Lecture 1 Practice Questions
From Frank text: In-chapter exercises 1.1-1.5.
Additional questions:
- Draw two Production Possibilities Frontiers (on two separate graphs). For the first, select goods for which the Law of Increasing Opportunity Cost would apply. For the second, select goods for which the Law of Increasing Opportunity Cost probably would not apply. Make sure the shape of the PPFs reflects whether the law applies or not.
- Suppose there are only two goods, feature films and short films. The trade-off between them is constant: you can always give up one feature film to get three short films (or vice versa). If all resources are devoted to features, you can make 10 of them.
(a)What is the opportunity cost of a feature? What is the opportunity cost of a short?
(b)Draw the PPF of this situation.
(c)How does the shape of your PPF differ from the usual PPF (like the first one drawn in class)? Explain why it makes sense for it to be shaped this way.
- Explain the labor theory of value, and state two reasons why modern economists no longer use it.
- Aki and Miko work in a Japanese restaurant, where they make sushi and tempura. Their hourly productivity is as follows: Aki can make 6 servings of sushi or 10 servings of tempura, and Miko can make 2 servings of sushi or 6 servings of tempura. Answer the following questions: (a) Who has the absolute advantage in each activity? (b) Who has the comparative advantage in each activity? [Hint: Figure out each worker's opportunity cost of making sushi.] (c) If each worker split her time equally between the two activities, how much of each dish would they produce? (d) Draw a PPF for these two workers. [Hint: Find how much sushi they could make if they made no tempura. Then find how much tempura they could make if they made no sushi. Then find the point of perfect specialization, and connect the dots.] (e) On the PPF you just drew, mark the production from part (c) with an X. What do you notice about this point?
- Deke and Cosmo are web designers. Each of them can create graphics and write html pages. Their daily productivity is as follows: Deke can produce 6 graphics or 8 html pages, and Cosmo can produce 2 graphics or 8 html pages. They can also do combinations by splitting their days between the two activities.
(a)If each person spends half a day on each activity, what will be their total production of each good?
(b)Who do you think should specialize in each task? Explain your answer using the notions of opportunity cost and comparative advantage.
(c)Create a PPF for Deke and Cosmo together, for one day of work.
(d)On the same graph, plot the production that resulted, in part (a), from each person splitting his time between the activities. What can you say about this point?
- State what the following features of a PPF illustrate: (a) downward slope, (b) outward-bowed shape, (c) points inside the curve, (d) points outside the curve.
- There are three policies (A, B, and C) that the government can adopt with respect to pie-throwing. There are three people who will be affected by the choice of policy: Larry, Moe, and Curly. The following table tells the dollar value that each individual places on each policy, relative to policy A (which is the policy currently in effect).
A / B / C
Larry / $0 / $0 / -$5
Moe / $0 / +$10 / +$15
Curly / $0 / +$25 / +$30
(a)According to the Pareto criterion, what can you say about A versus B? A versus C? B versus C? Which of these option(s) is (are) Pareto efficient?
(b)Answer part (a) using Kaldor-Hicks instead of Pareto.
- The imposition of a tariff on aluminum makes domestic aluminum producers $10 million richer. It makes foreign aluminum producers $7 million poorer. And it makes consumers of goods with aluminum in them worse off by $5 million (because they have to pay more for their goods). Using the Pareto criterion, what can you say about the two policies, tariff and no tariff? Using the Kaldor-Hicks criterion, what can you say?