Principles of Microeconomics
1. Budget Constraints:
a. Assume that your income is $250. You can either pizzas or tanks full of gasoline. Each pizza will cost you $10 and it will cost you $25 to fill your tank with gasoline. Complete the table.
b. Assume your income falls to $200. The price of gasoline and pizza does not change. Complete the table.
c. Assume that your income is still $200. The price of a tankful of gasoline falls to $20 but the price of pizza does not change. Complete the table.
d. On the following page, graph all three of these scenarios. You may graph all of these using the same graph.
2. You go to the Horseshoe Casino and you are very lucky at the black jack table – winning $25,000! You are trying to decide whether you should spend the money now or wait to spend it in 15 years. The interest rate is 3%.
a. Complete the table below to help you make your decision.
b. Graph this budget constraint
c. Would you have more or less incentive to consume in the future if the interest rate went to 6%? Why?
3. Jessica can write 2 novels or 6 songs in one year.
Brett can write 1 novel or 4 songs in a year’s time.
a. Who has the absolute advantage in novels? Who has the absolute advantage in songs?
b. Calculate the opportunity cost per unit of each good for each person to demonstrate who has the comparative advantage in novels and who has the comparative advantage in songs.
4. Identifying Comparative Advantage:
The table below represents the cost of production in Japan and Malaysia for the production of rubber and steel.
a. Productivity:
Calculate the amount of rubber and steel each worker can produce in Japan.
Calculate the amount of rubber and steel each worker can produce in Malaysia.
b. Which country has the absolute advantage in the production of rubber and which country has the absolute advantage in the production of rubber?
c. Assume the each country has 40 employees who can devote their time to either the production of rubber or the production of steel. Calculate the production options for Japan and draw the PPF in the space provided on the next page. Clearly label your graph.
Draw the PPF for Japan in the space below:
d. Assume the each country has 40 employees who can devote their time to either the production of rubber or the production of steel. Calculate the production options for Malaysia and draw the PPF in the space provided on the next page. Clearly label your graph.
Draw the PPF for Malaysia in the space below:
e. Calculate the opportunity cost per unit of each good for each country to demonstrate who has the comparative advantage in rubber and who has the comparative advantage in steel.
f. Fill in the table below based on the following information.
Row 1: Assume the countries are self-sufficient and that they are both going to devote half of their employees to the production of each good.
Row 2: Assume that Japan is going to shift 4 employees from producing steel and allow them to produce rubber instead. Also, Malaysia has decided to shift 10 employees from the production of rubber to allow them to produce steel. Show the gain or loss to each country for each good in row 2.
Row 3: Show production for each country and in total after the shift in production.
g. Based on the information in the table above, can either of these countries benefit from trade? Why or why not? You must explain your answer in order to get credit.
Quantity of
Gasoline
(tankful)
$ Spent on
Gasoline
Quantity
of
Pizza
$ Spent on
Pizza
0
2
4
6
8
10
Consume in
the Present
Save in
the Present
Consume in
the Future
$0
$5,000
$10,000
$15,000
$20,000
$25,000
JapanMalaysia
ProductionAmount of LaborAmount of Labor
500 tons of Rubber2 workers5 workers
500 tons of Steel1 worker2 workers
RubberSteelRubberSteelRubberSteel
1Self Sufficient
2Gain/Loss
3Production after Specialization
JapanMalaysiaTotal
Quantity of
Gasoline
(tankful)
$ Spent on
Gasoline
Quantity
of
Pizza
$ Spent on
Pizza
0
2
4
6
8
10
Quantity of
Gasoline
(tankful)
$ Spent on
Gasoline
Quantity
of
Pizza
$ Spent on
Pizza
0
2
4
6
8
