Quiz 1: Fall 1998

Greetings. Please write your name on the line above and write your quiz number but NOT your name on the cover of your blue book. You must turn in BOTH your test copy AND your blue book to receive a passing grade for the quiz.
Please answer each of the quiz questions as well as you can. Available quiz points are distributed in proportion to the recommended time limits listed in the quiz. The recommended times sum to 45 minutes, but you will be given 55 minutes to complete the quiz. Do the best you can on each question, and keep in mind that plenty of partial credit is available. Good luck!

1. (6 minutes) Answer any one of the Cooperative Learning Lab (CLL) questions on the page attached to the end of this quiz. (Available only at CLL.)

    2. (6 minutes) Consider the production possibilities curve depicted in the diagram to the right.
    a. What is the opportunity cost of the third gun?
    b. Make a rough sketch of the PPF in your blue book, and use your diagram to illustrate each of the following:
    (1) Temporary unemployment of some of the economy's resources.
    (2) Soil erosion which reduces productivity in the rose industry by 50 percent.

    3. (12 minutes) This question concerns the benefit-cost decision of going to college versus going to work with just a high-school degree, and it compares the situation I faced years ago with the decision you face now.
    a. College graduates these days can expect to earn more than they could back when I considered going to college. All else equal, how does this change affect (1) the benefits of a college degree, (2) the economic (opportunity) cost of pursuing a college degree, and (3) the overall benefit-cost decision to attend college? Explain (a diagram is optional; you can receive full credit with a careful explanation).
    b. High school graduates these days can expect to earn less than they could back when I graduated from high school. All else equal, how does this change affect (1) the benefits of a college degree, (2) the economic (opportunity) cost of pursuing a college degree, and (3) the overall benefit-cost decision to attend college? Explain carefully (again, a diagram is optional).
    c. Draw a supply and demand diagram for the market for college degrees, and illustrate an initial equilibrium tuition price and equilibrium quantity of college degrees. Then illustrate in your diagram the impact on the market equilibrium of your answers to parts a and b.
    d. Based on your analysis, would you expect:
    (1) tuition to be higher or lower now than it was back when I attended college?
    (2) more or fewer high-school graduates continuing onto college now than when I attended college?
    Explain both answers briefly, referring to your diagram from part c for support.

Traditional version (Adam Smith, Wealth of Nations): "Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it."
Modern version (Howard P. Marvel, Ohio State University lecture notes): "What’s worth more, diamonds or water? You will die without water. You might say you’ll die without a diamond, but most people won’t believe you."

a. Draw, side-by-side, a demand and supply diagram for water and for diamonds and show how diamonds can fetch a higher equilibrium price than water even though there is a much greater demand for water than for diamonds. What accounts for the higher price of diamonds compared to water despite the greater demand for water compared to diamonds?
b. The price situation became reversed in Shoah, a documentary about the Holocaust, in which witnesses told of Jews who, while being shipped by train across Europe without food and water, offered all the jewelry they owned to train station bystanders in exchange for a drink of water. Illustrate in your water-market diagram what caused the equilibrium price of water to change under these circumstances.

5. (12 minutes) Consider the following excerpt from the September 21, 1998, issue of the Los Angeles Times concerning Operation Gatekeeper, the Immigration and Naturalization Service (INS) program to reduce illegal immigration from Mexico to California:

"INS planners anticipated that [A] stepped-up border enforcement would deter some would-be illegals by raising the fees charged by coyotes or polleros--professional people-smugglers--for assistance in crossing the border and transportation to points north. The coyotes have, indeed, raised their prices; a pre-Gatekeeper fee of $300-$400 to get to L.A. or San Diego is now $900-$1,500. [B] But the number of migrants using the smuggler's services has also increased. By making coyotes indispensable, concentrated border enforcement has made the smuggling business much more lucrative...."

    a. Depict an initial equilibrium in a supply and demand diagram for the market for "smuggler's services." Use actual data from the excerpt to label the initial equilibrium price.
    b. Based on the excerpt, what has happened to the equilibrium price of smuggler's services since the start of Operation Gatekeeper? The equilibrium quantity?
    c. Indicate in your diagram how each of the two events described in passage A and passage B affects the market for smuggler's services and how the two events together could lead to the results you reported in part b. Use data from the excerpt to label the new equilibrium price.
    d. Given the direction(s) of the curve shift(s) you've drawn in your diagram:
    (1) Could the equilibrium price have ended up moving in the opposite direction from what you reported in part b? If not, why not? If so, illustrate an alternative outcome in your diagram.
    (2) Could the equilibrium quantity have ended up moving in the opposite direction from what you reported in part b? If not, why not? If so, illustrate an alternative outcome in your diagram.

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