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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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 wakeywakey 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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 Fall '07
 Fullenkampf
 Economics, white truffles

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