Problem set

1
Problem set

• Chapter one

2
1

• ANSWERS WILL VARY, BUT SHOULD INCLUDE THE NOTION
  THAT EACH ACTIVITY TAKES TIME AWAY FROM THE
  PURSUIT OF OTHER ACTIVITIES (OPPORTUNITY COST)
  AND THAT EACH ACTIVITY PROVIDES BENEFITS IN THE
  FORM OF SATISFACTION OR ADDITIONAL INCOME. ONE
  MUST COMPARE BOTH THE COSTS AND THE BENEFITS OF
  EACH ACTIVITY. EACH ACTIVITY IS LIMITED BECAUSE
  AS MORE TIME IS SPENT ON ANY ONE ACTIVITY, IT
  YIELDS SMALLER ADDITIONAL BENEFITS, AND
  ACTIVITIES ARE FOREGONE.

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2

• Normative
• Admission of Chile is normative reasons are
  positive
• Positive
• Normative

4
4

• AC 1.75 19.95/17
• MC 0

5
5

• Shopkeepers would gain by greater access to
  customers and higher profits. All city residents
  would gain, because greater access will generate
  higher sales and greater sales tax revenues.
  Consumers gain due to the opportunity cost of
  time not spent waiting in traffic jams.
• Losers would include shopkeepers closer to the
  other, older bridge whose customers choose to
  shop closer to the new bridge. Any taxpayers for
  whom the extra taxes exceed the added benefit of
  the new bridge would also lose.
• The gains/losses could be measured by adding up
  the value of all the time saved not waiting in
  line. We might say the bridge is efficient if the
  value of the time saved were greater than the
  cost of building the bridge.

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6

• Since gambling is not mandatory, only those who
  want to will gamble. The state should allow the
  market to provide what people want. Tax revenues
  are in essence paid voluntarily.
• It has been argued that gambling casinos bring
  with them higher crime and undesirable
  elements. In addition, gambling can be addictive,
  and it often leads some who can least afford it
  into poverty and bankruptcy. Thus, opponents
  argue that wanting to gamble may not be strictly
  voluntary. Clearly allowing casino gambling may
  produce more than just the enjoyment of gambling.
• The most frequent argument against casino
  gambling is that lower income households tend to
  gamble away more of their incomes than do higher
  income households. Thus, the taxes collected from
  gambling come predominantly from lower income
  households and often from gambling addicts.

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7

• (a) Tuition (which could have been spent on other
  things), forgone wages, study time, etc.
• (b) All the money (gas, depreciation of the car,
  etc.) could have been spent on other items time
  spent en route could have been used for other
  activities.
• (c) A better grade, no headache, perhaps
  admission to a better grad school, a
  higher-paying job. He has traded off an
  investment in human capital (staying in to study)
  for present consumption (going to the party).
• (d) The other things that 200 could buy.
• (e) The 1 million could have been invested in
  other profit-making ventures or projects or it
  simply could have been put into the bank or
  loaned out to someone else at interest.
• (f) From the standpoint of the store, Alex is
  free. From Alexs standpoint he gives up other
  uses of time and wages that could be earned
  elsewhere.

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Chapter Two

• Problem set

9
1

• (a) The value of alternative uses of time
• (b) The value of alternative uses of time
  including studying
• (c) Forgone opportunities to spend the same
  amount of money
• (d) The value of the goods and services that
  taxpayers would have purchased
• (e) The alternative uses to which those
  resources could have been put by the government
  or the value of the goods and services that
  taxpayers would have purchased
• (g) The forgone salary that you would have
  earned and the value of the alternative uses of
  time.

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2

• DISAGREE. TO BE EFFICIENT AN ECONOMY MUST PRODUCE
  WHAT PEOPLE WANT. THIS MEANS THAT IN ADDITION TO
  OPERATING ON THE PPF (RESOURCES ARE FULLY
  EMPLOYED, BEST TECHNOLOGY IS BEING USED) THE
  ECONOMY MUST BE OPERATING AT THE RIGHT POINT ON
  THE PPF.

