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| In the first round, the survey respondent was asked to rank each option without regard to cost; in the next round, the survey respondent was given the cost information and then asked to rank the options while considering those costs. (a) In the first round, one respondent ranked alternative C as best, and ranked A as tied with B. Plot the different combinations on a graph, with Fish Stocked on the horizontal axis and Miles of Hiking Trails on the vertical axis. Draw indifference curves that reflect this set of preferences. Do these indifference curves reflect free disposal, slope downward, and not cross, as indifference curves should? (b) Based on the comparison of alternatives A and B, how does this respondent trade off between fish stocking and hiking trails? In other words, if he were to give up 100 fish stocked, about how many miles of hiking trails would he need to get in compensation? What does this comparison tell you about how this respondent values fish stocking compared to hiking trails? (c) When the respondent was presented with the cost information, he changed his ranking so that A was best, C was second best, and B was least preferred. Does the fact that A and B are no longer equally preferred mean that the respondent is inconsistent in his preferences? Why or why not? (d) Compare alternatives A and C. What can you say about how much the respondent is willing to pay for 300 additional fish stocked when there are already 100 stocked? (e) Now compare alternatives B and C. What can you say about how much the respondent is willing to pay for 6 additional miles of hiking trails when there are already 2 additional miles of trails? |
The Forest Service is deciding how to allocate its recreational
Consider a Solow economy that begins with a capital stock
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| Consider a Solow economy that begins with a capital stock equal to $300 billion, and suppose its steady-state level of capital is $500 billion. To its pleasant surprise, the economy receives a generous gift of foreign aid in the form of $100 billion worth of capital (electric power plants, machine tools, etc.). (a) Use the Solow diagram, other graphs, and the mathematics of the Solow model to explain what happens to the economy, both immediately and over time. By what proportion does consumption per person initially increase? What happens to consumption in the long run? (b) Suppose instead of starting below its steady state, the economy begins in steady state, with a capital stock equal to $500 billion. Answer part (a) for this case. (c) Summarize what this exercise teaches you about the possible consequences of foreign aid. In this example, does foreign aid exert a long-run effect on the welfare of poor countries? What is the benefit of foreign aid? |
(a) On a graph with the probability of injury on
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| (a) On a graph with the probability of injury on the x-axis and the wage level on the y-axis plot two indifference curves, labeled UA and UB, so that the person associated with UA is less willing to take on risk relative to the person associated with UB. Explain what it is about the indifference curves that reveals person A is less willing to take on risk relative to person B. (b) Consider a third person who doesn’t care about the risk associated with the job. That is, he doesn’t seek to limit risk or to expose himself to risk. On a new graph, draw several of this person’s indifference curves. Include an arrow on the graph showing which direction is associated with higher levels of utility. (c) Consider a wage-risk equilibrium that is characterized by an upward-sloping hedonic wage function. Now suppose there is a government campaign that successfully alters people’s perception of risk. In particular, each worker adjusts her preferences so that she now needs to be more highly compensated to take on risk. Discuss, and show on a single graph, how the government’s campaign affects indifference curves, isoprofit lines, the equilibrium hedonic wage function, and the of workers to firms. |
In the 1960s Procter & Gamble recognized that disposable diapers
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| a. In considering these possible tactics, why should managers at Procter & Gamble be concerned about their costs? b. Why should managers be concerned with the costs to an entrant? c. By the 1990s Procter & Gamble had to compete with high-quality, private-label diapers (as well as with Kimberly- Clark, which successfully entered the market in the 1970s). In March 1993 its Pampers brand had about 30% of the market, and its Luvs brand had about 10%. The price of Luvs and Pampers exceeded that of discount brands by over 30%. Should Procter & Gamble have cut its prices? d. In 1993 Procter & Gamble sued Paragon Trade Brands, a private-label producer, alleging infringement of two patents. Are lawsuits of this kind part of the process of oligopolistic rivalry and struggle? |
Jane likes hamburgers (H) and milkshakes (M). Her indifference curves
