University of Calgary
Department of Economics
Economics of Social Problems
Problem Set I
Due January 30 2020
Econ 349(01) Robert Oxoby
Winter 2020 oxoby@ucalgary.ca
Readings
Readings available on D2L.
• Government of Canada, “A Backgrounder on Poverty in Canada,” 2016.
• Lamman and MacIntyre, “An Introduction to the State of Poverty in Canada,” 2016
• Sarlo, “Canada shouldn’t just be measuring poverty by comparing people’s incomes
to hockey millionaires,” Financial Post, 2018.
Problems
1. On the Consumption of Education: The following problem is intended review
some basic economic concepts.
(a) Consider an individual’s decision to attend university and receive an education.
As an abstraction, assume that the individual makes a binding decision to attend
college for a fixed number of years based on the costs and her perceived benefits
of doing so. What are the costs and benefits that the individual should consider?
(b) Assume that the individual’s demand for years of education can be quantified as
Y = 10 − 2t (1)
where Y is the number of years the individual chooses to attend college and t
is the yearly cost (tuition and other costs) in thousands of dollars. Assume the
marginal cost of education is $4,000 per year per student. Graph the individual’s
decision to attend college. How many years of education will this person choose?
(c) Is her choice efficient in an economic sense? Are there any aspects of education
the individual ignores in her decision?
(d) Suppose that the social benefits of education are described by the relation
Y = 10 − t. (2)
Graph this relation along with the individual’s demand relation. Why do the
social benefits lie above the individual benefits from education? What is the level
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of education (in years of college attendance) that the individual should seek if we
were interested in maximizing social welfare? Is this level of education efficient
from an economic point of view? Explain
(e) Explain how the government could change the individual’s incentives such that
she would choose to consume the socially efficient level of education. In partic-
ular, at what price would the individual choose the optimal level of education?
What level of subsidy (in dollars per year) would the government have to offer
at this level of education?
(f) Consider a variant of the previous scenario: Rather than years of university
education, suppose the problem were one of years of primary education and the
individual lived in a less developed country (LDC). Using the idea of opportunity
costs, explain how the individual’s decision will different from that described
above.
How responsive do you think this individual will be to changes in the price of
education?1 Explain.
Explain how the social benefits of primary education in a LDC may differ from
the social benefits of a university education in Canada. How might the policy
options available to a LDC differ from those available to a country like Canada?
2. Production Possibilities:
(a) Suppose an economy produces food and housing. Draw and explain the char-
acteristics of its production possibility curve. Explain the impact of (i) a new
technology that improves food production and (ii) a new invention that improves
both food and housing production.
(b) Explain how improvements in education may shift an economy’s production pos-
sibility frontier.
(c) Consider the following three uses of government spending: the purchase of a nu-
clear weapon, a “hot meals” program for the elderly, and a job training program
for the unemployed. Which of these would be most likely to succeed in shifting
out an economy’s production possibility frontier? Explain your answer.
3. Price Controls: Many have argued that the problems of poverty can be alleviated
through the use of controls in labor and housing markets. Consider the following two
types of controls.
(a) Consider the market for housing in an inner-city. Suppose the current equilib-
rium rent is $1000 per month for an apartment. Draw this market. In order
to make housing more affordable, the city has enacted a rent control mandating
rents be fixed at $700 per month. Explain who benefits and who loses from this
legislation. What are the long-term effects from the standpoint of consumers
and producers? How will the market for rental housing change over time? Has
the policy met its goal of fighting poverty?
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That is, do you think the price-elasticity of demand individual in a LDC is greater than or less than
that of a person living in Canada?
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(b) Consider a local labor market for manufacturing workers. Suppose the current
equilibrium wage is $10 per hour. In order to raise wages, the government has
enacted a minimum wage of $15 per hour in this industry. Analyze the effects
of this legislation using graphs and considering the short-run, long-run, and
incentive effects of the legislation.
(c) Given your analysis in parts a and b, do these policies achieve their desired
results? Why are these policies popular? Are these policies efficient from an
economic point of view? Are they equitable?
(d) Discuss at least one policy for each of the above problems which may do a better
job of helping those living in poverty.
4. Measuring and Responding to Poverty: Describe the measures of “absolute
poverty” and “relative poverty.” What are the differences between each? Give an
example of each.
Given that one is living in poverty, discuss at least two responses that people may make
to alleviate living in poverty. How would these responses be reflected in the market
behaviour and economic well-being of the individual? How might these responses
affect the environment in which an individual lives? Discuss two economic policies
that may change the individual’s response to living in poverty.
5. Types of Poverty: While we frequently think of poverty along the lines of incomes,
the readings emphasize how poverty can be experienced in a variety of contexts that
are not adequately reflected in incomes-based measures. Describe these other dimen-
sions of poverty and how these could be addressed by economic and welfare policies.
6. Problems with Measuring Poverty: Please read the editorial by Saro. Summarize
the argument and the comment on the author’s conclusions.
RJO
2020-01-15
