Edgeworth box, compartive advantage, and other topics
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1.
Two individuals are having a picnic. Jane brings 8 litres of soft drinks and 2 sandwiches. Bob, on the other hand, has 2 litres of soft drinks and 4 sandwiches. With these endowments, Jane's marginal rate of substitution (MRS) of soft drinks for sandwiches is 3, and Bob's MRS is equal to 1.
Draw an Edgeworth box diagram to show whether this allocation of resources is efficient. If it is, explain why. If it is not, then explain and show what exchanges will make both parties better off.
2.
Suppose there are two goods, video cassettes and record albums, produced by two firms (firm A and firm B). Moreover, suppose the marginal rate of product transformation (RPT) of record albums for video cassettes in firm B is 2. That is, firm B can always trade 2 video cassettes for 1 record album in production . On the other hand, the RPT in firm A is 1. Assume that each firm's RPT is constant over all possible output combinations.
If firm A produces 100 record albums and 100 video cassettes, how might firm A be made better off by shifting its output mix? Explain your reasonings clearly.
3.
When lecturing to 200 students in a room of 250, there is ample opportunity to add more students at a marginal cost of zero. Since lecturing to one is no different than lecturing to 250, the product (i.e., education) has the element of a public good. If that is the case, why do universities charge tuition that is far above the marginal cost of production?
Explain, relating part of your response to whether or not the good in question (i.e., education) has all the characteristics of a public good.
4.
Suppose a computer programmer lobbies against copyrighting software. He argues that everyone should benefit from innovative programs written for personal computers, and that exposure to a wide variety of computer programs will inspire young programmers to create even more innovative software programs. Considering the marginal social benefits possibly gained by his proposal, do you agree with the programmer's position?
Explain in the context of public good analysis.
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Solution Summary
Discussion on public goods and comparative advantage with examples
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1. See the attached file. We can represent the current allocation of goods as the intersection of the gray lines. At this point, we know that the allocation of resources is inefficient because the marginal rates of substitution are not the same. We are given that Jane's is 3 while Bob's is 1. This means that Jane is willing to give up three sandwiches for a drink, while Bob is willing to accept just one sandwich in return for a drink. We can represent the slopes of Jane's MRS as a red line, and Bob's as a blue line. Because they do not have the same slope, we know that trading can be ...
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