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| Jane likes hamburgers (H) and milkshakes (M). Her indifference curves are bowed in toward the origin and do not intersect the axes. The price of a milkshake is $1 and the price of a hamburger is $3. She is spending all her income at the basket she is currently consuming, and her marginal rate of substitution of hamburgers for milkshakes is 2. Is she at an optimum? If so, show why. If not, should she buy fewer hamburgers and more milkshakes, or the reverse? |
Draw on a single graph the time to transition to
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| Draw on a single graph the time to transition to a new labor equilibrium when a firm faces variable adjustment costs for the following two firms. (a) A trucking firm currently employs 100 drivers. If the economy enters an expansionary period, the firm would like to employ 120 drivers for the foreseeable future. If the economy enters a contractionary period, the firm would like to employ 80 drivers for the foreseeable future. There are few regulations in the hiring and firing of truck drivers. (b) A liberal arts college currently employs 100 professors-70 of whom are tenured, 20 of whom are on a tenure-track position, and 10 of whom are instructors not on a tenure track. (An assistant professor with a tenure-track position will eventually be denied tenure and asked to leave the college or she will eventually be granted tenure. Tenured faculty can only be released by the college if the professor engages in improper behavior or if the college faces extreme financial problems.) If the economy enters an expansionary period, the college would like to employ 120 professors for the foreseeable future. If the economy enters a contractionary period, the college would like to hire 80 professors for the foreseeable future. Legally it is very difficult to remove tenured professors, even during bad economic times. It is also very difficult to find (and hire) many high-quality professors during good economic times. Finally, almost all of the college’s professors must be tenured or on a tenure-track position in order to satisfy student and parent demands that the college employ high-quality professors. |
On June 20, 2007, John Authers, investment editor of the
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| On June 20, 2007, John Authers, investment editor of the Financial Times, wrote the following in his column “The Short View”: The Bank of England published minutes showing that only the narrowest possible margin, 5–4, voted down [an interest] rate hike last month. Nobody foresaw this. . . . The news took sterling back above $1.99, and to a 15-year high against the yen. Can you explain the logic of this statement? Interest rates in the United Kingdom had remained unchanged in the weeks since the vote and were still unchanged after the minutes were released. What news was contained in the minutes that caused traders to react? Use the asset approach. |
Suppose that the demand curve for a good is represented
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| Suppose that the demand curve for a good is represented by the straight line P = 10 – Q a. Draw a graph containing both the demand curve and marginal revenue curve. b. Is the marginal revenue curve a straight line as well? What is the slope of the marginal revenue curve? How does that slope compare with that of the demand curve? c. Does the marginal revenue curve contain negative values over the specified range of quantities? Explain why or why not. |
A phenomenon in the retail merchandising of food and clothing
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| A phenomenon in the retail merchandising of food and clothing in the United Slates and the United Kingdom is the growing popularity of private-label (also called store-brand) products. These products are priced at a lower level than the premium national brands. Use the concepts of price elasticity and relevant cost to explain the profitability of these products from the point of view of a. The retail stores that sell these private-label products. b. The manufacturers Hirers of these private-label products. If you were the manager of a national premium brand, what would you do to light the growing competition of private labels? |
The stock market is said to be a leading indicator
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| The stock market is said to be a leading indicator for GDP growth. Because the stock market prices the expectations of future earnings, a bullish market may predict future economic growth and vice versa. Let Y1, be GDP growth and Xt, be SP500 returns, (both series collected at the quarterly frequency as in the previous exercise). Run OLS for the following models: a. Yt = ?0 + ?1X1 + ut (contemporaneous correlation). b. Yt, = ?0 + ? 1xt–1 + ut, (one-quarter leading indicator). c. Y1 = ?0 + ?1Xt–1 + ? 2Xt–2 + ?3Xt–3 + ?4Xt–4 + ut (four-quarter leading indicator). d. Y1 = ?0 + ?1Xt–1 + ?2Xt–2 + ?3Xt–3 + ?4Xt–4 + ut (leading indica-tor tor with GDP inertia). For each model, assess the R-squared and the adjusted R-squared. Which model do you prefer? |
