1.
Describe some of the trade-offs faced by each of the following:
a. a family deciding whether to buy a new car
b. a member of Congress deciding how much to spend on national parks
c. a company president deciding whether to open a new factory
d. a professor deciding how much to prepare for class
e. a recent college graduate deciding whether to go to graduate school
a. Money spent on a new car could of been put in saving or used for food,
clothing, vacation expenses, education expenses etc.
b. When deciding how much money to allocate towards national parks, members
of Congress much calculate the trade-off with other important expenses such as
national defense, infrastructure (bridges and roads), social programs, education
etc.
c. Opening a new factory may limit investments in other projects, operation
expenses, capital on hand etc.
d. Trade-offs a professor should consider when deciding how much to prepare
for a class include time spent with family, personal activities and research.
e. A recent college graduate that goes to graduate school would trade-off earning
money now with a full time job and the money it costs to go to graduate school.
2. You are trying to decide whether to take a vacation. Most of the costs of
the vacation (airfare, hotel, and forgone wages) are measured in dollars,
but the benefits of the vacation are psychological. How can you compare
the benefits to the costs?
The benefits of a vacation will vary from person to person. Most people associate
a vacation with relaxation, peace and a chance to spend quality time with family.
If a person feels they need these psychological benefits then the costs of a
vacation may be worth it.
3. You win $100 in a basketball pool. You have
a choice between spending the money now or putting it away for a year in a
bank account that pays 5 percent interest. What is the opportunity cost of
spending the $100 now?
The opportunity cost of spending the $100 now is the additional $5 I would earn
in interest after 1 year.
4. The company that you manage has invested $5 million in developing a
new product, but the development is not quite finished. At a recent
meeting, your salespeople report that the introduction of competing
products has reduced the expected sales of your new product to $3 million.
If it would cost $1 million to finish development and make the product,
should you go ahead and do so? What is the most that you should pay to
complete development?
If I do not go ahead with production I would lose what was invested which is $5
million.
If I go ahead with production it will cost me an additional $1 million.
Sales from the product will be $3 million.
The net loss will be $3 million. (5 + 1) - 3
I should go ahead with production since the loss is less ($3 million) than if I
stopped production ($5 million).
The total cost that I should pay to complete development is $3 million.
5. A 1996 bill reforming the Australian federal governments antipoverty
programs limited many welfare recipients to only two years of benefits.
a. How does this change affect the incentives for working?
b. How might this change represent a trade-off between equality and
efficiency?
a. Because of the two year limit, welfare recipients are more likely to search for a
job while receiving welfare since they know the payments will not last forever.
b. This change increases efficiency at the cost of equality. It creates pressure on
recipients to search for a job.
6. Your roommate is a better cook than you are, but you can clean more
quickly than your roommate can. If your roommate did all the cooking and
you did all he cleaning, would your chores take you more or less time than
if you divided each task evenly? Give a similar example of how
specialization and trade can make two countries both better off.
Chores would take more time if we divided each task evenly since I am not a
good cook and my roommate doesn't clean as quick as me. It is more efficient for
me to do all the cleaning and my roommate to do all the cleaning.
The United States specializes in agriculture while Japan specializes in the
production of electronics. It would be beneficial to both countries if the US
imported electronics from Japan and Japan imported agricultural products from
the US.