Dept of Economics Spring 2014 University of Iowa Professor Frank 06E:001:SCA Principles of Microeconomics Problem Set 1 Due Monday, February 3 at beginning of class 1) [2 points] You roommate is offered a summer internship at a consulting firm paying $5,000. She turns it down to run her own dog-walking business. She earns $4,000 and has no out-of-pocket expenses. She happily tells you that her total profit for the summer was $4,000. Having taken economics, please explain to her why her decision to walk dogs actually cost her $1,000. 2) [4 points] Let’s consider a society that produces two types of goods: health care and farming. a. Draw the PPF for the society, putting health care on the vertical axis and electrical engineering on the horizontal axis. (There are no numbers in this question, so you cannot draw it precisely: I am looking for the general shape of the PPF.) b. Why is the PPF likely to be bowed out? Is opportunity cost of health care likely to increase or decrease as the society expands production? Why? c. Suppose the society invests in educating its youth. This quickly increases the educational attainment of the population. What effect will this have on the PPF? d. Suppose the society enters a recession and the unemployment rate increases. How will this show up on the diagram? e. Suppose technological advances in medicine have increased the productivity of health care but had no effect on electrical engineering. How will this change show up in the PPF diagram? 3) [4 points] Consider two small fictional towns nestled in the French Alps. One city is industrialized with an educated and skilled workforce. The other city has a low average educational attainment and literacy rate and is still developing its manufacturing sector. Suppose there are two goods which are produced in the Alps: Emmental cheese and skis. Let’s suppose the industrialized and the developing cities can produce the following units of Emmental cheese and skis per year: Industrialized (Ind) Developing (Dev) Emmental (lbs) 800 700 Skis (pair) 600 100 As you can see, the industrialized city can produce more Emmental and more skis than the developing one. This is due to better technology and superior productivity level of its workforce. a. What is Ind’s opportunity cost for a pound of Emmental in terms of skis? What is Ind’s opportunity cost for a pair of skis in terms of Emmental?What is Dev’s opportunity cost for a pound of Emmental in terms of skis? What is Dev’s opportunity cost for a unit of skis in terms of Emmental? b. Putting Emmental on the vertical axis and Skis on the horizontal axis, draw Ind’s PPF showing all combinations of Skis and Emmental it is able to produce in one year. On a new graph, draw Dev’s PPF. c. What do the