Lab #2 Name:_________________________

Agricultural and Resource Economics

(ARE 012) Section #:______________________

This lab assignment is worth 100 points.

Purpose of Lab:

This lab will review some of the basic economic concepts covered in lecture. The lab will
teach you how to calculate and interpret the unemployment rate, polish your ability at
using the economic method in addressing problems or issues, teach you how to determine
the purchasing power of a dollar, and show you how to compare the cost-of-living among
states.

Assignments:

I. Review of Basic Economic Concepts from Lecture: Answer the questions below.
You may refer to your notebook, textbooks, and lecture notes. For the multiple-choice
questions, provide a brief explanation of your answer.

1) The following topic is an example of microeconomic research:

a) Is there a tradeoff between unemployment and inflation?

b) What is the effect of interest rates on consumer purchases?
c) What is the profit maximizing level of output for a manufacturer?
d) Does the federal deficit drive up interest rates?
e) None of the above.

Brief Explanation:

Micro studies economic behavior of individual decision making units such as

consumers, resource owners, and/or business firms. Micro also considers
groups of consumers, resource owners, and/or business firms as well. A
group of business firms with similar outputs would be considered an
industry.

Several students chose "b" as there answer. The effect of interest rates on
consumer purchases is a macroeconomic topic. Consumer purchases is an
aggregate measure. The Federal Reserve lowered interest rates more than
seven times in 2001 in an effort to increase consumer purchases and capital
investment by business firms thereby strengthening the economy.
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2) The following statement is an example of positive economics:

a) The procedure under analysis is expected to cost $15,679 with a

probability of 95 percent.

b) The President's budget is not in the best interest of the country.

c) The appropriate action that you "ought to" take for your business is to drop
prices10%.

d) The Dow Jones is reaching its upper limit given the recent increase in the
prime rate.

e) None of the above.

Brief Explanation:

Positive economics is objective, without emotion or value judgements

imputed. Based on sound economic theory, probability, and statistical
methods. Many chose "d" as an answer, and some chose "b" as well. "b" is
a normative statement. If you are a Bush supporter, you would probably
disagree with the statement. If you were a Gore supporter, you may be
inclined to agree with the statement. Nevertheless, it is a normative
statement. All federal budgets are politically contrived and full of political
tradeoffs. I'll give you this if you will support that. The Bush budget has
called for an increase in military spending. Is this in the best interest of the
country? I think some folks could argue all night over that one. There does
not appear to be much money left for a farm bill due to the evaporation of
the surplus, should the President and Congress dip into the Social Security
Trust Fund to fund a new Farm Bill? If you are a farmer you may be
inclined to say, yes. If you are a 22 year old person worried about how the
country will provide for a country with one third of it population in
retirement, maybe no. Are you all catching my drift here? A positive
analysis of the Presidents budget would be quite lengthy pointing out the
economic pros and cons of the spending suggested by the budget document.

3) A smoker and a nonsmoker share a small office. The nonsmoker is irritated by

cigarette smoke. Is this situation a positive externality or a negative externality?
Incorporate the definition of an externality in your answer.

Negative externality

When you produce or consume a commodity (good or service) within your

private property rights that imposes a cost on a third party not directly
involved in the market transaction.
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4) Mrs. Smith has the most attractive yard in the neighborhood. Her yard is always
mowed and landscaped with flowers. Her neighbors' yards are "average" doing only the
minimum to satisfy the requirements of the homeowners association. Does this situation
set up the possibility of a positive externality or a negative externality? Incorporate the
definition of an externality in your answer.

Positive externality

Production or consumption of a good or service that bestows a benefit on a

third party not directly involved in the market transaction. This answer
assumes that we are looking at the situation of value flowing from Ms.
Smith's actions to her neighbors. It can be argued that a negative externality
may be incurred by Ms. Smith due to her neighbor's actions. I accepted that
argument.

