Ch01 & Ch02 HW

1) The Economist, a British newsmagazine that advocates free markets, often argues that the US should allow its citizens to sell human organs.

A) In the context of incentives, discuss the positive effects of this policy.

B) In the context of incentives, discuss the negative effects of this policy.

 

2) We did a classroom experiment to demonstrate that people are motivated to trade because what they want to consume may be different from the resources with which they are endowed. In practice, countries often engage in international trade because their workers are endowed with different abilities. Read Section 18.1 in your textbook and answer the following.

A) If you compare the US to India, which country’s workers do you suppose are better at producing high-tech computer equipment?

B) If you compare the US to India, which country’s workers do you suppose are better at producing computer software?

C) According to trade statistics, the US imports a substantial amount of computer software developed in India. Why do you suppose this happens?

D) Many sports analysts argue that Alex Rodriguez of the New York Yankees is the best defensive shortstop in baseball. However, he currently plays third base while his teammate Derek Jeter plays shortstop. A lot of fans and commentators criticize Yankee manager Joe Torre for refusing to allow Alex Rodriguez to play shortstop. Can you explain to them why Joe Torre might be making an economically sensible decision? (Note: I do not make a habit of asking sports-related questions on exams, since they are rather obnoxious to people who are not sports fans.)

 

3) The General Electric Company produces both jet engines and episodes of The Office (US version). Suppose all factors of production are fixed, so that GE must choose from among the following production mixes:

Jet Engines

Office Episodes

0

50

60

40

80

30

90

20

100

0

 

A)     Sketch the production possibilities frontier (PPF).

B)     Explain why the PPF takes its shape (i.e., why it is or isn’t bowed).

C)     What is the opportunity cost of making 30 Office episodes?

D)     If GE currently makes 20 episodes, what is the marginal cost of producing ten more?

E)      Sketch a PPF that could occur if GE acquires new equipment from Universal Pictures.

 

4) In the short run, one factor of production (usually capital) is fixed, while the other (labor) is not.

A) Sketch a graph of pizzas per hour that a restaurant can make as a function of the number of workers employed. Explain its shape.

B) Suppose the restaurant acquires a new machine. How would this change your graph?

 

5) Read the article “Bolton v Gore” from the June 22, 2006 edition of The Economist. Discuss the importance of scarcity and opportunity cost in the context of the article. (You can locate most magazine articles free online by going to the library’s homepage and using the “Journal Finder.”)