Economics 321 problem set 1

Total 20 points.

• (4 points) Production Possibility Frontiers: Studying or Socializing?
• (2 points) Draw a production possibilities curve for the pleasure you get between hanging with friends and from doing your Economics problem set. Are these activities complementary or are they substitutes? Does it matter which friend you are studying with? How do you show a tradeoff between them in your graph?
• (1 point) What happens to your production possibilities frontier if you the professor rewrites the textbook so that it is clearer? What happens if a new season of “Game of Thrones” comes on the air and you know that it would be fun to watch with your friends?
• (1 point) The professor redoes that problem set making it much harder and much less interesting? Show the new PPF. Your friend is very worried about passing the Economics course and insists that you work on the problem set together before socializing. Show the new PPF.
• (4 points) Capitalism
• (1 point) In the Wealth of Nations, Adam Smith proposes that among the first economic exchanges were when a hunter killed a beaver but wanted to eat venison (from a deer). Show the circuit of production for this hunter. How does it change if money is introduced and the hunter sells his beaver and uses the money to buy a deer? How does the circuit of production look when you set the table and do the dishes for your family’s dinner, a meal made by your father?
• (2 points) Describe the circuit for a capitalist who hires workers to produce commodities that she sells for a profit? Use the circuit of production to identify problems she might face.
• (1 point) Is your family’s dinner exchange or Adam Smith’s hunter an expansive system? What makes capitalism expansive? Use the circuit of production to identify why capitalists seek new markets for their produce, new technologies of production, and new sources of labor.
• (4 points) The Social and Detail Division of Labor: My neighbors Tom and Diane live on corn and pot. Each can produce both at the following rate of output (production can be stored):

• (2 points) Draw production possibility frontiers for Tom and Diane producing the two goods (pot and corn) without trade. What is the relative price of pot and corn for each?
• (1 point) If Tom and Diane can trade services, in which will each specialize? Show how trade shifts the PPFs for each.

• (1 point) Who gains from trade?

• (2 points) Methodological individualism and social science. What makes a social science explanation different from methodological individualism? How would social scientists and methodological individualists explain why most marathon races are won by Kenyans, why the Dominican Republic produces so many great baseball players, and why American women wear dresses and high heels?

(3 points) Externalities. United Airlines flies in and out of Logan Airport carrying people to cities throughout the world. Their flights are noisy and spread pollution over East Boston and Revere, disturbing the residents of these cities and lowering the value of their property. (1 point) What are the conditions of an efficient resolution to this dispute? (1 points) If there is a law restricting noise and pollution, then what can the airline do to continue to fly to and from Logan? Can there be an efficient outcome? Would you expect this to happen? (1 point) If there is a law allowing noise and pollution (or at least no law prohibiting it), then what could the neighbors do to stop the noise and pollution? Can there be an efficient outcome? Would you expect this to happen? (3 points) Why do we have economic growth? What is the “Commons” and who should profit from it? Consider the argument made by Peter Barnes, article 1.5 in Real World Micro. Give some examples of commons wealth? Who creates “commons wealth”? Who benefits from it? What would be a fair and equitable allocation of the commons wealth?