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a few general economic questions

1. A person rents a house for which she pays the landlord $12,000 per year. The house can be purchased for $100,000 and the tenant has this much money in a bank acount that pays 4% interest per year. Is buying the house a good deal for the tenant? Where does the opportunity cost enter the picture? Treat this question as a financial
tradeoff: the lost interest vs. the gained rent

2. Jasmine's Snack Shop sells two brands of potato chips. Brand X costs 60 cents per bag and Brand Y costs $1.00. Draw Jasmine's production possibilities frontier if she has $60.00 budgeted to spend on potato chips. Why is it not bowed out?

3. In 1981, when regualtions were holding the price of natural gas below its market level, then Congressman Jack Kemp of New York said the following in an interview with the New York Times "We need to decontrol natural gas, and get production of natural gas up to a higher level so we can bring down the price." Evaluate the congressman's statement. Removing a price ceiling normally results in the price rising to equilibrium. Why does Jack Kemp think that removing the ceiling on natural gas
price will result in a free market price lower than the original ceiling price?

4. from 1990 to 1997 in the U.S., the number of working men grew by 6.7%; the number of working women grew by 11%. During this time, average wages for men grew by 20%, while the average wage for women grew by 25%. Which of the following two explanations seems more consistent with the data?

A. Women decided to work more, raising their relative supply (relative to men).

B. Disccriminatin against women declined, raising the (relative to men) demand for female workers.

Here we need the explanation that explains why women's wages rose more than men's during the period, even though the supply of women workers grew nearly twice as much as men. Draw yourself two sets of demand & supply curves and work through the shifts described in the question. No need to submit graphs but explain your choice.

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Solution Preview

1) Clearly buying the house will save 12% a year ($12,000 of rent / $100,000 in bank), losing the 4% interest earned from the bank will net an 8% gain. This does not include the benefits of the house rising in value or the landlord raising the rent.

2) The graph would have Brand X on one axis and Brand Y on the ...

Solution Summary

answers to some general economics questions concerning Opportunity Costs of buying versus renting, production possibilities frontier, price rising to equilibrium, employment of men versus women