Ch01&02-AK

1A) People will have a greater incentive to supply their organs, either while living (kidneys) or dead (other organs), to people who need them to survive. As a result, people will live longer lives. Governments can monitor the market to ensure the safety of donors and recipients. (Currently, there is a large black market in organ sales).

1B) Criminals will have a greater incentive to murder people to harvest their organs. Ungrateful children will have less incentive to encourage doctors to take heroic measures to prolong their parents’ lives. Elder abuse could rise.

What this policy would do to the price of organs is a little ambiguous. Usually, an increase in supply would lower the price. Perhaps there is no current legal price on organs, as they are distributed on a first-come first-serve basis. If so, then the policy would alter the system so that willingness (and ability) to pay determines who receives them. Thus, the policy would have distributional consequences. How you feel about this is a normative economics issue. In positive economics, we would emphasize that the total number of people who would prolong their lives would unambiguously rise.

See http://www.economist.com/opinion/displaystory.cfm?story_id=8173039 or http://www.economist.com/world/international/displaystory.cfm?story_id=8173393 for commentary on this topic.

2A&B) The US has highly educated workers, vast amounts of capital, advanced technology, well developed infrastructure, etc. US workers are likely to be better at producing all goods than Indian workers are. US workers have an “absolute advantage” in the production of computer equipment and software.

2C) Comparative advantage determines trade patterns. The US is a little better than India in producing software, but it is far better in producing computer equipment. To conserve scarce resources, the US and India specialize and trade accordingly.

2D) Alex Rodriguez has an absolute advantage in playing both shortstop and third base. Obviously, he cannot play both positions at once. Since he is far better than Derek Jeter at third base, but just a little better at shortstop, he has a comparative advantage at third base. Manager Joe Torre puts his players in their respective positions accordingly.

3A)

3B) The factors of production are not perfectly substitutable. Some are better at making engines; others are better at making TV shows. It is not very costly to produce the first few episodes because they will employ K and L that is good at making shows. Eventually, however, episode production would require K and L that are better suited for jet production. At this point, producing episodes is quite costly.

3C) To produce 30 episodes of The Office, GE must sacrifice 20 engines.

3D) An increase of episode production from 20 to 30 implies a 10 jet engine marginal cost (a rise in opportunity cost of 10).

3E) If GE acquires new capital that is well suited for TV production, the PPF will shift out, and be biased toward The Office. It is possible (not drawn) that the new capital did not improve engine manufacturing processes at all, so you may also draw this shift such that the intercept on the engine axis did not move.

4A) The graph is increasing, but at a decreasing rate. This “Diminishing Marginal Productivity of Labor” occurs because with a fixed number of machines, additional workers will increase output, but not by very much.

4B) Pivot the graph upward. The firm still has diminishing MPL, but is now able to produce more output for any given number of workers.

5) The usual debate over how to curb global warming usually pits the interests of industry versus those of environmentalists. In this article, we see that this is a myopic way of looking at the problem. Even people concerned solely with social well-being (the UN) are forced to make decisions about the services they will supply.

Certain passages in this article are worth highlighting. First, note the line “We all want to make the world a better place but, given finite resources, we should look for the most cost-effective ways of doing so.” This is an admission that resources are scarce, so we have to make tough choices. More specifically, UN budgets are finite, and they cannot pursue every mandate they have created for themselves. Thus, they asked ambassadors the hypothetical question, “Given a notional $50 billion, how would the ambassadors spend it to make the world a better place?”

You could imagine that this implies that a PPF exists in which there is a tradeoff between public health initiatives (vaccinations, clean water, etc.) and global warming controls. The producers (UN) have to decide how to allocate their resources toward providing these services. Their actual production choice will depend upon their preferences. You could imagine that Al Gore and Michael Bolton differ in their opinions about how resources should be allocated, but this is a normative debate. The positive economic analysis suggests that increased efforts to curb global warming will reduce funds available to alleviate poverty.