Analysis Questions
1. Tracking the Economy - Historical Statistics: For each of the following variables, find its value in the years 1960, 1965, 1970, 1975, 1980, 1985, 1990, 1995 and 2000. You may use a variety of resources on the Web. suggestions include the President's Council of Economic Advisors and "Economic Report of the President", Bureau of Economic Analysis, Almanacs, Euro data, almanacs, Economagic at http://www.economagic.com/ , or other such sources:
2. PPF Application: The growth of environmental awareness and concern during the 1980s was one of the fundamental developments on the political scene during that time period. Yet, at a time that the political arena was also seeing an increased emphasis on economic well being, environmental protection was seen as costly in terms of jobs and livelihoods. When the U.S. forest Service sought to limit logging of old growth forests in the Pacific Northwest to protect the Spotted Owl, two government policies clashed. More importantly here, it clearly demonstrates how individuals are affected by government policy, and accounting for those effects is important in good policy making.
The logging was stopped to protect the Spotted Owl under the Endangered Species Act. Yet Forest Service policy was designed to encourage logging, thus supporting jobs and economic growth, under a "multiple use" policy on forest resources. When the Wall Street Journal claimed in an editorial (April 9, 1990, page A12) that such protection was misguided, ignoring the economic costs of animal protection policies, it generated a plethora of responses.
The editorial claimed that in "... a choice between people and animals ..." the animals will always win because of the political realities of the strength of eastern environmentalists over western logging interests. It noted that one preservation plan for the owls would restrict logging on federal lands to only forty percent of all Pacific Northwest national forest lands, eliminating between 9000 and 60000 jobs in California, Oregon and Washington. One conclusion, according to the editorial, is that the political system is ineffective.
Many readers supported the Journal, but others considered it misguided. Among the more interesting points of the debate was whether the owl or lost jobs was more important. In letters to the editor (May 4, 1990, page A11) the debate raged on. One letter writer argued that environmentalists were a legitimate interest groups which had reached the conclusion that protection was worth the jobs. Another argued that "... in the East, despite an abundance of quality timber, builders still use lower quality timber from the Northwest because of its subsidized, cheap price."
Even some residents of the Northwest supported Spotted Owl protection. One argued that in Washington State "... never has there been so much of the state treeless. ... There are other jobs at stake. The outdoor equipment and sports companies generate jobs. The 'multiple use' policy of the Forest Service is a singles policy when the forest is given to logging."
Relate the debate about the spotted owl to economic problems of choice and resource constraints using a Production Possibility Frontier.
Technical Problems:
1. Suppose you are policy maker faced with deciding how many public health nurses to employ. The following table shows Total Benefit and Total Cost from different levels of employment. Fill in the table, and answer the questions:
| number of public health nurses | total benefit | total cost | average benefit | average cost | net benefit | marginal benefit | marginal cost | marginal net benefit |
| 0 | 0 | 10 | ||||||
| 1 | 100 | 15 | ||||||
| 2 | 190 | 25 | ||||||
| 3 | 270 | 40 | ||||||
| 4 | 340 | 60 | ||||||
| 5 | 400 | 85 | ||||||
| 6 | 450 | 115 | ||||||
| 7 | 490 | 150 | ||||||
| 8 | 520 | 190 | ||||||
| 9 | 540 | 235 | ||||||
| 10 | 550 | 285 |
a) What level of employment maximizes total benefit? What level maximizes average benefit? What level maximizes marginal benefit?
b) What level of employment maximizes total cost? What level maximizes average cost? What level maximizes marginal cost?
c) What level of employment maximizes net benefit? What is the relationship between marginal benefit and marginal cost at this level of employment? Is there a relationship between average benefit and average cost at this level of employment?
d) Why is cost 10 even when employment is zero? We call this fixed cost. If there were no fixed costs, all costs would be reduced by 10. Does the presence of fixed costs change the optimal employment level? Explain why or why not.
2. Suppose as production manager you know that total revenue, R(Q) and total cost, C(Q) are given by the following functions, where Q is the output set (in thousands of units):
R(Q) = 1500Q - 4Q2 and C(Q)=50+Q2
a) Find the functions for profit (revenue - cost), marginal cost and marginal revenue. Hint: to check your calculus, plug R(Q) into the calculator at http://library.wolfram.com/webMathematica/MSP/Explore/Education/WalkD to find marginal revenue, and do the same with C(Q) to find marginal cost.
b) Find the output which maximizes profit. Find the value for marginal revenue and marginal cost at this output. How are they related?
c) Find the functions for average revenue, R(Q)/Q, and average cost, C(Q)/Q. One of your staffers argues that output should continue until average revenue = average cost. Why is this incorrect?
3. As a resource recovery expert you have been appointed your firm's recycling "czar". The benefits to this program include a cleaner environment (social benefit), goodwill to your company, and direct revenue from the sales of certain recyclables. The costs include direct labor and capital costs, and some costs associated with goods for which there is really no market for recycling. In fact, sometimes you have to pay to get something recycled. Your firm is interested in maximizing its net benefit from recycling.
a) Using marginal analysis, explain what you would consider in setting up the program.
b) Explain why society would probably want your firm to recycle more than it does.
4. Related to question 5, suppose we have the following functions. Q is the amount of recycling your firm does.
Social benefit from recycling: S(Q) = 20Q
Firm's (private) benefit: B(Q) = 80Q - 2Q2
Firm's cost: C(Q) = 10 + 2Q2
a) Determine the amount of recycling society would like to see your firm do. Now find the amount it will actually do. Why do they differ? HINT: Find the marginal private benefit and marginal private cost (by taking the derivatives of each function), set them equal, and solve for Q. This is the amount of recycling that is actually done. Now add the private benefit and social benefit together, and do the same. This is the amount that should be done.
b) Suppose tax credits lower the cost of recycling by 10 for each unit of Q (HINT: Subtract 10Q from the firm's cost). How would that change your answers to a)?
c) If instead of a tax credit lowering cost, the government directly paid your company 10 for each unit recycled, would it change your answer to the b)? Explain.