Hahaha

Spring 2016

Problem Set 1

1. An economy consists of three workers: Larry, Moe, and Curly. Each works 10

hours a day and can produce two services: mowing lawns and washing cars. In

an hour, Larry can either mow one lawn or wash one car; Moe can either mow

one lawn or wash two cars; and Curly can either mow two lawns or wash one

car.

a. Calculate how much of each service is produced under the following

circumstances, which we label A, B, C and D:

(A) All three spend all their time mowing lawns.

(B) All three spend all their time washing cars.

(C) All three spend half their time on each activity.

(D) Larry spends half his time on each activity, while Moe only washes

cars and Curly only mows lawns.

b. Graph the production possibilities frontier for the economy. Using

your answers to part (a), identify points A, B, C and D on your graph.

c. Explain why the production possibilities frontier has the shape it does.

d. Are any of the allocations calculated in part (a) inefficient? Explain.

2. Pat and Kris are roommates. They spend most of their time studying, but they

leave some time for their favorite activities: making pizza and brewing root

beer. Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a

pizza. Kris takes 6 hours to brew a gallon of root beer and 4 hours to make a

pizza.

a. What is each roommate’s opportunity cost of making a pizza? Who has

the absolute advantage in making pizza and who has the comparative

advantage?

b. If Pat and Kris trade foods with each other, who will trade away pizza

in exchange for root beer? In other words, who specializes in making

pizzas?

c. The price of pizza can be expressed in terms of gallons of root beer.

What is the highest price at which pizza can be traded that would make

both roommates better off? What is the lowest price? Explain.

3. Explain each of the following statements using supply-and-demand diagrams.

a. When a cold snap hits Florida, the price of orange juice rises...