HarryS.TrumanSchool of Public Affairs University of Missouri-Columbia PA 8190: Economic Analysis for

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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

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