6 harry suggests looking at whether productivity

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development; any more than that, and you won't be increasing profit at the margin. 6. Harry suggests looking at whether productivity would rise or fall. Productivity is certainly important, since the more productive workers are, the lower the cost per gallon of potion. Ron wants to look at average cost. But both Harry and Ron are missing the other side of the equation revenue. A frm wants to maximize its profts, so it needs to examine both costs and revenues. Thus, Hermione is right it’s best to examine whether the extra revenue would exceed the extra costs. Hermione is the only one who is thinking at the margin. 7. a. The provision of Social Security benefits lowers an individual’s incentive to save for retirement. The benefits provide some level of income to the individual when 3
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he or she retires. This means that the individual is not entirely dependent on savings to support consumption through the years in retirement. b. Since a person gets fewer after-tax Social Security benefits the greater is his or her earnings, there is an incentive not to work (or not work as much) after age 65. The more you work, the lower your after-tax Social Security benefits will be. Thus the taxation of Social Security benefits discourages work effort after age 65. 8. a. When welfare recipients who are able to work have their benefits cut off after two years, they have greater incentive to find jobs than if their benefits were to last forever. b. The loss of benefits means that someone who can't find a job will get no income at all, so the distribution of income will become less equal. But the economy will be more efficient, since welfare recipients have a greater incentive to find jobs. Thus the change in the law is one that increases efficiency but reduces equity. 9. By specializing in each task, you and your roommate can finish the chores more quickly. If you divided each task equally, it would take you more time to cook than it would take your roommate, and it would take him more time to clean than it would take you. By specializing, you reduce the total time spent on chores. Similarly, countries can specialize and trade, making both better off. For example, suppose it takes Spanish workers less time to make clothes than French workers, and French workers can make wine more efficiently than Spanish workers. Then Spain and France can both benefit if Spanish workers produce all the clothes and French workers produce all the wine, and they exchange some wine for some clothes. 10. a. Being a central planner is tough! To produce the right number of CDs by the right artists and deliver them to the right people requires an enormous amount of information. You need to know about production techniques and costs in the CD industry. You need to know each person's musical tastes and which artists they want to hear. If you make the wrong decisions, you'll be producing too many CDs by artists that people don't want to hear, and not enough by others.
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