Transcript Public Finance - Marietta College

Economics 211
Principles of Microeconomics
Dr. Greg Delemeester
Summer 2011
Economics
Making choices under conditions of scarcity
 What stocks should I buy for my portfolio?
 How many Whoppers should I eat?
 How many hours should I study for biology?
 How many cars should I steal?
 What Do Schoolteachers and
Sumo Wrestlers Have in
Common?
 How Is the Ku Klux Klan Like
a Group of Real-Estate
Agents?
 Why Do Drug Dealers Still Live
with Their Moms?
 Where Have All the Criminals
Gone?
 What Makes a Perfect Parent?
 Would a Roshanda by Any
Other Name Smell as Sweet?
 Increasing Residual Wage
Inequality: Composition Effects,
Noisy Data, or Rising Demand
for Skill?
 Medium-Term Business Cycles
 Can Information Heterogeneity
Explain the Exchange Rate
Determination Puzzle?
 Macroeconomic Effects of Tax
Changes
 An Efficient Dynamic Auction for
Heterogeneous Commodities
 Asymmetric Contests with
Conditional Investments
“Billy, you’ve been a fine son, but it’s time for a change.
I found a child overseas who can do it cheaper.”
Economic Fundamentals
 Self Interest
 Rationality
 Purposeful behavior
 Incentives matter
Best Undergrad College Degrees by Salary
Major
Starting Median Salary
Mid-Career Median Salary
Petroleum Engineering
$93,000
$157,000
Physics
$50,700
$99,600
Economics
$48,800
$97,800
Finance
$47,500
$91,500
MIS
$50,900
$90,300
Math
$46,400
$88,300
Chemistry
$42,400
$83,700
Political Science
$40,100
$81,700
Accounting
$44,500
$77,500
Marketing
$38,600
$77,300
History
$38,500
$73,000
Management
$41,100
$70,600
English
$37,800
$67,500
Journalism
$35,800
$66,600
Psychology
$35,300
$62,500
Graphic Design
$35,400
$56,800
Source: www.payscale.com
Economic Fundamentals
 Self Interest
 Rationality
 Purposeful behavior
 Incentives matter
 TANSTAAFL
 Scarcity  Choices  Opportunity costs
Trade-offs!
There
Ain’t
No
Such
Thing
As
A
Free
Lunch
Soak Up the Sun (2002)
William installs custom sound systems in cars. If he installs 7
per day, his total costs are $300. If he installs 8 per day, his
total costs are $400. William will install only 8 sound systems
per day if the 8th customer is willing to pay at least:
a)
b)
c)
d)
$50
$100
$300
$400
0% 0% 0% 0%
a)
b)
c)
d)
Space Mountain
(Problem Set 1, #9)
You have waited 30 minutes
in a line for the Space
Mountain ride at Disneyworld.
You see a sign that says,
"From this point on your wait
is 45 minutes." You must
decide whether to continue in
line or to move elsewhere.
On what basis do you make
the decision?
Do the 30 minutes you've
already stood in line come
into play?
Marginal Analysis ignores sunk costs!
Economic Fundamentals
Unintended Consequences
 CAFE (fuel economy) standards
27.5 MPG fleet average
Objective: Save energy + clean environment
 Lighter + smaller cars = more dangerous cars ?
 National Academy of Sciences: 1300 to 2600 extra
highway deaths each year
Modes of Analysis
 Positive Analysis
 Normative Analysis
Economic Model of Crime
 Decision Rule
 If MB > MC  steal another car
 Assumptions





Resale value on car = $40,000
Income = $20,000
Jail term = 5 years
Probability of Arrest = 20%
Probability of Conviction = 90%
MB = $40,000
MC = (5)($20,000)(.20)(.90) = $18,000
Steal the car!
Economic Model of Crime
 Policy Implications [How to deter crime?]




Increase
Increase
Increase
Increase
jail sentence
probability of arrest
probability of conviction
income
Which of the following will cause property
crime to increase?
a)
b)
c)
d)
An increase in jail terms.
A decrease in personal
incomes.
An increase in the probability
of arrest.
A decrease in the expected
benefit.
0% 0% 0% 0%
Gun-Related Murders (Thousands)
[What’s the Headline?]
16.0
1980
14.0
1975
12.0
10.0
1970
8.0
Correlation is not causation.