5) The following is an example of government policy that addresses a positive

externality:

a) Requiring the use of seat belts while driving or riding in a motor vehicle.
b) Regulation on exhaust emissions from automobiles.
c) Luxury taxes charged on certain commodities such as furs, cars, and boats.
d) Financial aid to college students.
e) None of the above.

Brief Explanation:

All others are examples of government response to negative externalities.

Education has enormous positive externalities. Higher education levels are
associated with higher real GDP levels and standards of living, higher tax
revenues, lower crime rates, decreased entitlement spending, and the
enhanced performance of and greater participation in a representative
democracy.
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2. Calculation and Interpretation of the Unemployment Rate:

a) Fill in the blanks in the table below. Then calculate the unemployment rate
and the employment rate using the information in the table.

Variable Number (millions)

Civilian Non-Institutionalized Population 205

Civilian Labor Force 142.625

Employed Population 137.375

Unemployed Population 5.25 (142.625 - 137.375)

Population Not in Labor Force 62.375

Population Not in Labor Force 62.375 (205 - 142.625)

Unemployment Rate = (5.25 / 142.625) x 100 = 3.68%

Employment Rate = 100.00% - 3.68% = 96.32%

b) What are the general relationships between the unemployment rate and
education and the unemployment rate and race?

Increased education results in decreased unemployment rates

across the civilian labor force as well as across race. This appears to
be also true between genders. Also notice how the difference between
unemployment rates between Whites and Blacks decreases as
education levels increase.
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3. Using the Economic Method to Make Decisions.

The economic method is comprised of five steps.

a) List the steps below.

Step 1: Identify and state the problem

Step 2: Apply the relevant economic model

Step 3: Identify the solutions

Step 4: Evaluate the solutions

Step 5: Select and implement a solution

4. Calculating the Purchasing Power of a Dollar. A dollar today is worth less

(purchases less) than a dollar last year because of inflation. For example, $10 in 2008
bought fewer goods and services than $10 did in 1990. You should refer to Chapter 1 in
Everyday Economics by Michael L. Walden in working the problems below. You have
to show all of your work to receive full credit.

To compare the purchasing power of a dollar amount in one year with the purchasing
power of a dollar amount in a different year, you have to calculate the purchasing power
of the two dollar amounts during a common year, or what is often referred to as the base
year. Table 1 in Chapter 1 of Everyday Economics gives the Purchasing Power
Converters that are used to express a dollar amount in a given year in terms of its
purchasing power during 2008.

In general,

Purchasing Power During 2008

of Y Dollars, in Year X = (Y Dollars, in Year X) x Purchasing
Power Converter in Year X)
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Example:
Could you have purchased more goods and services with $65 in 1989 or $83 in 2008?
According to Table 1, the Purchasing Power Converter for 1989 is 1.74. This means that
$65 in 1989 is equivalent in purchasing power to $113.10 during 2008:

Purchasing Power During 2008 of $65 Dollars in 1989 = $65 x 1.74

= $113.10

In this case, you could purchase more goods and services in 1989 with $65 than you
could with $83 in 2008. You would have to have $113.10 to purchase the same amount
of goods and services in 2008 as you could with $65 in 1989.

Please Work the Following Problems:

a) Joe's take-home salary was $25,425 in 1975. His take-home salary was $62,225 in
1997. In terms of purchasing power, was Joe better off in 1975 or 1997? Could you
reach the same conclusion if gross salary (i.e., before taxes) was given instead of take-
home salary?

25,425 x 4.01 = 101,954.25

62,225 x 1.34 = 83,381.50

Better off in 1975.

b) A movie ticket cost $2.50 in 1980. A movie ticket in 1990 cost $4.25.

Calculate the purchasing power equivalent of a movie ticket in 1980:

2.50 x 2.62 = 6.55

Calculate the purchasing power equivalent of a movie ticket in 1990:

4.25 x 1.65 = 7.01

In terms of purchasing power, did the price of a movie ticket increase or decrease
during the 1980s?

