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Econ 302- First Problem Set Solution Spring 2011-Ali Toossi Due: Wednesday, February 2 PPF & Opportunity Cost: 1- a) LHD ^ LB ^120 b) y^ HD ^0.^5 LHD , y^ B ^0.^5 LB c) Solve the three equations: LHD^ ^ LB ^120 & y^ HD ^0.^5 LHD & y^ B ^0.^5 LB yHD yB 60 d) 0 10 20 30 40 50 60 70 0 10 20 30 40 50 60 70
PPF
e) You have to give up one hot dog in order to get one more bun. Thus the opportunity cost is one. The opportunity cost is the absolute value of sloe of PPF. Taking derivative with respect to y^ B we get ^1 ^0 B HD dy dy ^1 B HD dy dy = slope of PPF opportunity cost = ^1 B HD dy dy f) You have to give up one bun in order to get one more hot dog. Thus the opportunity cost is one. The opportunity cost is the absolute value of sloe of PPF. Taking derivative with respect to y^ HD we get 1 ^0 HD B dy dy ^1 HD B dy dy = slope of PPF opportunity cost = ^1 HD B dy dy g) Consumer preference indicates they only consume combinations of hot dog and bun where y^ HD ^ yB. In the following graph the 45 degree line shows the combination that consumers will consume. Therefore they will choose the point ( y (^) HD 30 , yB 30 )on the PPF.
Since for producing every hot dog and ever bun we need two people therefore 60 million are employed in hot dog industry and 60 million in bun industry. h) y^ HD LHD i) We would like to know the impact of this technology improvement on employment. a. i. Since consumers consume 30 million hot dogs and now we only need one person to produce one hot dog, the employment in hot dog industry fall from 60 million to 30 million. ii. Since consumers still consume 30 million buns and we need two people to produce one bun, the employment in bun industry will stay at 60 million. iii. 30 million. b. No, it is not realistic. We expect as productivity and income increases people will also increase their consumption. The equation of the new PPF is: yHD ^2 yB ^120 i. The consumer preference is still the same. So they choose the point on on PPF where y^ HD ^ yB. Thus they choose the combination ( y (^) HD 40 , yB 40 ). So now 40 million will be employed in hot dog industry. Compared to the original 60 million, 20 million jobs are destroyed ii. Since every bun needs two people to produce it, so 80 million people will be employed in the bun industry. Therefore overall there is no unemployment in the society, just people move from hot dog industry to bun industry. Only the structure of employment in the economy changes. iii. Now consumers are consuming more, 40 million pairs of hot dog and bun compared to the 30 million pairs they consumed previously, so the society is richer. j) The statement is true. Although technology destroys jobs in one sector but it does not necessarily mean that it also destroys job in the whole economy. Technological improvement leads to change in the structure of employment
John's PPC 0 10 20 30 40 50 60 70 0 10 20 30 40 50 Wheat Corn Roger's PPC 0 5 10 15 20 25 30 35 0 10 20 30 40 Wheat Corn 2-B) John: Opportunity cost of producing corn (in terms of wheat): 2/ Opportunity cost of producing wheat (in terms of corn): 3/ Roger: Opportunity cost of producing wheat (in terms of corn): 1 Opportunity cost of producing corn (in terms of wheat): 1 2-C) Current Production: Total Wheat: 10 (John) + 15 (Roger) = 25 Total Corn: 45 (John) + 15 (Roger) = 60 Roger has lower cost of producing wheat and John has lower cost of producing corn. So Roger should specialize in producing Wheat and John in producing corn. This is called the principle of comparative advantage. Total Production after specialization: Total Wheat: 30 (Roger) Total Corn: 60 (John) Solution to the problems in the textbook.
Chapter 1: Questions for review Answer to question 1. The tuition is a sunk cost and so your roommate should consider only costs and benefits relevant now and in the future. If he will be better off in life by leaving school now, he should not let the tuition make the rest of life less meaningful. Chapter 1: Problems Answer to problem 1 The benefit of going to the park is $45. The explicit cost to Jamal of going to the park is $15 (admission fee) + $5 (gas & parking) = $20. a. If salary is $10, given that he is willing to pay $10 to do the job and he is not only paying anything but is even receiving a salary, the implicit cost is $20. Therefore the total cost is $40 and he should go to park. b. If salary is $15, the implicit cost is $25 and the total cost is $45. So he is indifferent between going and not going. c. If salary is $20, the implicit cost is $30 and the total cost is $50. So he should not go to the park. Answer to problem 4. The only costs that vary with mileage are fuel, maintenance, and tires, which average $0.25/mile. The cost of driving will thus be $250, and since this is less than the cost of the bus, you should drive. Answer to problem 5. The band and hall rental fees are fixed costs. The caterers charge at the rate of $7/guest ($5 catering bill/$2 drink). So an extra 10 guests will increase total costs by only $70. Answer to problem 7. Bill has already bought his ticket, so his cost-benefit calculation when it is time to go is as follows: benefit of seeing game vs. cost of the drive + time costs, etc. Joe, not having bought his ticket, faces a different calculation: benefit of seeing game vs. $30 + cost of the drive + time costs, etc. Since the benefits are the same in each case, but the costs are larger for Joe at the moment of decision, he is less likely to go. Answer to problem 8. A plane of either type--large or small--should use the state-of-the-art device if the extra benefits of that device exceed its extra costs. Because the device will save more lives in large planes than in small planes, its benefits are larger in large planes than in small ones. Your original recommendation was presumably based on the calculation that the benefits for the larger planes justified the extra cost, but did not do so in the case of the smaller planes. Airline passengers are like other people insofar as their willingness to invest in extra safety is constrained by other pressing uses for their scarce resources. Where extra safety is relatively cheap, as in large planes, they will rationally choose to purchase more than when it is relatively more expensive, as in small planes.
