Missouri PA 8190 – Economic Analysis for Public Affairs

Missouri PA 8190 – Economic Analysis for Public Affairs

Subject: Economics    / General Economics
Question

HarryS.TrumanSchool of Public Affairs

University of Missouri-Columbia

PA 8190: Economic Analysis for Public Affairs

Spring 2017

Problem Set #1

Due Monday, February 6that 8:30 a.m.

1. After earning your B.A., you have to decide whether to accept the offer of a job that will pay you $45,000 per year or spend an additional two years earning an MPA. If you decide to pursue the graduate degree, your annual expenses for tuition, books, board, and lodging will be $32,000. You have been offered a scholarship for $10,000 per year, but in order to pay the remaining $22,000 per year, you would have to cash in savings bonds that your grandparents have given you that have been earning $500 in interest per year. What is the annual opportunity cost of earning your MPA? Explain. (10 points)

2. Kelly needs to buy a textbook for the Economic Analysis for Public Affairs class. The price at the MU bookstore is $102. Amazon.com offers it for $95 and Barns and Noble’s online bookstore sells it for $97. All prices include sales tax. The accompanying table indicates the typical shipping and handling charges for the textbook ordered online. (10 points)

Shipping method Delivery time Charge ($)

Standard shipping 3-7 days 3.99

Second-day air 2 business days 5.98

Next-day air 1 business day 13.98

a. What is the opportunity cost of buying online instead of at the University bookstore? Note that if you buy the book online, you must wait to get it.

b. Show the relevant choices for this student. What determines which of these options the student will choose?

3. This year, Columbia, MO experiences a sudden doubling of the birth rate. After five years, the birth rate returns to normal. Use a diagram to illustrate the effect of these events on the following. You will need to discuss the possible changes in the equilibrium price and quantity. (15 points)

a. The market for an hour of babysitting services in Columbia today

b. The market for an hour of babysitting services 15 years into the future, after the birth rate has returned to normal, by which time children born today are old enough to work as babysitters

c. The market for an hour of babysitting services 30 years into the future, when children born today are likely to be having children of their own

4. The following table shows the demand and supply schedules for a vegetable fiber in the U.S. (25 points)

Price U.S. Supply (millions of lbs.) U.S. Demand (millions of lbs.)

$3 4 32

$6 6 26

$9 8 20

$12 10 14

$15 12 8

$18 14 2

a. What is the equation for demand? Show your calculations.

b. What is the equation for supply? Show your calculations.

c. What is the equilibrium price and quantity of vegetable fiber? Show your calculations.

d. What is the price elasticity of supply when the price moves from $9 to $12? Show your calculations. Interpret the result.

e. What is the price elasticity of demand when the price moves from $15 to $18? Show your calculations. Interpret the result.

5. The local Columbia pizza shop on 9th street has the following demand and supply equations for the number of slices of pizza sold based on the price of each pizza slice. (30 points)

Qd= -6.5P+70

Qs= 10P+0

a. Plot the equations and calculate and label the equilibrium price and quantities. (Remember to label your graphs!)

b. Calculate Price Elasticity of Demand and Price Elasticity of Supply at the equilibrium price. Interpret both the Price Elasticity of Supply and the Price Elasticity of Demand (e.g., elastic, inelastic, etc. and what that means)

c. Let’s suppose that Columbia experiences significant economic growth over the year. The average individual income increases by 10%, and the new demand schedule is: Qd= -6.5P + 80

i. Plot the new demand line on the existing graph

ii. Calculate the new equilibrium price and quantity

iii. Calculate the Income elasticity of demand for the pizza

iv. Is this an inferior, normal or other type of good? How do you know?

6. Is the cross-price elasticity of demand for red pens likely to be positive, negative, or zero when the price of blue pens increases? Explain why and use a graph or an equation along with your explanation. Be mindful of the perspectives (i.e teachers, students, etc.). (10 points).

BONUS QUESTION (3 points)

7. Read each of the following cases and draw an appropriate curve. Explain.

a. The demand for bladder cancer surgery, when it is guaranteed that the government pays the full cost of surgery for any patient

b. The demand for an elective surgery, such as cosmetic surgery, when the patient needs to pay the full cost

c. The supply of reproductions of Picasso paintings