The unit price of market goods is $1. Each person has 8 hours to work each day. Another couple, Sylvan and Alex, have the same productivities: Sylvan is identical to Rajan, while Alex and Esther are

The unit price of market goods is $1. Each person has 8 hours to work each day. Another couple, Sylvan and Alex, have the same productivities: Sylvan is identical to Rajan, while Alex and Esther are
Page 6 of 6 University of Victoria Economics 339 202009 Midterm answer key: written response questions Question 4 Question 4 Ember (E) and Rajan (R) are a couple with individual productivities in both the market and their home.  Each has 10 hours per day to devote to work. E can earn $9 per hour in the market, and can produce goods worth $8 per hour at home. R can earn $12 per hour in the market, and can produce goods worth $6 per hour at home. Market-produced goods cost $5 per unit. Who has the higher opportunity cost of home production? Briefly explain how you determined this.  _____________________________ Note: the wording is more confusing than intended. I will accept a couple of answers.  Answer: Opportunity cost of household production can be measured in two ways: using monetary values or quantities of good. Information in question gives hourly wage for market work, and “shadow wage” for household production. 1. Using hourly compensation in both production settings: if E switches one hour from market labour to household labour, the couple loses $9 worth of market produced goods and gains $8 worth of home-produced goods.  This means the opportunity cost of an hour of household production = $9/$8 =9/8. Following the same reasoning, the opportunity cost of an hour of household production for  R = $12/$6 = 2. Since 2 >9/8, R has the higher opportunity cost. 2. Have the information to calculate the number of units of market goods that can be purchased with one hour of labour: for R this is $12/$5 = 12/5 > 2, while for E this is $9/$5 = 9/5 < 2. Since in each hour of market work R can purchase more units of market goods than E can, and in household work E can produce a greater monetary value of goods per hour than R can, then R’s opportunity cost of household production is greater than E’s.  Marks: 2 for explicit statement of what is being used to calculate opportunity cost, 2 for reasoning behind this use, and 2 for showing and stating that R’s opportunity cost of household production is greater than E’s Score Question 5 Suppose Ember and Rajan choose to divide their time so that Rajan works part time in the market and part time at home, while Ember works full time in the market. Is this division of time efficient? Briefly explain why or why not. ______________________________ Answer: No, this allocation of time is not efficient. (2 points) If E works full time in the market and R works part-time at home, then the couple’s opportunity cost of an additional unit of market produced goods is equal to R’s opportunity cost of market produced goods measured, by the amount of household goods R does not produce with the reallocated labour. This is less than E’s opportunity cost for market goods in terms of home produced goods. If the couple switched time allocations, so R worked full time in the market and E worked part time in the market and part time at home, the couple would be able to consume more of both goods. This means that with the same resources the couple could increase the amount of consumption of both market and home produced goods, so the original allocation of time is not efficient. 4 points for an explanation of how consumption of both types of goods could be increased. 2 marks for stating that if it is possible for the couple to produce more of both typed of goods with the same resources then the initial time allocation cannot be efficient. Note: the wording of a student’s answer will almost certainly not match mine, but they should have full marks if they get the main ideas across clearly. Score Question 6 If the couple chose to consume more home produced goods than either Ember or Rajan could produce alone, and the couple wanted to maximize their joint utility, which partner would produce market goods? Briefly explain why. Note: you do not have enough information to provide a numerical answer.  Answer: R would produce market goods. E is more efficient working at home than in the market, compared to R.Therefore the amount of household goods that can be produced by the couple with only one person working at home is the max E can produce.If the couple chooses to consume more than E can produce alone, then R should shift some time from market labour to home production. So R would work part time in the market and part time at home. Question 7 What is the slope of the couple’s joint production possibility frontier (ppf)? What changes at the kink in the joint ppf? _____________ Answer: The couple’s joint ppf is piece-wise linear; there is a single kink. Above the kink the slope of the ppf is equal to the slope of E’s individual ppf. Below the kink the slope is equal to the slope of R’s individual ppf.At the kink, both individuals are working full time in the sphere in which they have the comparative advantage: in this case, R in the market and E at home. Moving along the ppf away from the kink in either direction has one person working part time in the market and part time at home while the other keeps working full time in the