1965
6.0
4.0
2.0
0.0
0.0
0.5
1.0
1.5
2.0
Guns Sold (Millions)
2.5
3.0
Applications
(#3, Problem Set 1)
A few years ago, Tina ranked three
available options as follows:
 1st Choice: pay $21,000 tuition and finish a
Master's degree in fine arts at the Ohio State
University.
 2nd Choice: earn $19,000 working part-time
managing a small local theater and spend her
spare time pursuing her theater hobby as a
volunteer director of small-theater plays.
 3rd Choice: earn $44,000 working full-time
reviewing yellow page advertisements for
Verizon.
What is the minimum value of Tina’s opportunity
cost for pursuing her first choice?
a)
b)
c)
d)
$19,000
$21,000
$65,000
$84,000
1st Choice: pay $21,000 tuition and
finish a Master's degree in fine arts at
the Ohio State University.
2nd Choice: earn $19,000 working parttime managing a small local theater and
spend her spare time pursuing her
theater hobby as a volunteer director of
small-theater plays.
3rd Choice: earn $44,000 working fulltime reviewing yellow page
advertisements for Verizon.
0%
19000
0%
0%
0%
21000
65000
84000
The acres of grass surrounding the Taj Mahal in
Agra, India, are often cut by young women who
slice off handfuls with short kitchen blades. Is this
a low- or high-cost way to keep a lawn mowed?
(#4, Problem Set 1)
Maximizing the Net Benefits from Pizza
TB
MB 
Q
TC
MC 
Q
How many pizzas should Stephanie purchase?
a)
b)
c)
d)
e)
f)
One
Two
Three
Four
Five
Six
0%
0%
0%
0%
0%
0%
Dollars
Total Benefit and Total Cost
50
45
40
35
30
25
20
15
10
5
0
TB
TC
0
1
2
3
4
5
6
7
Pizza
Marginal Benefit and Marginal Cost
$14
$10
Pizza
Rational Behavior:
Continue an activity until
MB = MC
$12
$8
MC
$6
$4
MB
$2
$0
0
1
2
3
4
Dollars
5
6
7
Production Possibilities Frontier
 Shows tradeoffs facing an economy that
produces two goods
 Assumptions
 Resources are fixed
 Land
 Labor
 Human Capital
 Capital
Cars
E
A
B
Unattainable
 Technology is fixed
D
C
Inefficient
Beer
Assume a concave production possibility frontier. Suppose that
the society decides to increase the production of beer by 20,000
kegs, and that as a result the output of cars falls by 1000. If a
further increase of 20,000 kegs of beer is sought, we can expect
that the output of cars will:
a)
b)
c)
d)
fall by 1000.
fall by less than 1000.
fall by more than 1000.
increase by less than 1000.
0% 0% 0% 0%
Concave PPF implies “law of increasing opportunity cost”
Cars
Δ Beer
A
B
C
- Δ Cars
D
Slope of PPF = - Δ Cars / Δ Beer
(measures the Opportunity Cost)
Beer
PPF and Economic Growth
Economic Growth requires an expanding PPF
 Shifts in the PPF are due to:
 Change in resources
 Change in technology
Production Possibilities Frontier
Examples
 Cars v. Beer: more efficient brewing process
 Houses v. Computers: immigration
 Coffee v. Clothing: Haiti earthquake
 Food v. Electronics: China’s Cultural Revolution
Consider the PPF depicted below. A reduction in the amount
of unemployment could be described as the movement from:
A to B
B to D
D to C
B to E
120
100
E
A
Music CDs
a)
b)
c)
d)
80
B
60
D
C
40
20
0
0
5
10
15
Books
0%
0%
0%
0%
Choices, choices, choices…
 All societies must answer basic questions:
 What will be produced?
 How will it be produced?
 For whom will it be produced?
 Allocation Mechanisms
 Tradition
 Plan
 Market
Gains From Trade
 Trade implies mutually beneficial exchanges
 Not a zero-sum game!
 Comparative Advantage
 David Ricardo
 Lowest opportunity cost producer
 Specialization and trade can allow individuals (and
countries) to expand their consumption beyond their PPF
constraints
Pizza
Pizza
slope = ∆P/ ∆ C = -300/25 = - 12/1
∆C = 25
slope = ∆P/ ∆ C = -200/50 = - 4/1
600
∆P = -300
400
∆C = 50
∆P = -200
300
200
50
100
Country A
Opportunity cost of 1 Car is 4 Pizzas
Cars
25
50
Country B
Opportunity cost of 1 Car is 12 Pizzas
Country A has the comparative advantage in producing cars.
