HomeAs6 - Fall 2010 - Answer Key

# HomeAs6 - Fall 2010 - Answer Key - cost Unit cost =(Total...

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Econ 3T03 Fall 2010 Home Assignment #6: Due to November 12, 2010. 1. (6 points.) You are introducing a new vacuum cleaner design in a tropical society which works well under humid conditions. The vacuum cleaner is produced using only labor. It requires 10 hours of working per unit and 100 hours of working for the maintenance of the factory. In other words, the total labor cost of producing Q vacuum cleaners is C(Q) = 10*Q + 100 . (a) Show that such production technology has the IRS property. (b) Discuss how the following factors affect your likelihood of success: (b.1) the proportion of the population who already use vacuum cleaners; (b.2) the per capita income of the society; (b.3) the market for loans; (b.4) the flow of information. Answer: (a) The IRS property means by definition that a unit cost falls with the volume of production. To see that this is true in our case, let’s calculate this unit

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Unformatted text preview: cost: Unit cost = (Total cost) / Q = C(Q)/Q = 10 + (100/Q), which falls with Q. (b) See discussion in Section 5.3.2 (b.1) the likelihood of success falls with higher proportion; (b.2) your likelihood of success rises with higher income per capita; (b.3) your likelihood of success falls with the incomplete or missing market for loans; (b.4) your likelihood of success rises if flow of information is fast. 2. (4 points.) Connect and contrast the following concepts: (a) inequality of current income versus inequality of the lifetime income; (b) functional versus personal income distributions (c) inequality of income versus inequality of opportunities. In each case make sure that you understand each of the concepts and how they are related to each other. Answer: Read the discussion at the beginning of Chapter 6....
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