Econ 201 – Homework 1 Key Notes

1. Opportunity Cost Analysis

• Question Context: Compare the opportunity costs of attending Darden Business School for an MBA at age 28 versus attending James Madison University (JMU) for an undergraduate degree at age 19.

  • **Considerations in Opportunity Cost:

  • Monetary Costs:

    • Darden Business School typically incurs higher monetary costs compared to JMU undergraduate costs.

  • Potential Salary Loss:

    • At age 28, with an undergraduate education already obtained, one could be earning a higher salary, thus the opportunity cost of attending Darden is significant due to foregone salary.

  • Age Factor:

    • Being older (28 versus 19) implies different responsibilities and opportunities in life that could influence economic decisions.

• Conclusion: The opportunity cost of attending Darden Business School generally is justified to be higher due to the combination of higher monetary costs and potential salary forgone.

2. Absolute Advantage and Opportunity Cost in Production

A. Production Capabilities of Jack and Jill

• Data Table: Units/hour

  • Berries:

  • Jack: 10

  • Jill: 8

  • Apples:

  • Jack: 30

  • Jill: 16

B. Absolute Advantage

• Who has the Absolute Advantage in Apples?

  • Jack has an absolute advantage in picking apples because he can pick more apples (30) than Jill can (16) in one hour.

• Who has the Absolute Advantage in Berries?

  • Jack also has an absolute advantage in picking berries, as he can pick more berries (10) in one hour compared to Jill (8).

C. Opportunity Costs Calculation

• Jack's Opportunity Costs:

  • Picking 1 Unit of Apples:

  • Jack's opportunity cost is $rac{1}{3}$ of a unit of berries.

  • Picking 1 Unit of Berries:

  • Jack's opportunity cost is 3 units of apples.

• Jill's Opportunity Costs:

  • Picking 1 Unit of Apples:

  • Jill's opportunity cost is $rac{1}{2}$ of a unit of berries.

  • Picking 1 Unit of Berries:

  • Jill's opportunity cost is 2 units of apples.

D. Specialization Based on Comparative Advantage

• Who Should Specialize in Berries?

  • Jill should specialize in the picking of berries because her opportunity cost of picking berries (2 units of apples) is lower than Jack's (3 units of apples).

  • Law of Comparative Advantage:

  • This law states that individuals or nations should specialize in activities where they hold a lower opportunity cost.

3. Production Possibility Frontier (PPF)

A. PPF for Pizza and Soda

• Drawing the PPF:

  • A PPF graphically represents the maximum production capacity of two competing goods, with Pizza on one axis and Soda on the other.

• Increasing Opportunity Costs:

  • This implies that as production of one good increases, the opportunity cost (in terms of the other good) grows steeper.

B. Changes to the PPF

• Increase in Labor Force:

  • If the labor force increases and production of both goods requires similar labor, the PPF shifts outward.

  • Label Shift: Subscript a to indicate this shift.

• Disease Impact on Milk Production:

  • Should a disease kill a large number of cows affecting cheese production, the PPF would similarly shift inward due to a decrease in production capacity.

  • Label Shift: Subscript b to indicate this negative shift.

C. Economic Concepts Illustrated by the PPF

• Scarcity:

  • Points outside the PPF are unattainable with current resources, illustrating scarcity.

• Choice/Tradeoffs:

  • Moving along the curve requires sacrificing one good for another.

• Opportunity Cost:

  • The slope of the curve indicates how much of one good must be given up to produce more of the other, illustrating opportunity cost.

• Economic Growth:

  • Shifts outward due to better resources, technology, or improved institutions (as shown in the response to part a).

4. Demand Curve Dynamics

A. Effects on Demand

• Consumer Incomes Fall:

  • Assumption: Satellite dishes are a normal good.

  • Shift Direction: Demand decreases, shifting the demand curve to the left.

• Increase in Price of Televisions:

  • Assumption: Satellite dishes are complements to televisions.

  • Shift Direction: Demand for satellite dishes decreases, shifting the demand curve to the left.

• Expectation of Future Price Increase:

  • Consumers anticipate higher prices in the future.

  • Effect: Current demand increases as consumers purchase now to avoid future costs, shifting the demand curve to the right.

• Current Increase in Price of Satellite Dishes:

  • When the price of the good itself changes, it results in movement along the demand curve rather than a shift of the curve itself.

5. Supply Curve Dynamics

A. Changes in Quantity Supplied

• Price Increase of the Good:

  • This leads to a change in quantity supplied, which is a movement along the supply curve.

• Increase in Supply:

  • Due to an increase in the number of producers, indicating a shift of the supply curve to the right.

• Impact of a Supply Shock:

  • An event causing a decrease in supply would shift the supply curve to the left due to reduced availability of the product.