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Supply – Discussion Questions

1. A prominent hospital in New England decided in 1980 to turn down a request by staff surgeons to perform heart transplants. The general director of the hospital objected to the statement that this decision was "based

largely on cost considerations." On the contrary, he insisted, "the decision was based largely on the limited physical resources and highly trained personnel of the hospital. For each heart transplantation operation," he pointed out, the hospital "would have to turn away a number of other patients who receive less resource-draining open-heart surgery thatis much more predictably beneficial to them than heart transplants currently are." Do you agree that the decision was not based on cost considerations?

a) What is the valuable opportunity forgone when the hospital performs a transplant operation?

b) Why didn't the hospital simply hire more surgeons and buy more physical resources if "cost considerations" were not the reason for the hospital's decision?

c) What do you suppose prompted the hospital's general director to insist that the decision was not based on cost considerations?

2. Here is a statement from the economics textbook most widely used in American colleges before 1860: "The qualities and relations of natural agents are the gift of God, and, being His gift, they cost us nothing. Thus, in order to avail ourselves of the momentum produced by a water-fall, we have only to construct the water-wheel and its necessary appendages, and place them in a proper position. We then have the use of the falling water, without further expense. As, therefore, our only outlay is the cost of the instrument by which the natural agent is rendered available, this is the only expenditure which demands the attention of the political economist."

a) What was the cost to a nineteenth-century mill owner of using a waterfall to power his mill if he owned the site of the waterfall?

a) What was the cost to the mill owner if someone else owned the site?

b) Under what circumstances would use of a waterfall to power a mill actually have cost nothing?

c) Why do modern "political economists" disagree with Francis Wayland and pay attention to the cost of using "natural agents"?

3. The acres of grass surrounding the Taj Mahal in Agra, India, are often cut by young women who slice off handfuls with short kitchen blades. Is this a low- or high-cost way to keep a lawn mowed?

4. By taking an airplane one can go from D to H in one hour. The same trip takes five hours by bus. If the air fare is $90 and the bus fare is $30, which would be the cheaper mode of transportation for someone who could earn $6 an hour during this time? For someone who could earn $30 an hour? $15 dollars an hour?

5. At a sufficiently high price for gasoline, almost everyone would choose to leave the car at home and use public transportation to commute to and from work. But that price will differ vastly from one person to another. Why might it be higher for self-employed than for salaried people? For executives than for clerks?

6. What would be the effect on the cost to students of completing high school if legislation denied drivers' licenses to anyone under the age of 18?

7. Why did the cost of hiring domestic servants increase dramatically during World War II? What would you have replied to people who said that servants "just weren't available"?

8. Explain the following statement by a military recruiter: "There's nothing like a good recession to cure our recruiting problems."

9. A severe hurricane passing through a populated area will blow out a lot of windows and thereby cause a huge increase in demand for the services of glaziers. If glaziers respond by raising their hourly rates, the cost to

homeowners of having their windows repaired will rise. But does a hurricane raise the cost to glaziers of repairing windows? Or are glaziers who raise their rates merely taking unfair advantage of the situation?

10. Smith, Ricardo, Marx, and Keynes are potential tutors for students in introductory economics. Each wants to work 8 hours a day at his best available monetary opportunity. Students regard their services as perfect substitutes: As far as students are concerned, an hour of tutoring is equally valuable whichever of the four provides it.

Marx is willing to tutor 8 hours a day for $4 an hour, because his next-best opportunity, fomenting revolution, currently pays only $3.99 an hour. Ricardo can work 4 hours a day at Merrill Lynch for $13.99 an hour; after that he's reduced to selling shoes for $4.99 an hour. Smith's best alternative is teaching moral philosophy at the local college for $7.99 an hour, 8 hours a day. Keynes has an 8-hour-per-day job, paying $11.99 an hour, raising money for the local symphony.

a) Construct the supply curve of tutoring services from these data on the graph in Figure 3B.

b) Show how the supply curve would change if Merrill Lynch hired Ricardo full time.

c) Show the change that would occur if someone offered Marx a job as a newspaper reporter at $9.99 an hour.

d) How would the supply curve change if the public suddenly became much more interested in learning something about moral philosophy?

11. The supply curve on the graph in Figure 3C shows the wage rates that would have to be offered by business firms to obtain various quantities of hours of envelope stuffing on any given day.

a) What wage rate will firms have to offer if they want to hire 400 hours of envelope stuffing?

b) What will be the firms' total expenditure on the wages of envelope stuffers?

c) What will be the total opportunity cost to the envelope stuffers of stuffing envelopes? (Hint: Each square represents $20: 20 hours times $1.) -

d) What is the price elasticity of supply between $4 and $6? Between $6 and $8?

12. (a) It has been argued that a volunteer army would discriminate against poor people, because they tend to have the lowest-value alternatives to military service and hence would dominate the ranks of volunteers. Do you agree with the analysis and the objection?

b) Some critics have argued that if the military relied exclusively on volunteers, the armed forces would be filled with people of such low intelligence and skills that they could not operate sophisticated weapons. International Business Machines relies exclusively on "volunteers," and its employees are not predominantly people of low intelligence and skills. What's the difference between the armed forces and IBM? How would you reply to the argument of these critics?

c) Another frequent criticism of a volunteer military is that we don't want "an army of mercenaries." How high does the military wage have to be before the recipient becomes a mercenary? Are officers compelled to remain in the armed services? Why do they stay in? Are they mercenaries? Is your teacher a mercenary? Your physician? Your minister?

