Economics 310
First Exam
Problem 1. Jerry is a high powered corporate attorney. Juan is an illiterate illegal
immigrant with no education. The hours it takes each to accomplish two tasks is
given below.
Compute the opportunity cost of accomplishing each task for Jerry and
Juan. Who has the comparative advantage in what? Explain.
Jerry
Juan
Cut Grass
2 hours
2 hours
Prepare Legal
Contract
½ hour
12 hours
Opportunity Cost:
Jerry
Juan
Jerry has C.A. in
contracts.
Cut Grass
4
1/6
Juan has C.A. in
grass cutting
Prepare Legal
Contract
1/4
6
1. Suppose Jerry and Juan each want their grass cut and one legal contract
prepared. How can they benefit from voluntary exchange. How would this would be
accomplished?
2. Explain the underlying economic principles of such a gain and compute the gain
from trade.
They would each specialize in the production of the good in which they have a comparative
advantage and exchange for the good in which they have a comparative disadvantage.
This could be accomplished by leaving them alone to pursue their self-interest (do-nothing
principle).
If the exchanged one contract preparation for one grass cutting, they would collectively
save 11.5 hours. Individually, Jerry would save 1.5 hours and Juan would save 10 hours.
With
Trade
Without
Trade
Jerry
1
2.5
Juan
4
14
Read the following article. Comment in light of your answer above and using any
other applicable economic principles from the textbook and lectures.
Do-nothing principle.
More different principle.
Collective and individual enrichment from voluntary exchange.
Score determined by quality.
Copyright 2000 The Financial Times Limited
Financial Times (London)
September 28, 2000, Thursday USA Edition 1
HEADLINE: WORLD NEWS: THE AMERICAS: Immigration becomes source of friction VISA LEGISLATION SENATE SET TO ALLOW IN MORE
WORKERS FOR HIGH-TECH INDUSTRIES:
BYLINE: By DEBORAH MCGREGOR
Politically sensitive immigration policies are emerging as a significant source of friction between Democrats and Republicans in Congress, as
the parties jockey for an election-year advantage with various ethnic groups, including Hispanic voters.
After a prolonged delay, the Senate is finally moving ahead with legislation - intensively sought by business groups - to raise the number of
H1B visas for temporary, highly skilled workers to enter the US, helping to meet the huge demand for personnel in the high-tech sector.
Both parties, anxious to appease the high-tech industry, have basically agreed on the merits of the H1B initiative. The bill would expand to
195,000 the number of visas available, up from this year's level of 115,000. Once it passes the Senate, President Bill Clinton is expected to sign
it into law.
But other immigration issues are now proving contentious.
As part of the wrangling over the H1B visa bill, congressional Democrats joined forces with the White House to push for a provision that would
allow some illegal immigrants who have lived in the US for a long period to be granted amnesty and allowed to apply to become legal residents.
When their efforts were blocked, Democrats began pushing for inclusion of the proposal inamust-pass spending bill that provides funding for
the commerce, justice and state departments. Mr Clinton has threatened to veto the spending bill unless it includes the amnesty. The proposal
has the strong support of Hispanic and pro-immigration lobbying groups, who contend that many illegal immigrants unfairly missed out under
an earlier amnesty because of procedural problems at the federal immigration service. Republican leaders, who had opposed the initiative on
grounds it rewards illegal immigration, are scrambling to come up with a new approach.
Dozens of business groups have banded together to form an umbrella group in favour of the amnesty and many Republicans in swing districts
are openly worried about alienating Hispanic voters if their congressional leaders are seen as thwarting it.
Similar concerns have now dimmed prospects for the passage of another immigration bill, which would make it easier for farmers to pay
migrant workers lower wages than currently required. Also, under that bill, farmers would be able to give workers housing allowances instead
of providing housing for them.
But Hispanic advocacy groups have mounted an intense campaign against the legislation because most of the affected workers are Latinos
from Mexico and Central America, who are already paid low wages.
Another proposal gaining prominence is a move to restore a provision of US immigration law that expired in 1997. It would allow immigrants in
line for permanent residency (a green card) to apply from the US, even if their visa had expired. Currently, that person must leave the US to
apply.
The provision is gaining ground in a year when both parties want to be seen as immigrant-friendly.
Problem 2. Consider a person with $5,000 of income who purchases food and
housing. Suppose food costs $10 per meal and housing costs $2 per square
foot. Draw the person budget line placing housing on the vertical axis and
food on the horizontal axis.
