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.

3. 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.

6. 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.

7. 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 Alex’s standpoint he gives up other uses of time and wages that could be earned elsewhere.

8. 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.

10. 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.

11. 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).

12. Question 3 part C

13. Question 3 continues • (d) Kristen: 150 wristbands and 30 potholders. Anna: 120 wristbands and 20 potholders. • Total wristbands=270. 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.

14. 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 future—avoiding 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.

15. Question 5 • (a) Blah;Blah • (b)Blah: fruit • Figistan: timber

16. Fruit 36,000 9,000 Fruit 12,000 4,000 4,000 6,000 Timber 9,000 12,000 Timber 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 ppf’s.

18. Question 6 a

19. 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.

20. 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

21. 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.

23. 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.