ECONOMICS 3600
ANSWERS TO EXERCISES
EXERCISE SET 7:
From the introductory information, you know that Crusoe must work (10300) = 3000 hours to
gather adequate seeds on uncleared land. That leaves him with 5000 – 3000 = 2000 hours of
leisure. He must work (8300) = 2400 hours to gather adequate seeds on cleared and planted land.
That would leave him with 5000–2400 = 2600 hours of leisure.
If he chooses B, he must also work 1600 hours in the initial period. So if he chooses B, he has 2000
– 1600 = 400 hours of leisure in the initial period.
1. a. V(A) = 2000 + (2.52000) = 7000. V(B) = 400 + (2.52600) = 6900.
b. Cost(B) = 2000 – 400 = 1600. Return(B) = 2.5(2600–2000) = 1500. Return < Cost.
c. In both cases (of course both) Crusoe chooses A.
2. Choose B in initial period: V(B) = 400 + (32600) = 400 + 7800 = 8200. Choose B in t
= 1: V(B) = 2000 + 400 + (22600) = 2000 + 400 + 5200 = 7600. Greater value to
choose in initial period.
3.
a. V(A) = 2000 + (22000) = 6000. V(B) = 400 + (22600) = 5600. Crusoe chooses A.
b. V(A) = 2000 + (32000) = 8000. V(B) = 400 + (32600) = 8200. Crusoe chooses B.
4. Crusoe must now work (8.5300) = 2550 hours to gather adequate seeds on cleared and
planted land. That would leave him with 5000–2550 = 2450 hours of leisure.
V(A) = 2000 + (32000) = 8000. V(B) = 400 + (32450) = 7750. Crusoe chooses A.
5. a. V(A) = (.56000) + (.58000) = 7000. V(B) = (.55600) + (.58200) = 6900. Crusoe
chooses A.
6. b. V(A) = (.26000) + (.88000) = 7600. V(B) = (.25600) + (.88200) = 7680. Crusoe
chooses B.