Problem Set 1
1.The Social Security system provides income for people over age 65. If a recipient of Social Security decides to work and earn some income, the amount he or she receives in Social Security benefits is typically reduced. A.How does the provision of Social Security affect people’s incentive to save while working?
The provision of Social Security will decrease people’s income after tax this leads to people not to save incentives while working.
B.How does the reduction in benefits associated with higher earnings affect people’s incentive to work past age 65?
The people’s incentive to work past age 65 will be decreased because the income after tax is reduced when they work past age 65.
2.Imagine a society that produces military goods and consumer goods, which we’ll call “guns” and “butter.” A.Draw a production possibilities frontier for guns and butter. Using the concept of opportunity cost, explain why it most likely has a bowed-out shape
The PPF graph is bow-shaped because of different resources with varying opportunity costs. The opportunity cost of butter depends on the quantity of butters and guns that economy is producing. The economy divides its resources between two industries, this yields other points on the PPF. The opportunity cost of butter is highest when the economy is producing much butter and fewer guns where the frontier is steep (Point B). When the economy is producing less butter and many guns, the frontier is flatter, and the opportunity cost of butter is low (Point A).
B.Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient.
Regarding to above PPF graph, the point B is impossible for the economy to achieve. It is outside of the PPF. Point C is feasible but inefficient because it is inside of the PPF.
C.Imagine that the society has two political parties, called the Hawks (who want a strong military) and the Doves (who want a smaller military). Show a point on your production possibilities frontier that the Hawks might choose and a point the Doves might choose.
The Hawks might choose Point A because they prefer to produce more guns. On the other hand, the Doves might choose Point B because they prefer to produce much butter.
3.The following table describes the production possibilities of two cities in the country of Baseballia:
Pairs of Red Socks per Pairs of White Socks per Worker per Hour Worker per Hour ________________________________________
Boston 3 3
Chicago 2 1
A.Without trade, what is the price of white socks (in terms of red socks) in Boston? What is the price in Chicago?
The price = The opportunity cost.
The price of white socks (in terms of red socks) in Boston = 1 The price of white socks (in terms of red socks) in Chicago = 2
B.Which city has an absolute advantage in the production of each color sock? Which city has a comparative advantage in the production of each color sock?
1)Absolute advantage :
The Boston has an absolute advantage both in producing white socks and in producing red socks because it requires less time than the Chicago to produce a unit of either goods.
The opp.cost of red socksThe opp.cost of white socks
Boston1 white1 red
Chicago1/2 white2 red
% Comparative advantage : when describing the opportunity cost of two products. The producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing Good X and is said to have a comparative advantage in producing it.
The Boston has a comparative advantage in producing white socks because it has a lower opportunity cost of producing white socks than dose the Chicago. The Chicago has a comparative advantage in producing red socks because it has a...