Increase
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c) The sticker price for an F-150 pickup truck was $22,000 in 2008. What would have
been the sticker price for an F-150 pickup truck in 1950 if the truck cost the same amount
of money in terms of purchasing power as a truck in 2008?

(Help: sticker price in 1950 x Purchasing power converter, 1950 = $22,000)

What you want to figure

out. Look it up in The price of a n
Table 1 of F-150 pickup in
"Everyday 2008
Economics"

Figure it out right here:

8.95x = 22,000

solving for x gives an answer of 2,458.10

What factors other than monetary cost should you consider when comparing a
1950 truck with a 2004 truck?

Technology differences?
Tire quality in 1950 vs. 2008
Ignition system technology?
Air conditioning?
Automatic transmissions?
Fuel efficiency?
Quality and safety differences?

d) Lisa earned $35,000 in 1996. What would Lisa's salary have to be at the beginning of
year 2009 for her to have the same level of purchasing power as in 1996. The expected
inflation rate 2.5% for 2008.

(Need some help? Take a look at Example 5 on page 6 of your "Everyday Economics"
text. If you are still stumped, raise your hand.)

(1.37)(1.025)(35,000) = $49,148.75
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5. Comparing the Cost of Living Among States. The cost of living will often vary
from one state to the next. In general, the cost of living is usually higher in urban areas
than in rural areas. You should refer to Chapter 2 in Everyday Economics by Michael
L. Walden in working the problems below. You have to show all of your work to receive
full credit.

Table 2 on page 10 of Everyday Economics gives the cost-of-living indices for states in
2008. The average cost-of-living index for the United States is 100.

Example:

i) Is the cost-of-living lower in North Carolina or South Carolina? According to Table 2,

the cost-of-living index is 96.70 for North Carolina and 95.40 for South Carolina. These
indexes can be interpreted as "the cost-of-living in North Carolina is 96.70% of the
average cost-of-living in the United States, and the cost-of-living in South Carolina is
95.40 % of the average cost-of-living in the United States." In other words, the average
cost of living in live in South Carolina is less than the average cost of living in North
Carolina.

ii) Let's assume that your income is $22,000 in South Carolina. What level of income in
North Carolina would give you the same level of purchasing power as in South Carolina?
An income of $22,000 in South Carolina is equivalent to an income of $22,299.79 in
North Carolina. How did we figure that out?

We would have to have a North Carolina Income of

$22,000 x (96.70 / 95.40) = $22,299.79

South Carolina income N.C. Cost-of- S.C. Cost-of-

Living Index Living Index

to have the same purchasing power that a $22,000 income in South Carolina would
provide.

In general,

The Level of Income Needed

in State X to Obtain the Same
Level of Purchasing Power as
in State Y
Cost of Living Index for State X
= (Income in State Y) x
Cost of Living Index for State Y
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Please Work the Following Problems:

a) You are currently earning $25,000 in North Carolina. You are offered a job in
California for $35,000 and your new employer will cover all of your moving and
relocation expenses. Assuming that monetary income is all that matters to you, should
you take the job?

(Help: Take a look at Example 2-1 and 2-2 on page 11 of your Everyday Economics
text.)

25,000 X (California / N.C.) = 25,000 X (139.4 / 96.70) = 36,039.30

$35,000 in California is NOT better.

A few of you got the cost-of-living index ratio upside down. To help, remember the
following:

Cost of living index of the state you are moving to divided by the cost of living index
of the state you are moving from.

b) Let's assume that your income is $40,000 in Massachusetts. What would your income
have to be in Mississippi for you to have the same level of purchasing power as in
Massachusetts?

40,000 X (92.10 / 122.90) = 29,975.59

Is this one of factors that helps explain why some folks that retire from a job in the
Northeast, U.S. move to the Southeast, U.S. to live out there retirement years?

c) Think of five factors, other than monetary income, that you would consider in
deciding which state you would take a job and live in?

Crime rates
Hospitals and medical care
Educational facilities
Cultural activities
Geography
Weather
Proximity to beaches, mountains, lakes other recreational opportunities
Etc.