Please complete this exercise in Word and submit an electronic copy of it. This is to be independent work.  Do not “check” one another’s work.  Do not compare answers.  Do not copy one...

Please complete this exercise in Word and submit an electronic copy of it. This is to be independent work.  Do not “check” one another’s work.  Do not compare answers.  Do not copy one another’s work. Do not collaborate on answers. Reason out the answers yourself and submit your best responses to the questions posed.  The take home quiz that you submit should reflect your own level of understanding.

1-2Read the article from The Economist magazine, “The great trailblazer” from the May 10 print edition.

  1. Summarize the article in your own words. (5 points)
  1. Depict Becker’s insights about discrimination using the production possibilities frontier model as follows.
  2. Define and sketch the model, include a thorough explanation of its assumptions. Label the axes with two representative goods. (10 points sketch; 5 points explain)
  1. Include a representative point in the model that illustrates production in the event of discrimination. Explain thoroughly, connecting the simplified depiction in the model with the insights from Becker’s work described in the article.  (15 points)

3.         Suppose you earn $14 an hour and every day you go to lunch at your favorite restaurant, Café Excel, where you spend 30 minutes in transit and waiting for a table, then spend 30 minutes eating and pay $16 for lunch. Suppose further you get a raise to $20 an hour and simultaneously Café Excel has a special allowing you to pay only $12 for lunch. What is the difference in the full price of lunch after your raise? Explain thoroughly.  (10 points)

4.         When the price of a top-of-the-line luxury sedan was $85,000 there were 6,184 sold.  Several years later when the price was $116,000, although the cars were basically unchanged, there were 9,462 sold.  Does this mean that the demand for these sedans slopes upward to the right (i.e., that it is positively sloped in two-dimensional space)?  Carefully explain.  (10 points)

1 Answer

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

In this answer, I will help you understand how to answer these questions, but we cannot simply write answers for you on this site.

The main issue with the Becker article is how to depict his ideas on a production possibilities curve (PPC).  Becker argues that discrimination will result in a situation where some people are not used to their full capacity because firms are unwilling to hire them on racial (or other discriminatory grounds).  The curve on a PPC shows what an economy can accomplish when it uses its resources to the fullest possible extent.  A point inside the curve (not on it) is an inefficient point—one where not all resources are being exploited.  This is what will happen in the case of discrimination.

Moving now to your question about the price of lunch, we can see that you are being asked to include the opportunity cost of your lunch in these calculations.  In the beginning of this scenario, you are actually paying $16 for you lunch.  Since you make $14 per hour, you are also presumably losing the chance to make $14 since your lunch takes you that long.  Therefore, the total cost of your lunch is $30.  After your raise and the reduction in the price of lunch, you only pay $12 for the lunch, but you lose the chance to make $20.  Therefore, the total cost of your lunch is now $32—an increase of $2.

Finally, we have a case in which the number of cars sold increases even though the price of the car has gone up.  Could this mean that the demand curve in this case actually has a positive slope?  No, it does not.  Please note that there is the element of time here in addition to that of price.  What has probably happened is that something has changed over time to increase the demand for these cars.  In other words, the demand curve is still sloping downward, but the whole curve has moved upward.  What could cause this?  The most likely explanation is an increase in consumer income/wealth.  Perhaps the economy has improved and people have more money to spend.  Since they have more money to spend, they are willing to spend more to buy this car.  They would probably buy even more cars if the price were lower (so the demand curve still slopes downward), but their improved financial state allows them to buy more cars at a higher price than they could a few years before.