Housing
2500
Consumer’s
budget constraint
0
500
Food
Draw the person’s indifference curves if when he consumes 250 units of
food, the marginal rate of substitution of food is 7. Explain the logic behind
your depiction. No points will be awarded without an explanation.
The relative price of food is
5 (rise/run=2500/500).
Quantity
of Housing
2500
If the MRS =7 then the
MRS> relative price.
At point A, the MRS >
A relative price.
0
250
500
Quantity
of Food
Suppose the price of food were to decrease to $5 per meal. Show the change in the
consumption of food and housing and the substitution and income effect on food if
housing were normal and food inferior.
A to B is the S-effect.
New budget constraint B to C is the I-effect.
Quantity
Of Housing
The I-effect is to reduce
consumption of food
therefore, Food is inferior.
C
A
Initial budget
constraint
I2
B
Initial optimum
I1
0
500
Substitution effect
Income effect
1000
Food
Doyle B. is a 50-year-old professional poker player. He plays Wednesday through Sunday (5
days) for 8 hours a day. One of the best card players in the world, he wins $200 per hour playing
in public card rooms in Los Angeles and Las Vegas. Ten years ago his wife died and since then
he has lived alone. In the last year, Doyle B. has decided to start dating.
1. Draw Doyle’s weekly budget line between income and leisure (time spent not playing
poker). Assume that there are 7 days in a week and there are 16 hours a day to play poker.
2. Draw indifference curves showing his optimal choice between leisure and income.
Income
22,400
B
C
8,000
0
72
A
112
Leisure
Doyle B. meets a nice mature lady--an account executive at a downtown bank. They start a
relationship. After a couple of months problems arise. Doyle likes her a lot but she knows nothing about the
world of high stakes poker. In particular, she cannot understand why he wants to play poker on Friday and
Saturday night when he could be with her instead. Doyle keeps explaining that Friday and Saturday are the
days when most people play poker. If he doesn’t play those days, he will be giving up a lot of income. She
counters that he should value her company more than playing poker. Draw Doyle’s indifference curve through
the combination of leisure and poker that the mature lady wants him to choose, i.e. not playing on Friday and
Saturday.
What can you say about the dollar value to Doyle of additional time spent with the mature lady?
Explain and show on your graph.
Income
22,400
Reducing his hours moves Doyle to point
D.
B
At point D, the slope of the BL is greater
than the slope of the IC, therefore, the
value of time spent with the mature lady is
less than $200 per hour, i.e. if given a
choice between an hour spent with the
C mature lady and $200, he would choose
the $200.
8,000
6,400
D
0
72
88
A
112
Leisure
Doyle tries giving up poker on Friday and Saturday but is not happy. He misses the income and the
joy of gambling. Sitting at home eating a home cooked meal and watching TV, he can’t get his mind off the
money he could be winning. One night he decides that as much as he likes the mature lady, he must break off
their relationship. After a long talk, the mature lady suggests a compromise. Doyle can keep playing
Wednesday through Friday but he has to keep regular hours. He must leave the casino at a specified time so
that she knows when he will be home. Doyle explains that playing poker is not like a regular job. If a real
sucker sits down in the game, he has to be able to keep playing until the sucker has lost all his money. If he
can’t do that he will not win as much money. He estimates keeping fixed hours will lower his hourly winnings
from $200/hour to $150/hour. Draw the effect of the ladies proposal on Doyle’s budget line.
IncomeIf Doyle had to choose, which would he prefer giving up poker on Friday and Saturday or having to
keep fixed hours?BExplain and show on your graph?
22,400Will Doyle and the mature lady stay together? Explain and show on your graph?
16,800
C
4,800
0
The mature ladies proposal
will shift Doyle’s budget line
in, therefore, he would not
accept.
D
72
88
A
112
Leisure
The Curve.
Mean
Standard Deviation
Students Taking Exam
Students Enrolled in Class
Grade
A
B
C
D
F
Without
With
Homework Homework
32.3
35.7
14.3
17.1
86
87
Required
Score
60
46
31
17
Number
Percent
Normalized Receiving Receiving
Score
Grade
Grade
2
6
7%
1
17
20%
-0.02
26
30%
-1
26
30%
9
10%
Questions about exam?
ONE WEEK MANDATORY
COOLING OFF PERIOD.
No questions answered about
exam until next Wednesday.