area in which they have the comparative advantage.Therefore the changes at the kink are a reallocation some of one person’s labour away from complete specialization in the area in which the have the comparative advantage to part-time work in both areas.Marks: 3 for the slope and 3 for the changes.Slope can be identified by value of opportunity cost (answer in Q4) or as I did – saying whose opportunity cost is relevant without stating its value.Changes at the kink are time reallocations – one person splits their time between home and the market. Students do not need to specify who divides their time on which portion of the ppf. Score Question 8 Suppose Ember and Rajan together initially chose a bundle of the two types of goods requiring Ember to work part time in both the market and their home. One effect of the COVID-19 lockdown was that Ember’s return from market labour was reduced to $7 per hour, or $70 per day. Nothing else changed.  Given their initial choice, how would you expect the allocation of the couple’s labour to change as a result of this? Explain this, using income and substitution effects. Answer: This decrease in E’s hourly market wage, all else equal, has two effects:1.  Substitution effect: E’s opportunity cost of household labour would be lower than it was before. If E is currently dividing their time between market and household labour while R works full time in the market, the couple’s opportunity cost of household production = E’s opportunity cost. All else equal, including the initial level of utility (staying on the same indifference curve), this would induce an increase in consumption of household goods (and decreased consumption of market goods) for the couple. The only way to increase the production of household goods is to shift some of the couple’s labour from the market to the household, and it is efficient to reallocate E’s time.2. Income effect: the maximum amount of market production obtainable by R working full time in the market while E splits her time is now less than it was before. If both market and household produced goods are normal goods, then this decrease in potential income would lead to a reduced consumption of both home and market produced goods. Given the initial time allocation, the only way to reduce home production is for E to switch time from home to the market.The combined income and substitution effects lead to a  decrease in the amount of market produced goods the couple would choose to consume. The overall effect on home produced goods is ambiguous, since the substitution and income effects are of opposite signs. The decrease in the amount of market goods consumed does not indicate a definite reallocation of E’s time, because this can be accomplished by not changing the current time allocation, decreasing the amount of time E spends in the market, or even increasing E’s market labour a bit.Marking scheme: 2.5 points for a clear explanation of income effects, and 2.5 for a clear explanation of substitution effects, on the bundle of home and market produced goods.3 points for a discussion of the consequences for time allocation.     Score Expand question feedback: many students assumed that since Ember’s market productivity declined, the couple would choose to have Ember devote more time to market work (and therefore less to homework) to make up the lost income. This might be true, but it is not the only possible outcome. The substitution and income effects on the household’s consumption of home produced work in opposite directions; they work in the same direction on market produced goods. This means that the quantity of market goods unambiguously decreases. This will happen if the productivity change leads to no change in E’s market labour. Question 9 One widely observed practice after the COVID-19 lockdown was an increase in homemade bread. Flour, butter and sugar were difficult to find, and when they were available in grocery stores there were limits on the amounts any person could purchase at one time.  How might you explain this, using the information above? ______________ Note: there was a glitch in presenting the information for this question (mine? Brightspace?) Questions 4-9 were all to be based on the information in Q4-Q9. Even without this statement, it is reasonable to expect students to answer this in the context of the material covered in the course. For this question, this would be an increase in home production. Answer: This question will be marked out of 5, and students will receive 4/5 for a reasonable discussion of this situation in terms of supply and demand.)During the initial COVID-19 lockdown, many people were left with either reduced work hours or unemployment. Several people switched at least part of this additional time to home production. Homemade bread was one of the products of this switch. People were also encouraged to make fewer shopping trips per week.People stocked up on the ingredients needed to make bread, leading to an increase in demand for these ingredients. Maintaining a supply adequate for the jump in demand was difficult for most grocery stores/chains – because of both layoffs and social distancing, fewer workers were available to work and transportation networks were slowed down (ferry crossings reduced…). One common mechanism for alleviating the upward pressure on prices was to ration amounts purchased by any one household. Score