Homework 1

Intro Micro--

  1. 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.

    1. Draw a production possibilities frontier consistent with the above information. Indicate which points are efficient.
      Answer to 1(a)

    2. A new bean growing technology is developed, but it does nothing directly for lumber production. Draw the new PPF.
      Answer to 1(b)

    3. 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)

    4. 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)

    5. 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)

  2. 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%.

    1. 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)

    2. 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)

  3. Consider the following questions. Our idea of economic cost makes them very easy to explain.

    1. 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)

    2. Why do more students blow off studying at the beginning of the semester than later on? Answer to 3(b)

    3. 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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