Ba 211 – Microeconomics
Problem Set #1 – Chapters 1 & 2
1. Give three examples of important trade-offs that you face in your life. (9 pts)
-Family Income
-Getting a new car (Good or bad on gas)
-Student Tuition and budget
2. The Social Security system provides income for people over age 65. If a recipient of Social
Security decides to work and earn some income, the amount he or she receives in Social Security
benefits is typically reduced. (8 pts)
a. How does the provision of Social Security affect people’s incentive to save while
working?
The provision of Social Security benefits lowers an individual’s incentive to save for
retirement. The benefits provide some level of income to the individual when he or
she retires. This means that the individual is not entirely dependent on savings to
support consumption through the years in retirement.
b. How does the reduction in benefits associated with higher current earning affect people’s
incentive to work past age 65?
Since a person gets fewer after-tax Social Security benefits the greater is his or her
earnings, there is an incentive not to work (or not work as much) after age 65. The more
you work, the lower your after-tax Social Security benefits will be. Thus the taxation of
Social Security benefits discourages work effort after age 65.
3. The company that you manage has invested $5 million to date in developing a new product, but
the development is not quite finished. At a recent meeting with marketing personnel, they shared
the unfortunate news that the recent introduction of a competitor’s product has reduced potential
sales of your product to $3 million. If it will cost $1 million to finish development and make the
product, should you go ahead and do so? What is the most that you should pay to complete
development? (10 pts)
If there is already 5 Million invested and that it will cost and other 1 million to finish the
production, development and sale of the product; with a total cost of production of 6
Million. Yet, we only have a potential sale of 3 Million making the production and
investment in this product a total deficit. If there is no more potential in revenue for the
product in question. I would not go ahead. Although, if there is a potential deficit of 200%
with the revenue of the product, but a good possibility of a connect correlated product to
produce important revenue. I would go ahead. Ex: PlayStation games, extra gadgets… I
