Problem Set - Introduction Unit

1. Suppose that on the basis of a nation’s production possibilities curve, an economy must sacrifice 10,000 pizzas domestically to get one additional industrial robot. However, this country can purchase a robot from another country for 9000 pizzas. How does the opportunity of trade affect this country's production possibilities curve?

2. Explain how each of the following events affects the location of the production possibilities curve (i.e. cause the production possibilities curve to shift outward).

•The standardized exam scores of high school and college students improve. •The unemployment rate rises from 6 to 9 percent. •Defense spending is reduced to allow the government to spend more on health care. • A new technique is developed for locating sources of oil and natural gas. •Roads and bridges are not maintained or repaired.3A. Suppose you arrive at a store expecting to pay $100 for an item, but learn that a store 2 miles away is selling the same good for $50. Would you drive to the second store to buy the good?

3B. Now suppose you arrive at a store expecting to pay $6000 for a good, but discover a store two miles away is selling the same good for $5950. Would you drive to the second store to buy the good?

4. You have paid $50 for a concert on Tuesday night that will give you a benefit of $60. The ticket is nonrefundable and cannot be sold. On Tuesday morning, you learn that there is another concert the same night that will give you a benefit of $70 and costs $45.

What is the benefit of each concert?

What is the opportunity cost of each concert?

What is the sunk cost?

Which concert should you attend?

5. Thor and Felix live together on an island. They are both able to build houses and grow food. The chart below shows the amounts of both that they can produce in period of time:

Who is better at building houses and who is better at growing food?

If Thor and Felix cannot trade or help each other and they need to produce their own houses and food how much could they expect to produce (assume they spend half of their time producing each thing)?

What would happen if they specialized and only produced what they are good at and then traded for the other product? How much more would be produced?

6. If Thor and Felix specialized and only produced what they are good at and then traded, what would be a good barter exchange rate between Thor and Felix for houses and food?

How is the rate of exchange based on mutual benefit?

Is this a fair rate of exchange?

Video Explaining Thor & Felix trading based on Comparative Advantage - click here

7. Consider a new situation where Thor is better than Felix at both making houses and growing food. This is shown in the chart below:

What is Thor’s opportunity cost for building houses? What is his opportunity cost for growing food?

What is Felix’s opportunity cost for building houses? What is his opportunity cost for growing food?

Considering Thor’s and Felix’s opportunity costs, is there any advantage to specialization and trade?

Video Explaining Thor & Felix trading when Thor has Absolute Advantage in both goods - click here