Aplia Homework: What Is Economics?
Consider the following dialogue between Beth, a student in an introductory economics class, and Beth’s teaching assistant, Darnell.
BETH: Hi, Darnell. This is my first economics course, and many of the concepts discussed in class are really confusing. Today the professor explained that the true cost of going to college includes both the tuition I pay as well as something called the "opportunity cost" of going to college. I don’t understand. I pay $49,000 per year in tuition. The tuition is what I pay to the school, so it seems like that should be my true cost!
DARNELL: Hi, Beth. Many concepts in economics can be confusing at first. Let’s talk it through.
Economists think of costs a bit differently than just the dollar amount that you pay. To an economist, the true cost of college includes the total value of what you give up in order to acquire your college education. In other words, not only did you give up the tuition money that you paid, but by attending college, you gave up opportunities to do other things with your time as well. This is where the idea of opportunity cost comes from.
The opportunity cost of your decision to go to college is the value of the next best alternative that you gave up. Suppose that your next best alternative to college is to work as a cashier. By not going to college, and taking this job, you could earn $28,000 per year. Then your opportunity cost of college is___, and your total cost of a year of college is ___ per year.
BETH: I think I get it now. So when I take into account the opportunity cost of college, the true cost is actually ___ than just the tuition.
DARNELL: Correct. Thinking about costs in this way will help you make more rational decisions in your everyday life. Now tell me, how can you explain your decision to go to college?
BETH: I chose to go to college because, for me, the value of a year in college ____.
2. Effects of rent control
Rent controls force landlords to price apartments below the equilibrium price level. An immediate effect is that housing becomes_____, because at the lower rent, it is______ profitable to build and maintain rental housing.
3. Comparative advantage
Jacques and Kyoko are partners at a management consulting firm. They are trying to determine which of them has a comparative advantage in creating the 25 slides required for a presentation to a prospective client.
Jacques can create 20 slides per hour. For other activities, he can bill clients $400 per hour. Jacques’s opportunity cost of creating slides is_____ per slide.
Kyoko’s opportunity cost of creating slides is 35% higher than Jacques’s. Therefore,_____ has a comparative advantage in creating slides.
4. Dialogue: Thinking at the margin
Consider the following dialogue between Simone, a student in an introductory economics class, and Simone’s teaching assistant, Ana.
SIMONE: Hi, Ana. I was very confused by what the professor was lecturing on today in class. The professor said that in real life many people do not use marginal analysis and mistakenly look at average costs and benefits when making decisions. What did she mean by that?
ANA: Hi, Simone. A lot of students have had questions about this topic. Let’s go over the concept together.
Marginal analysis involves examining the additional costs and benefits of an activity. Suppose you are deciding how many slices of cake to eat. Some people may look at the costs and benefits of eating an entire cake. Marginal analysis says you should consider the costs and benefits of each slice individually.
Suppose you have eaten six slices of cake. You are considering eating a seventh slice. If the marginal benefit of the seventh slice is $18 and the marginal cost is $4, then you should______ an additional slice.
However, if the marginal benefit of the seventh slice is $8 and the marginal cost is $19, then you should_____ an additional slice.
SIMONE: I see! So following this logic, I should continue to eat cake as long as the marginal benefits are_____ the marginal costs. If the marginal cost of the next slice of cake is greater than the marginal benefit, I should________ !
ANA: I think you get it now. While this is a very simple example, it does show how marginal analysis can help prevent you from eating an extra cake and getting sick!
5. Key facts about economic fluctuations
The following graph approximates business cycles in the United States from the first quarter of 1953 to the third quarter of 1957. The vertical blue bar coincides with a period of six or more months of declining real gross domestic product (real GDP).
1953195419551956195727002600250024002300REAL GDP (Billions of dollars) YEAR
Source: “Current-Dollar and Real GDP,” Bureau of Economic Analysis, last modified May 1, 2013, accessed May 15, 2013, http://www.bea.gov/national/xls/gdplev.xls.
Notice that real GDP trends upward over time but experiences ups and downs in the short run. A period of declining real GDP, such as the blue-shaded period in 1953, is known as________ .
True or False: Economists today believe monetary and fiscal policy can help reduce the magnitude of fluctuations in real GDP.
__________
6. The short-run inflation-unemployment trade-off
The following graph shows the combinations of unemployment and inflation that existed in the United States from 1961 through 1969.
3.03.54.04.55.05.56.06.57.05.04.54.03.53.02.52.01.51.00.50INFLATION RATE (Percent) UNEMPLOYMENT RATE (Percent) 616362646566676869
Hint: Use the graph to answer the following questions. Select any black point (plus symbol) on the graph to get its exact coordinates.
What happened to the inflation rate between the year when the unemployment rate was 5.5% and the year when it was 4.5%?
_______
The points on the graph represent observations along the U.S. economy’s Phillips curve during the 1960s. If the inflation rate had been 2.5% during the 1960s, the unemployment rate would most likely have been:
_______
7. Agreement and disagreement among economists
Suppose that Nick, an economist from a research institute in Texas, and Rosa, an economist from a public television program, are arguing over budget deficits. The following dialogue shows an excerpt from their debate:
ROSA: Most people recognize that the budget deficit has been rising considerably over the last century. We need to find the best course of action to remedy this situation.
NICK: Based on a few studies I have seen, I believe that a cut in income tax rates of 5% would boost economic growth and raise tax revenue enough to reduce budget deficits.
ROSA: I think cutting income tax rates would boost the economy as well, but how do we know that a 5% cut is big enough to stimulate the economy in this day and age? The studies I have seen suggest a more aggressive cut of 20% should be made to income taxes.
The disagreement between these economists is most likely due to_________
Despite their differences, with which proposition are two economists chosen at random most likely to agree?
_________
