Microeconomic answer
Microeconomic First Homework
Chapter 1
4. You win $100 in a basketball pool. You have a choice between spending the money now or putting it away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of spending the 100$ now?
Answer: By spending the money right away the opportunity cost is 5 percent of 100 dollars that is 5 dollars plus the 100$ itself. So the total opportunity cost is $105,-
5. 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 to $3 million. If it would cost $1 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?
Answer: Those $5 million that you have invested is called sunk cost and not relevant anymore. The important thing is to earn profit at the margin. So it is wiser to spend the $1 million and finished the project, because you could still get $2 million marginal profit. It is better than no sales at all and have $5 million losses. So the most important thing is the profit you can earn at the margin not the total profit you get.
Chapter 2
1. Draw a circular flow diagram. Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities.
a. Martin earns $15 per hour working in a factory.
b. Matilda spends $6 for a pizza
c. Madeline’s bakery pays $500 for the rent of its shop
d. Maria purchases a new pair of earrings for $200
Answer:
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.
b. Show a point that is
Chapter 1
4. You win $100 in a basketball pool. You have a choice between spending the money now or putting it away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of spending the 100$ now?
Answer: By spending the money right away the opportunity cost is 5 percent of 100 dollars that is 5 dollars plus the 100$ itself. So the total opportunity cost is $105,-
5. 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 to $3 million. If it would cost $1 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?
Answer: Those $5 million that you have invested is called sunk cost and not relevant anymore. The important thing is to earn profit at the margin. So it is wiser to spend the $1 million and finished the project, because you could still get $2 million marginal profit. It is better than no sales at all and have $5 million losses. So the most important thing is the profit you can earn at the margin not the total profit you get.
Chapter 2
1. Draw a circular flow diagram. Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities.
a. Martin earns $15 per hour working in a factory.
b. Matilda spends $6 for a pizza
c. Madeline’s bakery pays $500 for the rent of its shop
d. Maria purchases a new pair of earrings for $200
Answer:
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.
b. Show a point that is