Problem Set 1

Problem Set 1 - Rohit Banerjee September 6 2007 Problem Set...

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Rohit Banerjee September 6, 2007 Problem Set 1 1a. In 1939, there were 40 million people employed exclusively in the civilian (public goods) sector. However due to the fact that the United States was mobilizing to enter World War II, a certain amount of civilian laborers had to be diverted to producing war goods. Now, assuming that there is absolutely no loss in productivity, it would take 4 people to produce 1 war unit but for every 2 people diverted from the public goods production, 1 civilian unit is lost. People Employed (War/NonWar) War Goods Produced (millions) Nonwar goods produced (millions) 40 million/ 0 10 0 35 million/5 million 8.75 2.5 30 million/10 million 7.5 5 25 million/15 million 6.25 7.5 20 million/20 million 5 10 15 million/25 million 3.75 12.5 10 million/30 million 2.5 15 5 million/35 million 1.25 17.5 0/40 million 0 20 If we plot the production possibilities curve with the number of civilian goods produced on the vertical axis and the number of war goods produced on the horizontal axis, we can see that it produces a straight line indicating that the opportunity cost for moving either way on the PP curve does not waver but stays constant. This also indicates that the resources involved, namely laborers, can move seamlessly between private and public sectors and not lose any productivity in the process. b. If the war goods output was increased by 1 unit, then 4 workers would have to be diverted from the civilian sector. Because 2 workers can produce 1 civilian unit, the opportunity cost for the increase in the war goods output is 2 civilian units. c. If the number of workers in the war goods sector was increased from 20 million to 30 million laborers,

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This note was uploaded on 07/14/2008 for the course ECON 73100 taught by Professor Klepper during the Fall '07 term at Carnegie Mellon.

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Problem Set 1 - Rohit Banerjee September 6 2007 Problem Set...

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