1. You are trying to decide whether to take a vacation. Most of the costs of the vacation (air-fare, hotel and forgone wages) are measured in dollars, but the benefits of the vacation are psychological. How can you compare the benefits to the cost?
2. 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 introduction of competing products has reduced the expected sales of your new product to $4million. If it would cost $3 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?
3. Explain whether each of the following government activities is motivated by a concern about equality or a concern about efficiency. In the case of efficiency, discuss the type of market failure involved. a. regulating cable TV prices
b. providing some poor people with vouchers that can be used to buy food c. prohibiting smoking in public places
d. Breaking up Standard Oil (which once owned 90% of all oil refineries) into several smaller companies e. Imposing higher personal income tax rates on people with higher incomes f. Instituting laws against driving while intoxicated
4. 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. b. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient. c. Imagine that the society has two political parties, called the Hawks (who wants a strong military) and the Doves (who wants a smaller military). Show a point on your PPF that the Hawks might choose and a...