Economics 1 TA section Week 1 Fall 2023 Felipe Leal September 28 2023 Chapter 1 Question 5 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 in troduction 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 Solution The fact that you have already sunk 5 million is not relevant to your decision anymore because that money is gone What matters now is the chance to earn profits at the margin If you spend another 1 million and can generate sales of 3 million you ll earn 2 million in marginal profit so you should do so You are right to think that the project has lost a total of 3 million 6 million in costs and only 3 million in revenue and you should not have started it That is true but if you do not spend the additional 1 million you will not have any sales and your losses will be 5 million So what matters is not the total profit but the profit you can earn at the margin In fact you would pay up to 3 million to complete development any more than that and you will not be increasing profit at the margin I thank all the former TAs of this course these notes are based on their notes Contact lealnfe lipe gmail com If you find any typo or error please shoot me an email 1 ECON 1 Week 1 Chapter 2 Question 3 The first principle of economics discussed in Chapter 1 is that people face trade offs Use a production possibilities frontier to illustrate society s trade off between two goods a clean environment and the quantity of industrial output What do you suppose determines the shape and position of the frontier Show what happens to the frontier if engineers develop a new way of producing electricity that emits fewer pollutants Solution See Figure 1 The shape and position of the frontier depend on how costly it is to maintain a clean environment the productivity of the environmental industry Gains in environmental productivity such as the development of a new way to produce electricity that emits fewer pollutants lead to shifts of the production possibilities frontier like the shift from PPF1 to PPF2 show in the figure The economy can now produce with a more clean environment for any given quantity of industrial output Figure 1 PPF 2 ECON 1 Week 1 Question 4 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 we label A B C and D a Calculate how much of each service is produced under the following circumstances which All three spend all their time mowing lawns A All three spend all their time washing cars B All three spend half their time on each activity C Larry spends half his time on each activity while Moe only washes cars and Curly only mows lawns D b Graph the production possibilities frontier for this 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 Solution a A 40 lawns mowed 0 washed cars B 0 lawns mowed 40 washed cars C 20 lawns mowed 20 washed cars D 25 lawns mowed 25 washed cars b The PPF is hown in figure 2 Points A B and D are on the frontier while point C is inside the frontier 3 ECON 1 Week 1 Figure 2 PPF c Larry is equally productive at both tasks Moe is more productive at wahsing cars while Curly is more productive at mowing lawns d Allocation C is inefficient More washed cars and mowed lawns can be produced by simply reallocating the time of the three individuals 4 ECON 1 Week 1 Chapter 3 Question 2 American and Japanese workers can each produce 4 cars a year An American worker can produce 10 tons of grain a year whereas a Japanese worker can produce 5 tons of grain a year To keep things simple assume that each country has 100 million workers a For this situation construct a table analogous to the table in Figure 1 of chapter 3 of the textbook showing the production opportunities b Graph the production possibilities frontiers for the American and Japanese economies c For the United States what is the opportunity cost of a car Of grain For Japan what is the opportunity cost of a car Of grain Put this information in a table analogous to Table 1 d Which country has an absolute advantage in producing cars In producing grain e Which country has a comparative advantage in producing cars In producing grain f Without trade half of each country s workers produce cars and half produce grain What quantities of cars and grain does each country produce g Starting from a position without trade give an example in which trade makes each country better off Solution a See Table 1 Table 1 Workers needed to make One Car One Ton of Grain U S Japan 1 4 1 4 1 10 1 5 b See Figure 3 With 100 million workers and four cars per worker if either economy were devoted completely to cars it could make 400 million cars Because a U S worker can 5 ECON 1 Week 1 produce 10 tons of grain if the United States produced only grain it would produce 1 000 million tons Because a Japanese worker can produce 5 tons of grain if Japan produced only grain it would produce 500 million tons These are the intercepts of the production possibilities frontiers shown in the figure Note that because the trade off between cars and grain is constant for both countries the production possibilities frontiers are straight lines Figure 3 c Because a U S worker produces either four cars or ten tons of grain the opportunity cost of one car is two and one half tons of grain which is ten divided by four Because a Japanese worker produces either four cars or five tons of grain the opportunity cost of one car is one and one fourth tons of grain which is five divided by four Similarly the U S opportunity cost of one ton of grain is 2 5 car 4 divided by 10 and the Japanese opportunity cost of one ton of grain is 4 5 car 4 divided by 5 This results in the following table 6 ECON 1 Week …