13. Why might a multinational corporation with identical plants in different countries pay different wage rates to workers in the two countries even though their skill levels are the same? Does this strike you as unjust? Why might the higher-paid workers object?

14. If people are offering to pay $100 for $10 (face-value) tickets to the Big Game, and someone gives you a ticket, what does it cost you to attend the game? Would you be more likely to attend if someone gave you a ticket than if you had to purchase one for $ 100? Would you be more likely to attend if someone gave you a ticket than if you had to purchase one that you could buy (through an inside source) for $10?

15. Rising commercial rents in San Francisco in recent years have induced many corporations to move their offices out of the city. Can a San Francisco firm that owns its own office building simply ignore rising rents?

16. Henrietta George bought her large, old house 48 years ago for $2000. She could get $200,000 for it today if she chose to sell it. About how much do you suppose it's costing her to continue living in her large, old house?

17. What is the cost per ticket to a professional baseball club that offers 50 free tickets to an orphanage? Does it matter for what game the tickets are offered? Why would it probably cost the ball club more to give the tickets

to college students than to poor orphans?

18. Think about the cost of television commercials. What enters into the cost of a 30-second commercial plugging Friendly Fred's Ford Dealership? How do you explain the fact that the same commercial will cost $90 on

Wednesday morning but $1600 right before a big football game? Local television stations are often asked to donate time for public-service spots. Does this cost the station anything? Do you think that station owners' religious beliefs make them more willing to donate time on Sunday mornings than on weekday mornings?

13. The network advertising fee per 30-second spot during Super Bowl XVIII was $484,000. Did that reflect the network's estimate of the cost of providing a 30-second advertising spot? What made the cost so high?

14. Why do parking lot fees vary so widely from city to city in the United States? The all-day rate in Manhattan, for example, is often $20. In Atlanta, it is likely to be less than $5. Does this difference reflect the greater greed of New York City parking-garage owners?

15. In 1977 a Seventh Day Adventist congregation in Manhattan purchased a former synagogue for $400,000. Several years later the congregation decided to sell it because the maintenance costs were running $100,000

per year, too much for the 80-family congregation to pay. In 1982 a developer paid the congregation $2.4 million cash for the property. (The information is taken from a Wall Street Journal article of September 27,

1982.)

a) What would it have cost the congregation to continue using the building?

b) Would you say that it is greed that prompts congregations to sell large, old churches in downtown areas to commercial developers?

22. Most mobile-home owners own their homes but pay rent for the land on which the home sits. Some municipalities have recently begun to impose legal limits on the amount by which the owners of mobile-home parks can increase the rent they charge for their sites. One argument given in defense of such rent controls was that zoning regulations against mobile-home parks made it difficult for mobile-home owners to move to a new

site when faced with a huge rent increase.

a) What determines the rent a mobile-park owner can charge for a site?

b) To what cost, if any, is this charge related?

c) How do zoning regulations against mobile-home parks affect the rents park owners can charge?

d) Do you agree with the mobile-home owner who, when faced with a large increase, protested indignantly, "my home gives value to that pad of dirt"?

23. A number of American cities have passed rent-control ordinances in recent years. These ordinances often try to restrict rent increases to the amount of the owners' cost increases. Use the analysis of this chapter in thinking about these questions:

a) What is the cost to a landlord of renting an apartment to you for $150 if someone else is willing to pay $250?

b) What determines the cost to a potential landlord of purchasing an apartment building?

c) What effect will a rent-control ordinance have on the cost of purchasing an apartment building?

a) What effect will a rent-control ordinance have on the cost to land lords of letting an apartment unit stand idle, or of using it themselves, or of allowing relatives to live in it rent-free?

b) What concept of cost do you think supporters of rent controls have in mind when they speak of basing maximum rents on landlords' costs?

24. Are hand-carved redwood flamingos that sell for $ 150 valuable because they take so many hours to carve? Or do people spend many hours carving redwood flamingos because they are valuable? Does the value of an object ever depend on what people know about how it was produced? Would a flamingo be more valuable if people thought it had been carved by Pope John XXIII than if they thought you had carved it?

25. Many Americans today seem to be much more "pressed for time" than were their grandparents. This is rather odd in view of the fact that to day's homes and workplaces are full of so many time-saving devices to which our grandparents had no access. How would you account for this? If you can't think of an explanation, ask yourself what causes anyone to feel "pressed for time." What happens to the cost of engaging in an activity, whether it's for business or for pleasure, when attractive alternative opportunities suddenly present themselves?

26. "In the Middle Ages people believed in a just price for goods, not determined by supply and demand, but by the cost of raw material and labor." Assume that the author of that statement is accurate in his historical facts, and correct his economic analysis.

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Note: We will use these questions in conjunction with our discussion of supply in chapter 3 of the McConnell & Brue text. But these questions are taken from our secondary textbook – Dr. Paul Heyne’s The Economic Way of Thinking (micro split) which I chose not to issue to you this semester due to our time constraints.

A.P. Economics

Gary Nelson

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