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Principles of Microeconomics - Homework 1 | ECON 2010, Study notes of Economics

Homework 1 Material Type: Notes; Professor: Winters; Class: Economics I (Micro); Subject: Economics; University: Auburn University-Montgomery; Term: Summer 2010;

Typology: Study notes

2009/2010

Uploaded on 09/28/2010

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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.
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Principles of Micro HW 1 Chapter 1 P&A

  1. 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?
  2. 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?
  3. 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.
  5. 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.

Chapter 3 P&A

  1. Maria can read 20 pages of economics in an hour. She can also read 50 pages of sociology in an hour. She spends five hours per day studying. a. Draw Maria’s Production Possibilities Frontier for reading economics and sociology. b. What is Maria’s opportunity cost of reading 100 pages of sociology?
  2. American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers. a. For this situation, construct a table analogous to the table in Figure 1. b. Graph the production possibilities frontier of the American and Japanese economies. c. For the United States, what is the opportunity cost of car? Of grain? For Japan, what is the opportunity cost of a car? Of grain? Put this information in a table analogous to Table 1. d. Which country has an absolute advantage in producing cars? In producing grain? e. Which country has a comparative advantage in producing cars? In producing grain? f. Without trade, half of each country’s workers produce cars and half produce grain. What quantities of cars and grain does each country produce? g. Starting from a position without trade, give an example in which trade makes each country better off. Chapter 4 P&A
  3. Consider the market for minivans. For each of the events listed here, identity which of the determinants of demand or supply are affected. Also, indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price and quantity of minivans. a. People decide to have more children. b. A strike by steelworkers raises steel prices. c. Engineers develop new automated machinery for the production of minivans. d. The price of sports utility vehicles rises. e. A stock market crash lowers people’s wealth.
  4. Suppose that the price of basketball tickets at your college is determined by market forces. Currently, the demand and supply schedules are as follows: Price ($) Quantity Demanded Quantity Supplied 4 10,000 8, 8 8,000 8, 12 6,000 8, 16 4,000 8, 20 2,000 8, a. Draw the demand and supply curves. What is unusual about the supply curve? Why might this be true?

a. Use the midpoint method to calculate your price elasticity of demand as the price of compact discs increases from $8 to $10 if (i) your income is $10,000 and (ii) your income is $12,000. b. Calculate your income elasticity of demand as your income increases from $10,000 to $12, if (i) the price is $12 and (ii) the price is $16.