Homework 1
Intro Micro--
- Country A produces only buildings and beans using only land and
labor. Some land is better for growing beans and some for growing
the trees used for lumber. Some citizens of Country A make better
farmers and some make better carpenters. If all resources are
used either 100 buildings or 100 tons of beans or some intermediate
combinations can be produced in a year.
- Draw a production possibilities frontier consistent with the above
information. Indicate which points are efficient.
Answer to 1(a)
- A new bean growing technology is developed, but it does nothing
directly for lumber production. Draw the new PPF.
Answer to 1(b)
- Immigrants move into the country. Some have been farmers and some
have been builders in the old country, show what this does to
the PPF.
Answer to 1(c)
- Label a point U on the original graph that indicates a possible
outcome if there is some unemployment. Shade the region of points
that will always be preferred by any society to points like U. Answer to 1(d)
- Finally, draw a PPF that would be consistent with a country in
which the opportunity cost of beans in terms of buildings is always
the same. Answer to 1(e)
- Pamela is quite lucky. She just graduated with a degree in economics
and was offered a job at an important brokerage house for $200,000
a year. She also found out that she won $2,000,000 in the Wisconsin
lottery at roughly the same time (suppose the entire winnings
are all paid in the first year). She turns down the job and starts
her own consulting business using her winnings as initial investment
capital, which we will suppose she can exactly recover if she
sells her business. Suppose the interest rate is 10%.
- During the first year, after paying all expenses, Pamela is able
to pay herself $300,000. Did she earn a profit or loss? How much?
Explain. Answer to 2(a)
- At the end of the second year she pockets $400,000. Did she earn
a profit or loss? (ignore complications like interest on interest
and possible raises if she had taken a job) How much? Explain. Answer to 2(b)
- Consider the following questions. Our idea of economic cost makes
them very easy to explain.
- For many students the out-of-pocket costs of graduate school are
far lower than those of undergraduate school. Many graduate departments
are able to partially employ most of their graduate students,
usually lowering and often completely covering tuition. Yet, many
students who could easily attend such programs do not. Explain. Answer to 3(a)
- Why do more students blow off studying at the beginning of the
semester than later on? Answer to 3(b)
- If a higher proportion of students attend graduate school in the
next 5 years how will that make it cheaper for students 10 years
from now to attend graduate school. (This involves slightly more
complicated reasoning, but not much). Answer to 3(c)
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