Suggestions for mixed bag I

 

The suggestions for the mixed bag are organized by problem.

 

Problem 1: Plot the production possibilities curve for this case. Begin with all 200 units of labor used to produce clothing (this is the good which requires the same amount of labor per unit, which makes it easier to start with all labor allocated to produce this good). Then start transferring enough labor to increase the production of food by one unit. At first, how many units of labor need to be transferred from clothing to food to increase the amount of food produced by one unit? How many units of clothing are sacrificed at first to increase food production by one unit? At what level of food production does this relationship change, and how does it change? You should be able to address the individual questions once you have answered these subsidiary questions and plotted the production possibilities curve of the country. Generally, if you have enough information to represent the production possibilities curve graphically, you should first graph the curve. This generally will make it easier to address the individual questions.

 

Problem 2: Recall the two themes in the suggestions for problem set 2: using the MU/P formula and using the diagrammatic model to analyze a consumerís well being at two different points in time or under two different programs. Which of these two types of reasoning applies here? Size up the information provided in the question that is relevant to the approach you think can be used to analyze this problem. Recall the inferences you can and cannot make using this type of reasoning, as reviewed in the suggestions to problem set 2. Which of the inferences in the individual questions are justifiable?

 

Problem 3: This problem parallels the food-stamp application we will review soon in class. Once this application is reviewed, you should see the parallel and how you can exploit the reasoning developed on the food-stamp application. For now, you can analyze this problem in a number of ways. One way is to construct your own numerical example that conforms to the setup of the problem. Choose an income and prices of food and nonfood for the consumer, then increase the price of food for all units above 100. Plot the initial budget line and the budget line with the higher price of food for units above 100. Compare these budget lines. This will enable you to answer individual questions 11, 12, 13, and 15. The other questions involve the choices the consumer makes before and after the tax and the well being of the consumer before and after the tax. How can you compare the well being of a consumer at two points in time without knowing the consumerís consumption choices at either time? Review the suggestions for problem set 2 if you do not recall the answer. Concerning the consumption choices of the consumer, consider whether any new possibilities arise as a result of the tax and whether any old possibilities are no longer available as a result of the tax that might influence the consumption choices of the consumer.

 

Problem 4: Again, there were two themes emphasized in the suggestions regarding problem set 2. Which applies to this problem? As indicated in the hint, the key to answering this problem is to locate the two relevant budget lines on the same graph. Once you do this, consider whether the Social Security recipient would consume the same combination of food and shelter in the two years. If he/she did, would the marginal utility of food divided by its price equal the marginal utility of shelter divided by its price in both years? If not, how would you expect the combination of food and shelter consumed to differ in the two years? If the consumer could purchase the combination of food and shelter chosen in another year but chooses not to, what can you infer about the consumerís relative well being in the two alternative years?

 

Problem 5: Again, which of the two themes in the suggestions to problem set 2 are relevant to this question? Each individual question provides information and asks you to compare the well being of the consumer at two different times. How can you do this given the available information? You need to judge whether the information provided in each individual question is sufficient to be able to use your method of comparision to assess the consumerís relative well being in the two time periods.