Economy

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Intro Micro                              Your Name(s):__________________________________________

Professor Kane

                                                                                                                                                           

Problem Set 3

For graphs, it is often best to use Excel or draw your graph and attach the picture

Total 19 points.

 

  1. (4 points) Production Possibility Frontiers: apples and wheat

Table 1. Production of apples and wheat

Apples Wheat
0            500
1            499
2            495
3            489
4            476
5            453
6            415
7            358
8            275
9            160
10                 5

 

  1. (1 point) Draw a production possibilities curve for your two-acre farm between growing apples and wheat. Is there a tradeoff between these two? How is a tradeoff shown in your graph? (Make sure you label you axes.)
  2. (1 point) Is the trade-off constant or does it change as you have more or less apples and wheat? How is the trade-off represented in the slope of the line? Why does the trade-off change?
  3. (1 point) What is the price of apples? What is the price of wheat?  Add a column to Table 1 and give the price of additional bushels of wheat or apples.  Where is the price of wheat on your graph?  What happens to the price of wheat as you are growing more wheat and fewer apples?  Why does the relative price change and how does this relate to the neoclassical theory of production?
  4. (1 point) Suppose instead of producing wheat, you produce honey where you attract bees to your apple blossoms and the bees make honey for you using the apples’ pollen? What happens to your production possibility frontier? Does this mean that you have a free lunch?

 

  1. (4 points) Capitalism
    1. (1 point) How hard do people work when they are working for themselves? What determines how much they work?  New England farmers owned their land. Use the Marxist circuit of capital language (e.g. C-M-C’) to explain how hard they worked and how much they produced.
    2.  (1 point) How do things change when these farmers lost control of the means of production (their land) and have to sell their labor power to a capitalist? Will the formally independent workers now stop working when they have enough money for the desired consumption? Will they produce more output?
    3.  (1 point) How does the capitalist make a profit from a relationship where he pays the workers a fair value for their time and sells at a fair price?  Are capitalists guaranteed a profit?  How could the capitalist not make a profit?
    4. (1 point) What do capitalists do with their profits, and how does this explain the expansion of capitalism throughout the world and into areas of household production?

 

  1. (5 points) Externalities. The Trump administration has been reversing many of the measures taken by the Obama administration to protect clean air and water. The effect has been to increase profits for some industries (notably chemical and fossil fuels) while reducing profits for other industries as well as public health and safety.
    1. (1.5 points) How should we evaluate these policy changes? How can we tell if they are good or bad?
  1. (1.5 points) If people don’t like the Trump Administration’s actions, how might they get the industries that benefit to stop polluting? Could the market lead to the efficient level of pollution if there are full and clear property rights?
  2. (2 points) By themselves, the United States, the People’s Republic of China and India account for almost half of world greenhouse gas emissions causing catastrophic climate change. Many of the poorest countries, including those producing the fewest greenhouse gases, will suffer the most from climate change.
    1. Why don’t countries most threatened, pay the polluters to stop?
    2. Even the rich will suffer from climate change. Use game theory and the prisoners dilemma to explain why China, India, and the United States don’t agree to stop polluting.
  3. (6 points) Is inequality necessary? Is it good?
    1. (2 points) Describe economic inequality in America.
      1. Compared with other countries or with the United States in the past, how unequal is the distribution of income?
      2. Who is rich and who is poor ? Are there demographic differences between rich and poor Americans?
    2. (2 points) Should we equalize income for all Americans? Explain the utilitarian argument for egalitarian social policies.
    3. (2 points) Arthur Okun argues that we can redistribute income from rich to poor only in a “leaky bucket” where some is lost along the way. Why does Okun think there is a trade-off between equality and efficiency? Is he right?