Cars
Pizza
Pizza
Country B
Country A
600
400
300
200
50
Cars
100
No Trade
Pizza
Production
Cars
25
With Trade
Pizza
Cars
A
200
50
0
100
B
300
25
600
0
500
75
600
100
World
50
Cars
 Problem Set 1: #14
Sue Student
Go to college
Don’t go to college
Tuition
$27,000
Job
$24,000
Food + Rent
$ 8,000
Food + Rent
$ 8,000
Parties
$ 4,000
Parties
$ 4,000
Books
$
Car
$ 4,600
Car
$ 4,600
Opportunity cost
of going to college =
900
$27,000 + $900 + $24,000 = $51,900
Problem Set 1: #13
Problem Set 1: #21
Output per hour
Country
Tons of
Steel
Bushels of
Wheat
US
6
60
South Korea
3
6
Opportunity cost of …
1 ton of
steel
1 bushel
of wheat
10 W
1/10 S
2W
1/2 S
US switches 1 hour of labor from steel to wheat
SK switches 4 hours of labor from wheat to steel
Trade: 50 W for 10 S
US
South Korea
Steel
Wheat
Steel
-6
+60
+12
-24
Trade
+10
-50
-10
+50
Consumption change
+4
+10
+2
+26
Production change
Wheat
Assume that Robinson and Crusoe live on a desert island. With a day’s
labor, Robinson can produce 6 fish or 4 coconuts; Crusoe can produce 3
fish or 1 coconut. Robinson’s opportunity cost of producing 1 coconut is
____, and he should specialize in the production of ____.
a)
b)
c)
d)
1/4 fish; coconuts
1.5 fish; coconuts
3 fish; fish
6 fish; coconuts
0%
0%
0%
0%
Corner offices in high-rise office buildings usually cost more
to rent than other offices. This best illustrates the economic
principle of:
a)
b)
c)
d)
Scarce resources
Marginal analysis
Equilibrium
Opportunity costs
0%
0%
0%
0%
A friend comes up to you and offers to give you a free ticket to the local
professional team's baseball game that night. You decide to attend the
game. It takes five hours to go to the game and costs you $15 for
transportation. If you had not attended the game, you would have worked
at your part-time job for $8 an hour. What is the cost of you attending the
game?
a)
b)
c)
d)
Zero—the ticket is free.
$15
$55
$40
0%
0%
0%
0%
a)
b)
c)
d)
In the accompanying figure, Tealand is currently producing at point C on
its production possibilities frontier. What is the opportunity cost in
Tealand of increasing the production of tea from 20 million cups to 30
million cups?
a)
b)
c)
d)
10 million cups of tea
5 million scones
10 million scones
The answer is impossible to determine
from the information given.
0%
0%
0%
0%
Which of the following is a normative statement?
a)
b)
c)
d)
International trade will increase the
average income of Americans.
Higher expenditures on health care
will reduce infant mortality rates.
We ought to reduce our dependence
on oil imports in order to increase our
national security.
Increased defense spending will lead
to higher budget deficits.
0%
0%
0%
0%
While eating pizza, you discover that the marginal benefit of
eating one more slice is greater than the marginal cost of that
slice. You then conclude:
a)
b)
c)
d)
you will be better off if you eat one
more slice.
the total cost of eating the pizza will be
more than the total benefit of eating the
pizza.
you will be worse off if you eat one
more slice.
you will be no better off and no worse
off from eating one more slice.
0%
0%
0%
0%
Which of the graphs below shows the impact of scientists
developing a more powerful fertilizer?
a)
b)
c)
d)
Figure
Figure
Figure
Figure
A
B
C
D
0%
0%
0%
0%
If they spend all night writing computer programs, Derek can write 10
programs while Tian can write 5. If they spend all night making
sunglasses, Derek can make 6 while Tian can make 4. From this
information we know that:
a)
b)
c)
d)
Tian’s opportunity cost of writing
programs is less than that of Derek.
Derek’s opportunity cost of writing
programs and of making sunglasses
is less than that of Tian.
Tian’s opportunity cost of writing
programs and of making sunglasses
is less than that of Derek.
Derek’s opportunity cost of writing
programs is less than that of Tian.
0%
0%
0%
0%
Greg Delemeester
“I’d like to introduce you to Marty
Thorndecker.
He’s an economist but he’s really very nice.”