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f07 ec51 ps1

# f07 ec51 ps1 - Economics 51D 27 August 2007 PROBLEM SET 1 1...

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Economics 51D 27 August 2007 PROBLEM SET 1 1. Suppose that the citizens of Bureaucroatia produce scandals and reports using a common set of inputs. The known production possibilities for this year are summarized in the following table: Scandals Reports (tons) 0 3000 20 2994 35 2985 60 2960 74 2929.2 112 2716.4 158 2284 187 1878 211 1470 230 976 244 444 249 0 A. Using Excel, graph the production possibilities frontier. B. Is the combination of 130 scandals and 2548 tons of reports efficient, feasible but inefficient, or infeasible, according to this PPF? It is efficient because it lies on the PPF curve C. On your spreadsheet, create two columns for midpoints and two columns for marginal costs. Calculate the midpoints, the marginal cost of scandals in terms of reports, and the marginal cost of reports in terms of scandals. D. Note that when we calculate marginal costs, we assume this is valid for the midpoint between the points on the production possibilities frontier. But what about the marginal cost right at these points? Calculate an estimate of the marginal cost of scandals for exactly 2929.2 tons of reports. -2.2 E. Suppose you knew that the marginal social benefit of scandals was constant, at exactly 1 ton of reports per scandal. What is the socially optimal level of production of scandals and reports in this case? 35 scandals and 2985 reports 1

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F. Now suppose the marginal social benefit of reports is constant at 1/20 of a scandal. Calculate an estimate of about where the socially optimal level of production of scandals and reports is in this case. 200 scandals and 1600 reports 2. The island of Lunesta is infested with moths that infect residents with sleeping sickness and then proceed to eat their clothing (if it contains natural fibers). Thus, the inhabitants devote a significant portion of their resources to producing wakey-wakey pills and polyester smocks (the native costume). Unfortunately the chief statistician was infected with sleeping sickness and didn’t quite finish the following table of statistics on Lunesta’s PPF. Fortunately, you should be able to calculate the missing data from the other numbers in the table. Fill in the crucial quantities, currently denoted by letters, in the table below. Wakey Pills
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f07 ec51 ps1 - Economics 51D 27 August 2007 PROBLEM SET 1 1...

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