Question

Question 1

Describe some of the trade-offs faced by each of the following:

a. a family deciding whether to buy a new car

b. a member of Congress deciding how much to spend on national parks

c. a company president deciding whether to open a new factory

d. a professor deciding how much to prepare for class

e. a recent college graduate deciding whether to go to graduate school

Question 2

i. 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 new product to $3 million. If it would cost $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?

ii. Explain whether each of the following government activities is motivated by a concern about equality or a concern about efficiency. In the case of efficiency, discuss the type of market failure involved.

a. regulating cable TV prices

b. providing some poor people with vouchers that can be used to buy food

c. prohibiting smoking in public places

d. breaking up Standard Oil (which once owned 90 percent of all oil refineries) into several smaller companies

e. imposing higher personal income tax rates on people with higher incomes

f. instituting laws against driving while intoxicated

Question 3

Imagine a society that produces military goods and consumer goods, which we’ll call “guns” and “butter.”

a. Draw a production possibilities frontier for guns and butter. Using the concept of opportunity cost, explain why it most likely has a bowed-out shape.

b. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient.

c. Imagine that the society has two political parties, called the Hawks (who want a strong military) and the Doves (who want a smaller military). Show a point on your production possibilities frontier that the Hawks might choose and a point that the Doves might choose.

d. Imagine that an aggressive neighboring country reduces the size of its military. As a result, both the Hawks and the Doves reduce their desired production of guns by the same amount. Which party would get the bigger “peace dividend,” measured by the increase in butter production? Explain.

Question 4

i. Classify the following topics as relating to microeconomics or macroeconomics.

a. a family’s decision about how much income to save

b. the effect of government regulations on auto emissions

c. the impact of higher national saving on economic growth

d. a firm’s decision about how many workers to hire

e. the relationship between the inflation rate and changes in the quantity of money

ii. Classify each of the following statements as positive or normative. Explain.

a. Society faces a short-run trade-off 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.

iii. Are the following statements true or false? Explain in each case.

a. “Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods.”

b. “Certain talented people have a comparative advantage in everything they do.”

c. “If a certain trade is good for one person, it can’t be good for the other one.”

d. “If a certain trade is good for one person, it is always good for the other one.”

e. “If trade is good for a country, it must be good for everyone in the country.”

Question 5

Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities.

a. Selena pays a storekeeper $1 for a quart of milk.

b. Stuart earns $8 per hour working at a fast-food restaurant.

c. Shanna spends $40 to get a haircut.

d. Salma earns $20,000 from her 10 percent ownership of Acme Industrial.

Question 6

a. Under what conditions is the production possibilities frontier linear rather than bowed out?

b. Explain how absolute advantage and comparative advantage differ.

c. Give an example in which one person has an absolute advantage in doing something but another person has a comparative advantage.

d. Maria can read 20 pages of economics in an hour. She can also read 50 pages of sociology in an hour. She spends 5 hours per day studying. Draw Maria’s production possibilities frontier for reading economics and sociology.

e. What is Maria’s opportunity cost of reading 100 pages of sociology?

Question 7

England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour.

a. Which country has the absolute advantage in the production of each good? Which country has the comparative advantage?

b. If England and Scotland decide to trade, which commodity will Scotland export to England? Explain.

c. If a Scottish worker could produce only 1 sweater per hour, would Scotland still gain from trade? Would England still gain from trade? Explain.

Answer 1

1)

Trade off occurs where resources available can be employed to achieve few objectives only or few are sacrificed.

a. a family deciding whether to buy a new car

If family buys a new car, it would have to sacrifice its expenditure on other facilities such as education or saving. it either can buy car or increase saving or educational attainments.

b. a member of Congress deciding how much to spend on national parks

congress has limited resources, if it makes expenditure on the national parks, then it would have to reduce expenditure on national defense or infrastructure.  

c. a company president deciding whether to open a new factory

If firm does not open factory, it can keep its cash in liquid form or lend out and earn interest.

d. a professor deciding how much to prepare for class

Professor if devote much time on preparation for class, then it would have to sacrifice its research and resting times.

e. a recent college graduate deciding whether to go to graduate school

If student goes to graduate school, he would have sacrifice recreational time or he can use its time to earn money.