Problem Set 2
Busn 521: Managerial Economics
This assignment is due on Friday Oct 17th, 2014.
Problem Set 2
1. Pat and Kris are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew a gallon of root beer and 4 hours to make a pizza.
a. What is each roommate’s opportunity cost of making a pizza? Who has the absolute advantage in making pizza? Who has the comparative advantage in making pizza?
b. If Pat and Kris trade foods with each other, who will trade away pizza in exchange for root beer?
c. The price of pizza can be expressed in terms of gallons of root beer. What is the highest price at which pizza can be traded that would make both roommates better off? What is the lowest price? Explain. ****************
2. Consider a professor who is writing a book. The professor can both write the chapters and gather the needed data faster than anyone else at his university. Still, he pays a student to collect data at the library. Is this sensible? Explain. **************
3. England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour.
a. Which country has the absolute advantage in the production of each good? Which country has the comparative advantage?
b. If England and Scotland decide to trade, which commodity will Scotland trade to England? Explain.
c. If a Scottish worker could produce only 1 sweater per hour, would Scotland still gain from trade? Would England still gain from trade? Explain. *****************
4. During the 1990s, technological advance reduced the cost of computer chips. How do you think this affected the market for computers? For computer software? For typewriters?