Question 1

1. Scarcity, opportunity cost, and marginal analysis Andrew is training for a biathlon, a winter racing sport that combines crosscountry skiing and rifle shooting. Consider the following scenario: Andrew has only 15 hours available to devote to his training this week. Each hour he spends skiing is one hour that cannot be spent working onhis shooting. Which basic principle of individual choice do these statements best illustrate? Andrew has an incentive to spend more time on skiing than on shooting. Andrew can use time most efficiently by spending the same amounts of time on skiing and shooting. People face tradeoffs. People usually exploit opportunities to make themselves better off. 2. Determining opportunity cost Suppose that Ciana is deciding whether or not to buy a pair of sandals that she has been researching online, and also the best place to make her purchase. Three different stores in the area sell the sandals she likes, but some stores are more convenient for Ciana to reach than others. One option is her local shoe store located only 15 minutes away from where she works, where they charge a marked-up price of $122 for the sandals: Travel Time Each Way Price of a Sandals Store (Minutes) (Dollars per sandals) Local Shoe Store 15 122 Different Neighborhood in Town 30 96 Rural Outlet 60 80 Ciana earns an hourly wage of $26 at her job. In order to purchase her sandals she will have to take time off work, so each hour away from herjob costs her $26 in lost income. Assume that Ciana's travel time is the same each way (to and from the store) and that it will take her 30 minutes once she reaches a store to complete her shopping. Assume throughout the question that Ciana incurs no additional costs other than the sandals, such as gas. Complete the following table by computing the opportunity cost of Ciana's time and the total cost of shopping at each location. Opportunity Cost of Time Price of 3 Sandals Total Cost Store (Dollars) (Dollars per sandals) (Dollars) Local Shoe Store 122 Different Neighborhood in Town 96 Rural Outlet 80 Assume that Ciana considers both her opportunity costs and the price of sandals when making her shopping decision. Ciana will minimize her cost of buying the sandals if she shops at the V . 3. Efficiency in the production possibilities model Suppose the fictional country of Katmai produces only two goods: rye and axles. The following graph plots Katmai's current production possibilities frontier, and includes six different output combinations given by black points (plus symbols) labeled A to F. 100 - so - B A PPF + 2 so - g E, U) u.| E A 3' 4o - D + + + F 20 - + + C o : : . : : o 20 40 so so 100 RYE (Millions of bushels) Complete the following table by indicating whether each point represents output combinations that are inefficient, efficient, or unattainable. Check all that apply. Point Inefficient Efficient Unattainable A O B C 0 O D O O O E F O