Principles of Microeconomics ECON 101 Homework #1 Due: Jun 16, 2006
Suggested Solutions
Questions for Review
2. Why does scarcity imply a choice among alternatives?
Scarcity implies a choice among alternatives because while we have unlimited wants, needs, and desires, we have only limited resources. This means we can not produce all the things we would like. We would really like to have a lot of each alternative, but faced with a scarcity of resources, we must chose among alternatives.
Problems
2. Compare the opportunity cost of one more year of school versus working for one year for (1) a high school graduate, (2) a college graduate, and (3) a medical school graduate.
(1) When a high school graduate is considering taking one more year of school he/she must consider all the things that could be done instead. There are many alternatives for the high school graduate. He/she could find a job, travel, hang out at home, and all kinds of other things. Remember, though, that opportunity cost is the value of the second best choice. So, suppose that the second best choice for this high school graduate is to work for a year. Then we would say that the opportunity cost of one more year of school is the forgone wages that the high school graduate could have been earning had he/she been working instead. If the high school graduate we able to get a full time job paying ten dollars an hour this would be $20,800. (Ten dollars hour is probably a high estimate.)
(2) Similarly the college graduate considers taking one more year of school. (e.g., Working toward a second bachelor’s degree, or starting a graduate program.) Suppose also that his/her second best alternative is to work for the year. Supposing he/she was a liberal arts and science graduate, the forgone salary would likely be about $30,828. Incidentally, for an economics/finance major the average is about $45,191. Click here http://www.naceweb.org/press/display.asp?year=&prid=230 to explore more.
(3) Finally, the medical school graduate is faced with the same choice. Work for another year, or go to school for another year. According to Salary.com, the forgone salary of the medical school graduate is likely to be about $120,000.
Notice the increasing opportunity cost of another year of school. The more schooling you get, the opportunity cost of an extra year of school becomes higher and higher. It becomes more and more attractive to leave school and join the work force. Think about it, do you know many people who finish medical school and then go back to work on a bachelor’s degree in history?
Note: For this question, we didn’t expect you to research the average salaries in each of the three cases. We just provide it here as extra information.
3. Allison will graduate from high school next June. She has ranked her three possible post- graduation plans in the following order: (1) Work for two years at a consulting job in her hometown paying $20,000 per year, (2) Attend a local community college for two years, spending $5,000 per year on tuition and expenses, and (3) Travel around the world tutoring a rock star’s child for pay of $5,000 per year. What is the opportunity cost of her choice?
Since we know how Allison ranks the alternatives, we know she will choose her first ranked alternative, which is working for two years at a job in her hometown paying $20,000. So, her opportunity cost is the value of her next best alternative. In this case, it is attending community college for two years. The opportunity cost, then, is the forgone increase she is likely to see in her salary over her lifetime as a result of developing her skills at the community college for two years. Or, an economist might say, “… as the result of the increase in her human capital.”
6. Suppose you must divide your time between studying for your math final and writing a final paper for your English class. The fraction of time you spend studying math and its relation to your grade in the two classes are given in the table.
a. Draw a tradeoff curve for the math grade versus the English Grade.
b. What is the opportunity cost of increasing the time spent on math from 80 to 100 percent?
50 points on your English grade
What is the opportunity cost of increasing the time spent on math from 60 to 80 percent?
20 points on your English grade.
c. Are there increasing opportunity costs from spending more time on math?
Yes. As you increase the percent of time spent on math in equal increments, your English grade will go down more and more.
d. What can you do to get a 92 in both subjects? Explain.
There are a few acceptable answers here. One is nothing, (92, 92) is beyond your "Grade Possibility Frontier." Another is, since (92, 92) is beyond your "Grade Possibility Frontier," you would have to increase your current resources to make this grade combination possible. Yet another would be to find someone who is relatively good in math and trade. However, this strategy might get you kicked out of the university. ;-)