Answers to Recommended Problems III

Chapter 9

3.5

a.  Chile has the absolute advantage in the production of both products.

b.  Opportunity costs:

Chile has the comparative advantage in hat production, Argentina has the comparative advantage in beer production.

c.  Skip

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4.11

Done in class

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Chapter 10

1.8

a.  The table below assumes the "price" of studying for either is the same (P = 1)

Going with the highest MU / P first, studying should be in the following order:  ECON, ECON, ECON, PSYC, ECON, PSYC, for four hours of studying for ECON and two hours studying for PSYC.  The utility maximizing condition is met:

MU_ECON / P_ECON = 5 = MU_PSYC / P_PSYC

b. The table below assumes the "price" of studying for either is the same (P = 1)

Going with the highest MU / P first, studying should be in the following order:  PSYC, PSYC, PSYC, PSYC, ECON, ECON, for two hours of studying for ECON and four hours studying for PSYC.  The utility maximizing condition is nearly met:

MU_ECON / P_ECON = 7, MU_PSYC / P_PSYC = 9   

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3.4

a.  Smart watches have significant network externalities.  The more people who have smart watches, the more valuable they become because more apps are developed for them.

b.  Dog food has no significant network externalities.

c.  Board games may have significant network externalities.  The more people who own a game, the more valuable it is because here are more potential opponents.

d.  There are less network externalities with LCD televisions because no special programming is needed for them.

e.  3D televisions may have significant network externalities.  The more people who own 3D televisions, the more valuable they become because more programming is developed for them.

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Chapter 11

2.8

a.  Fixed cost - It is the same amount regardless of the number of pizzas produced

b.  Variable cost - More pizzas produced means more dough is needed, and the payment for dough increases

c.  Variable cost - More pizzas produced means more workers are needed, and wages increase

d.   Fixed cost - It is the same amount regardless of the number of pizzas produced

e.   Fixed cost - It is the same amount regardless of the number of pizzas produced

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3.4

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5.3

a.  TC = FC + VC => $30,000 = $10,000 + VC => VC = $20,000

b. 

AVC = VC / Q = $20,000 / 10,000 = $2

AFC = FC / Q = $10,000 / 10,000 = $1

c.  The dollar difference between the ATC and the AVC is greater when output is 10,000.  The difference between the ATC and the AVC is the AFC.  The AFC always declines as output increases, so the difference will be smaller at 30,000 than 10,000.