Homework 1
Principles of Economics
Prof. Sarah West
30 points
1. (6 points) Explain whether each of the following government activities is motivated primarily by a
concern about equality or a concern about efficiency. Explain why you have chosen either efficiency or
equity by stating why it is the one you chose and why you did not choose the other. In some cases there is
more than one acceptable answer. If you choose efficiency, be sure to discuss the type of market failure
involved.
a. Instituting laws against driving while intoxicated.
b. Breaking up AT&T (which once was the sole provider of telephone services in the United
States) into several smaller companies (breaking up “Ma Bell” into the “Baby Bells”).
c. Providing lower income people with “food stamps,” vouchers that can be used to buy food.
d. Prohibiting smoking in public places.
e. Imposing higher personal income tax rates on people with higher incomes.
f. Regulating cable TV prices.
2. (5 points) For each sub-question below, draw a production possibility frontier that is consistent with
the given description, and state any assumptions you made when drawing the frontier in the way you did.
a. An economy produces corn and computer chips. For any level of production of either good, the
economy must give up 25 bushels of corn to make one computer chip.
b. An economy produces corn and computer chips. At one (and only one) specific level of
production of each good, the economy must give up 25 bushels of corn to make one computer
chip.
3. (4 points) You and your roommate have two tasks to complete each week: vacuuming (or sweeping)
your dorm room, and cleaning your shared refrigerator. When negotiating the division of labor for
completing these tasks, your roommate makes two statements to you:
Statement A: “You are faster and better at doing both of these tasks.”
Statement B: “You should do all the work involved with both these tasks.”
You agree with Statement A but disagree with Statement B. Use production possibilities frontiers to make
sense of your assessment of your roommate’s statements. Accompany your PPFs with a written
explanation that makes specific references to the PPFs.
4. (12 points) PPFs and Gains from Trade. The table below summarizes the productivity of workers in
automobile and electronics production in Mexico and the United States:
United States
Mexico
Output per worker per year
Automobiles Electronics
8
3
1
2
a. You may assume that each country has 40 million workers and that opportunity costs are
constant. Below, graph each country's production possibilities frontier on separate graphs. Label
graphs fully. You may assume that opportunity costs are constant.
b. According to the theory of comparative advantage, which country should we expect will export
automobiles? Electronics? Be sure to use specific numbers to support your answers, and explain
fully.
c. Within what range of prices would both the United States and Mexico be willing to trade
automobiles for electronics? Explain.
5. (3 points) Define and provide two real world examples for each of the following. Your definitions may
be based on those found in your textbook (but written in your own words), but your examples may not.
a. Competitive market.
b. Two goods that are substitutes for each other.
c. An inferior good.