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3

• (a) For Kristen the cost of a potholder is five
  wristbands for Anna the cost of a potholder is
  six wristbands. Kristen has a comparative
  advantage in potholders.
• (b) Anna has a comparative advantage in the
  production of wristbands because the opportunity
  cost (1/6 potholder) is lower for Anna than it is
  for Kristen (1/5 potholder).

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Question 3 part C
13
Question 3 continues

• (d) Kristen 150 wristbands and 30 potholders.
  Anna 120 wristbands and 20 potholders.
• Total wristbands270. Total potholders 50.
• (e) 285 wristbands and 51 potholders.
• (f) Kristen should completely specialize in
  potholder production and earn 60x 5.50 330 .
  Anna should completely specialize in wristband
  production and earn 240 x 1 240. Maximum
  combined revenue is 570.

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Question 4

• (a) Depends on her state of mind and income. If
  she will be paying for college, she may have to
  work more later. In a sense, she is trading
  future work for present consumption. On the other
  hand, if she is really stressed out, taking time
  off may well make her a more productive student
  and earn her higher grades later on.
• (b) Sacrificing present consumption for the
  future benefits of losing weight. For most
  people, dieting and working out are difficult.
  The future benefits of feeling well and being
  healthy make it worthwhile for many.
• (c) Time and money spent today on maintenance
  can be thought of an investment in the
  futureavoiding costly repair bills and/or the
  inconvenience of breaking down on the road. (Pay
  me now or pay me later.)
• (d) Present time saved vs. risk of an accident or
  a ticket, which could be costly.

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Question 5

• (a) BlahBlah
• (b)Blah fruit
• Figistan timber

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Question 5 part c
17
Question 5 parts d and e

• Figistan 800 workers to timber
• 400 workers to fruit
• produces 4000 of each
• Blah 900 workers to timber
• 300 workers to fruit
• produces 9000 of each
• Figistan moves all labor to timber and produces
  6000 board feet
• Blah moves to 150 out of timber into fruit
• 450 in fruit produces 13,500 baskets 750 in
  timber produces 7,500 ft.
• Blah trades 4200 baskets to Figistan for 1800
  board ft.
• Blah ends up with 9300 of each Figistan ends up
  with 4200 of each
• Both move beyond their individual ppfs.

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Question 6 a
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Question 7

• According to the News Analysis box on page 38 of
  the text, countries like Poland, Hungary, and the
  Czech Republic have been making progress
  economically, while poorer countries like
  Albania, Bulgaria, and Romania have had more of a
  struggle. Differences are due to factors such as
  geography (and in particular, proximity to the
  West), history and culture, and government
  policies.

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Question 8

• Graph c d
• Graphs a, d, e and f
• Graphs c,d, e
• Graph e
• Graph b, c, d, e f
• Graph b

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Question 9 a
22
Question 9 continued

• (b) Yes, increasing cost applies. The opportunity
  cost of the first 15 million loaves of bread is 4
  ovens, of the next 15 million loaves, 6 ovens
  and so on.
• (c) Over time, as the number of ovens increases,
  the capacity to produce bread with the same
  quantity of other resources will also increase.
  Thus, the production possibilities curve will
  shift out horizontally to the right. The vertical
  intercept (maximum possible oven production) will
  remain unchanged, but the horizontal intercept
  (maximum possible bread production) will
  increase.
• (d) See graph in a above.
• (e) Before the new technology, production of 22
  ovens left enough resources to produce 45 loaves
  of bread. After the new technology, production of
  30 ovens leaves enough resources to produce 60
  loaves of bread.

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Question 6

• b. A straight-line ppf curve intersecting the Y
  axis at 1,000 units of luxury goods and
  intersecting the X axis at 500 units of necessity
  goods. These are the limits of production if all
  resources are used to produce only one good.
• c. Unemployment or underemployment of labor
  would put the society inside the ppf. Full
  employment would move the society to some point
  on the ppf.
• d. Answers will vary, but the decision should
  be based on the relative value of necessities and
  luxuries, and the degree of concern that all
  fellow citizens have enough necessities.