I Homework Principles of Microeconomics 1101 Lecture 001 Summer 2008
Mike Walrath Due 06/24/08
Note: Homework must be turned in during lecture on Tuesday, 06/24/08. As the syllabus says, no late homework will be accepted. Your homework must be in chronological order. Answer questions in order and please put all tables and graphs in the same area as your answer. Type everything but graphs and calculations for full credit. Label all graphs for full credit. Show all work.
Question 1 (8 points) Define a normative and positive statement. Give an example of each.
Question 2 (18 points) Consider an economy with two people, Richard and Kelly. The economy only produces two goods, snakeskin belts and fur hats. Richard and Kelly can produce the goods as follows: Belts 5 hours/belt 2 hours/belt Hats 3 hours/hat 6 hours/hat
Richard Kelly
Suppose Richard and Kelly each have 40 hours. (a) Draw Richard and Kellys PPFs on separate graphs. For both graphs put belts on the Y-axis. (b) Calculate all of the opportunity costs. Be sure to include the units. (c) Who has comparative advantage in the production of belts? Why? (d) Who has absolute advantage in the production of belts? Why? (e) The price of belts can be expressed in terms of hats. What is the highest price at which belts can be traded that would make both people better off? What is the lowest price? Explain.
Question 3 (8 points) Come up with an example (not seen in class) of a bowed out PPF. Be sure to include the two goods being produced and discuss the inputs used in production. Explain why the PPF would have a bowed-out shape. Briefly discuss the opportunity cost of each good given this PPF.
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Question 4 (10 points) Consider the following production possibilities table for a farmer: Corn 10 9 7 4 0 Wheat 0 3 6 9 12
A B C D E (a) (b) (c) (d) (e)
Draw this PPF, putting Corn on the Y-axis. Compute the opportunity cost of Wheat in terms of Corn between points A and B. Compute the opportunity cost of Wheat in terms of Corn between points B and C. Compute the opportunity cost of Wheat in terms of Corn between points C and D. Compute the opportunity cost of Wheat in terms of Corn between points D and E.
Question 5 (8 points) This question is concerned with the shape of indifference curves. Consider two goods, good x and good y. Consider the indifference curve below:
Good y
IC
Good you x
Can think of two goods that would have this shape of an indifference curve and what is your reasoning for picking these goods? Explain the intuition for why an economist would not expect to see an indifference curve with this shape.
Question 6 (8 points) Suppose Kate can choose between socks and flip-flops. Socks cost $2 a pair and flip-flops are $5 per pair. Kate has $12. (a) Construct Kates budget constraint graphically (putting socks on the Y-axis). (b) Show Kates optimal consumption bundle using indifference curves (like those seen in class). (c) What is the slope of Kates budget constraint?
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Question 7 (12 points) (a) Give two examples of complement goods (give two pairs of goods). (b) Give two examples of substitute goods (give two pairs of goods). (c) Define what an inferior good is. (d) State the law of demand.
Question 8 (15 points) Suppose Kyle has an income $100. Kyle consumes only two goods, apples and oranges. (a) Construct a budget constraint for Kyle, putting apples on the y-axis (if you need any additional information, state this, and then make a reasonable assumption). Assume Kyle is spending all of his money. At Kyles current consumption bundle, his marginal rate of substitution of good y for good x (negative slope of the indifference p curve) is greater than the ratio of prices, ( p xy ), (this is the same thing as saying that his indifference curve is s...