Part A:
Question 1:
- When the wage increases sixfold and hours fall by one-third, income
becomes 6×2/3=4 times higher, not three → A false.
- If total free time rises by one-fifth, solving gives H=63H → B true.
- Excluding sleep, free time rises from 49 to 70 hours (≈ 43%), not 50% → C
false.
- The proportional increase is bigger without sleep → D false.
Answer: B
Question 2:
- The graph doesn’t prove that longer hours cause higher output → A false.
- “Always worked longer” is too strong → B false.
- During 1929’s Great Depression both GDP and hours dropped in the US
and France → C true.
- Hours don’t always keep falling → D false.
Answer: C
Question 3:
- At A (MRS = 3, MRT = 9) and B (MRS = 2, MRT = 20), studying gives more
grade points than the value of leisure → study more.
- At E (MRS = MRT = 7) the student is balanced.
- The claim about giving up all free time is incorrect.
Answer: A, B and D
Question 4:
- A → C shows the substitution effect (leisure becomes costlier, so work
more).
- C → D is the income effect (richer, may take more leisure).
- C and D can’t both be positive or always so.
Answer: A
Question 5:
- We can’t draw full indifference curves from just data points → A false.
- Predicting Turkey’s wages from Dutch data → B false.
- “The income effect always dominates” → C false.
- Dutch workers enjoy more free time for similar consumption, so they value
leisure more → D true.
Answer: D
Question 6:
- At $2 → 40 000 lb demand → A true.
- Selling 24 000 lb “at least $3” doesn’t make sense → B false.
- Doubling sales ≠ halving price → C false.
- No demand above $7.20 → D true.
Answer: A
Question 7:
- Unit cost = $2 → A true.
- Profit C = $36 000 not shown → B false.
- Higher isoprofit = higher profit → prefer B to C → C true.
- Point (4500, 9) not on B → D false.
Answer: A and C
Question 8:
- Profit = (P − 70) × Q.
- At Q = 200, P = 180 → (110 × 200) = £22 000 → A true.
- Max profit not at Q = 400 → B false.
- Max profit > £9 000 → C false.
- Zero profit possible when P = 70 → D true.
Answer: A and D
Question 9:
- Using AC = TC / Q and MC = ΔTC(a) = 156 and (d) = 79 fit the table.
- Other values don’t.
Answer: A and D
Question 10:
- At A price > average cost → positive profit → A true.
- B and D on different isoprofits → profits not equal → B false.
- Profit margin similar at B and D → C true.
- Isoprofit not flat at D → D false.
Answer: A and C
Part B:
Exercise 3.6: Why do people still work long hours?
1. Tim Harford, in his Undercover Economist column, offers several reasons for this.
First, as societies become wealthier, our desires and lifestyles also expand. Instead
of being satisfied with basic comfort, people aim for better housing, more travel, and
newer technologies. These new wants push individuals to keep working longer to
afford them. Second, social comparison plays a role. Many people measure success
relative to others, so higher income can signal status as much as it provides comfort.
Finally, modern work often brings psychological or professional satisfaction. Some
people simply enjoy their jobs or see career progress as part of their identity, which
keeps them engaged even when they could afford more leisure.
- These reasons do not affect everyone equally. Higher-income professionals may
choose long hours for career goals or competition, while lower-income workers may
work longer because of financial necessity or job insecurity. In both cases, leisure
does not increase as much as Keynes expected.
2. If Harford’s view is correct, then as prosperity has grown, the marginal rate of
substitution (MRS) between consumption and free time has changed. In the past,
people were willing to give up much less leisure for extra income, but now the trade-
off has shifted. The MRS between consumption and leisure has fallen—people are
increasingly willing to exchange free time for additional goods or income. This means
that even though we are richer, our preferences have evolved toward more
consumption rather than more leisure.
Exercise 7.2:
Total cost = Average cost (AC) x Students (Q)
→ Total cost = 7,038 x 8,250 = $58,063,500
→ Total cost = 8,672 x 1,650 = $14,308,800
2.
3. For undergraduates, the curves show a typical pattern. At first, as student numbers
increase, the average cost per student declines because resources such as
classrooms and staff are used more efficiently. This is the region of economies of
scale. Beyond a certain point, both marginal and average costs start to rise as
overcrowding, heavier workloads, and administrative complexity appear—this reflects
diseconomies of scale. The marginal cost curve cuts the average cost curve at the
lowest point of AC, confirming standard cost theory.
For graduates, the shape is similar but the overall level of cost is higher. Graduate
teaching often involves smaller classes, more supervision, and specialized resources
such as research labs, so both AC and MC lie above those of undergraduates.
However, the economies of scale for graduate programs are usually narrower
because quality expectations limit class size.
4. In comparing the two, both sets of curves display U-shaped behavior, but
undergraduate education benefits from greater scale efficiency, while graduate
education is costlier and levels off more quickly. This reflects the real-world structure
of universities: large lecture-based undergraduate programs can spread fixed costs
widely, whereas graduate education remains more individualized and resource-
intensive.