HarryS.TrumanSchool of Public Affairs University of
HarryS.TrumanSchool of Public Affairs University of
HarryS.TrumanSchool of Public AffairsUniversity of Missouri-ColumbiaPA 8190: Economic Analysis for Public AffairsSpring 2017
Problem Set #1
Due Monday, February 6that 8:30 a.m.
1. Afterearning your B.A., you have to decide whether to accept the offer of a job thatwill 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 scholarshipfor $10,000 per year, but in order to pay the remaining $22,000 per year, youwould have to cash in savings bonds that your grandparents have given you thathave been earning $500 in interest per year. What is the annual opportunitycost of earning your MPA? Explain. (10 points)
2. Kellyneeds to buy a textbook for the Economic Analysis for Public Affairs class. Theprice at the MU bookstore is $102. Amazon.com offers it for $95 and Barns andNobleâ€s online bookstore sells it for $97. All prices include sales tax. Theaccompanying table indicates the typical shipping and handling charges for thetextbook ordered online. (10 points)Shipping method Deliverytime Charge ($)Standard shipping 3-7days 3.99Second-day air 2business days 5.98Next-day air 1business day 13.98a. What isthe 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 therelevant choices for this student. What determines which of these options thestudent will choose?
3. Thisyear, Columbia, MO experiences a sudden doubling of the birth rate. After fiveyears, the birth rate returns to normal. Use a diagram to illustrate the effectof these events on the following. You will need to discuss the possible changesin the equilibrium price and quantity. (15 points)
a. Themarket for an hour of babysitting services in Columbia todayb. Themarket for an hour of babysitting services 15 years into the future, after thebirth rate has returned to normal, by which time children born today are oldenough to work as babysittersc. Themarket for an hour of babysitting services 30 years into the future, whenchildren born today are likely to be having children of their own
4. Thefollowing table shows the demand and supply schedules for a vegetable fiber inthe 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 isthe equation for demand? Show your calculations.b. What isthe equation for supply? Show your calculations.c. What isthe equilibrium price and quantity of vegetable fiber? Show your calculations.d. What isthe price elasticity of supply when the price moves from $9 to $12? Show yourcalculations. Interpret the result.e. What isthe price elasticity of demand when the price moves from $15 to $18? Show yourcalculations. Interpret the result.
5. The localColumbia pizza shop on 9th street has the following demand and supply equationsfor the number of slices of pizza sold based on the price of each pizza slice.(30 points)Qd= -6.5P+70Qs= 10P+0
a. Plot theequations and calculate and label the equilibrium price and quantities. (Remember to label your graphs!)b. CalculatePrice Elasticity of Demand and Price Elasticity of Supply at the equilibriumprice. Interpret both the PriceElasticity of Supply and the Price Elasticity of Demand (e.g., elastic,inelastic, etc. and what that means)c. Letâ€ssuppose that Columbia experiences significant economic growth over theyear. The average individual incomeincreases by 10%, and the new demand schedule is: Qd= -6.5P + 80i. Plotthe new demand line on the existing graphii. Calculatethe new equilibrium price and quantityiii. Calculatethe Income elasticity of demand for the pizzaiv. Is thisan inferior, normal or other type of good?How do you know?
6. Is thecross-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 oran equation along with your explanation. Be mindful of the perspectives (i.eteachers, students, etc.). (10 points).
BONUS QUESTION (3 points)7. Read eachof the following cases and draw an appropriate curve. Explain.a. Thedemand for bladder cancer surgery, when it is guaranteed that the governmentpays the full cost of surgery for any patientb. Thedemand for an elective surgery, such as cosmetic surgery, when the patientneeds to pay the full costc. Thesupply of reproductions of Picasso paintings
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