Principles of Micro HW 1
Chapter 1 P&A
4. You win $100 in a basketball pool. You have a choice between spending the money now or
putting it away for a year in a bank account that pays a 5 percent interest. What is the
opportunity cost of spending the $100 now?
5. The company that you manage has invested $5 million in developing a new product, but the
development is not quite finished. At a recent meeting, your salespeople report that the
introduction of competing products has reduced the expected sales of your product to $3 million.
If it costs $1 million to finish development and make the product, should you go ahead and do
so? What is the most that you should pay to complete development?
9. Your roommate is a better cook than you are, but you can clean more quickly than your
roommate. If your roommate did all the cooking and you did all the cleaning, would your chores
take more or less time than if you divided each task evenly? Give a similar example of how
specialization and trade can make two countries both better off.
Chapter 2 P&A
4. An economy consists of three workers: Larry, Moe, and Curly. Each works ten hours a day
and can produce two services: mowing lawns and washing cars. In an hour, Larry can either
mow one lawn or wash one car; Moe can either mow one lawn or wash two cars; and Curly can
either mow two lawns or wash one car.
a. Calculate how much of each service is produced under the following circumstances which we
label A, B, C, and D:
All three spend all of their time moving lawns. (A)
All three spend all of their time washing cars. (B)
All three spend half of their time on each activity. (C)
Larry spends half his time on each activity, while Moe only washes cars and Curly only
mows lawns. (D)
b. Graph the production possibilities frontier for this economy. Using your answers to part (a),
identify points A, B, C, and D on your graph.
c. Explain why the production possibilities frontier has the shape that it does.
d. Are any of the allocations calculated in part (a) inefficient? Explain.
6. Classify each of the following statements as positive or normative. Explain.
a. Society faces a short-run tradeoff between inflation and unemployment.
b. A reduction in the rate of money growth will reduce the rate of inflation.
c. The Federal Reserve should reduce the rate of money growth.
d. Society ought to require welfare recipients to look for jobs.
e. Lower tax rates encourage more work and more saving.
