston area of the recent building boom and the higher enrollments at URI.
a. A b. B c. C d. D e. E
The building boom tells us that there has been a shift outward in supply while the higher enrollments suggests that there will be an increase in demand. Graph #1
13. The president has been looking for some support for the extension of the NAFTA agreement to Chile - which happens to be a producer of salmon that costs substantialy less than American salmon. What will be the impact on the market for salmon of a decision to allow Chile to import its salmon to the US?
a. A b. B c. C d. D e. E
This is just like the new technology problem which should be an indicator that we are talking about supply. In this case we have a new supplier who will be charging lower prices. This will result in a lower price of salmon which will be shown with an outward shift in the supply curve. Graph #4
14. The impact on the market for plumbers in New York City of the recent lifting of the ban on garbage disposers.
a. A b. B c. C d. D e. E
This is good news for plumbers. Now that people in NYC can use garbage disposers, they will need to install the machines which will require many of them to hire plumbers. The increase in demand will be shown with a shift out of the D curve. Graph #3
15. The impact on the market for package delivery of the recent settlement with UPS that resulted in higher wages.
This is just like question #10 except that here we are talking about an increase in production costs so the supply curve would shift back which is a decrease in supply.
16. What would happen to the market for beef with the release of a new study linking higher beef consumption to higher cholesterol levels. We would expect:
The bad publicity can be expected to reduce demand - individuals will decide to lower their consumption of beef.
17. There has been a report of a decrease in consumption of oil and an increase in the price. This could best be explained by:
A decrease in consumption and an increase in price represents a move upward and to the left. this will happen if we have a decrease in supply.
18. In class we talked about alternatives open to a national leader looking to expand the possibilities open to his people. Which of the following alternatives to war was offered by Adam Smith?
Adam Smith talked about the concept of productivity-if we allow for specialization we will find that there will be an increase in productivity which will be shown by an outward shift in the PP curve.
19. If you found policy makers in a position where they could forecast that price would rise as a result of a public policy but that they were unable to forecast the impact on consumption, then you would expect that the policy caused:
The inability to forecast consumption tells us we are dealing with shifts in both curves. In this case we can forecast a price increase which means that both the supply and demand shifts tend to push up price. this would happen if there were an increase in Demand and a decrease in Supply.
20. Which of the following would lower a student's estimate of the cost of a year's college education?
As many of you pointed out, b and c are OK as answers since we would expect that the higher unemployment rate would lower expected earnings of high school graduates while the higher wages of part-time workers would raise the earning capacity of college students working part-time.
21. Below is the possibility curve of a student in an MBA program attempting to allocate her time in a way to balance peace at home with good grades in the program. What would happen to the curve if the student developed a better way to study which would increase the efficiency of time spent studying?
An increase in efficiency / productivity will increase the potential output of grades. The curve would get flatter and lie outside of the existing curve.
22. Stephen Works, the owner of SDI, a rapidly expanding computer services business which he started a few years ago, has been told by his accountant that profits for the next five years, the firm's expected 'lifetime', should total $250,000 on revenues of $1,500,000 and labor and material costs of $1,250,000. He has also been approached by WBS (World Business Systems) to sell his business. They are willing to pay him $500,000 for the business. Should he take the deal? What is the profit of SDI after the offer?
This is a classic opportunity cost problem. Before the offer the profit (earnings) equaled $250,000. The alternative use of the resources would be to sell - in which case Stephen would earn $500,000. If we compare the two you can see that he is earning $250,000 less if he stays in business and thus the profit of staying in business would be -$250,000.
What are the possibilities open to some potential trading partners? As a first step toward answering this question we can look at the following production possibility curves for two countries producing Naugahyde and Liveries.
23. What can you tell about the price of liveries in Empire B?
This is based on the model of trade. The possibility curves tell us about the possibilities open to the two countries given the resources and technology. We cannot tell anything about the actual price, but we can say that the price of Liveries should be more expensive than the price