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1.
Suppose that a nation's production possibilities can be represented by the table below:
Production Alternatives | |||||
| Products | A | B | C | D | E |
| Food | 0 | 4 | 8 | 12 | 16 |
| Clothing | 20 | 18 | 14 | 8 | 0 |
- What is the maximum amount of food this economy can produce? How much clothing can it produce at this point? If the economy is producing at alternative C, what is the cost of one more unit of food? If the economy is producing at alternative C, what is the cost of one more unit of clothing? Is this economy subject to the law of increasing opportunity costs? How can you tell?
- Suppose the economy is currently producing 4 units of food and 16 units of clothing. Is this economy producing efficiently?
Suppose that Russ has budgeted $20 a month to buy candy bars, music downloads, or some combination of each. If Russ buys only candy bars he can obtain 40 bars a month; if he buys only downloads, he can buy 20 a month.
- What is the price of a candy bar? What is the price of a music download? What is the opportunity cost of a music download? What is the opportunity cost of a candy bar?
- Would the opportunity cost of each good change if Russ decided to increase his monthly budget to $30 for the two items?
Suppose that you drive a truck which can operate on regular unleaded gasoline or ethanol. The current price of a gallon of regular unleaded gasoline is $2.50 and ethanol is $2.25 per gallon. Your truck gets an estimated 20 miles to the gallon. If the use of ethanol degrades your gas mileage by 10% is it still economical to fill your gas tank with ethanol or should you continue to use regular unleaded gasoline. If the price of regular unleaded gasoline doesn’t change, what would the price per gallon have to be for ethanol to make you indifferent between using either fuel? Prove your case mathematically.
4.
Can a decision be economic, if there is no money involved? Why or why not?
5.
What can and should be done for companied lagging behind while the rest of the economy is moving ahead? Don’t simply state your unqualified opinion. You must make cogent arguments that are logical.
6.
Critically evaluate the following statement. “Since the amount of revenue the government collects from corporations is small relative to all tax sources then it stands to reason that the economically rational thing to due is to raise the corporate income tax.” You must carefully explain your reasoning.
7.
Suppose that the New York State Assembly has gathered evidence that the number of injuries and deaths due to electrical repairs has increased substantially over the last few years. As a consequence the legislature decides to pass a law which makes obtaining an electrician’s license more stringent (meaning it’s now more difficult to become a certified electrician). How and why might this not necessarily result in fewer deaths and injuries due to electrical repairs? Make sure to go beyond the primary effects and look into the possible secondary effects of this law and beyond.
8.
In class we discussed a strange auction whereby a former Harvard professor auctioned off a $100 dollar bill. Whoever was willing to pay the highest for it would be the winner and would simply settle up with the professor by paying his bid. However, there was a strange twist to the game. Whoever had the second highest bid still had to pay the professor but did not get anything in return. I shared with you the results of the experiment and it turned out the winning bid was over $400. Explain how and why this was a rational outcome even though to a casual observer this seems quite absurd. Cite an example from life that seems remarkably similar to this situation? Make sure to explain how it is similar.
9.
Due to cost overruns, a factory has cost, so far, $4 million to build. It will be useless (not even having a scrap value) unless completed, but this will take another $2 million. If completed, the factory will produce future revenues whose present value is worth $3 million to the firm. Should the factory be completed?
10.
An owner of a small firm needs to hire some managers. Assume that each manager has time to do only one task. Task A is worth $100,000 to the owner. Task B is worth $75,000 and Task C is worth $50,000. The owner hires only two managers, having one do Task A and the other do Task B. What is the opportunity cost of Task B?
In the above problem, assume the firm still has only two managers. Assume further that each manager can do the other’s task with the same efficiency. What is the value of the second manager (i.e. what would the firm lose if it fired [and did not replace] the second manager)? What is the value of the first manager (when the second is still employed)?
11.
Can there be a surplus of food in a society where people are hungry? Explain.
12.
Is it possible for oil to become increasingly scarce yet exhibit no shortage? Explain. Alternatively, is it possible for any good to become less scarce (i.e. new discoveries or increased production) yet for shortages to persist? Explain. (Hint: knowing the difference between the terms shortage and scarcity will help you answer this.)
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