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Chapter 3: Exchange and Markets
COMPARATIVE ADVANTAGE IN THE WORKPLACE
Discussion Question Answers:
1. With the current allocation of time, Julio is producing 98 keyboards and 2 modems, while
2. The opportunity cost for Julio to produce 1 modem is 7 keyboards (the number of keyboards
he could produce in the ½ hour it takes him to produce a modem); his opportunity cost for
producing 1 keyboard is 1/7 modem. Chenyu’s opportunity cost for producing a modem is only 5
3. Chenyu should produce all 5 modems, which would take 1 hour and 40 minutes. She should
produce 95 keyboards with the remaining 6 hours and 20 minutes of her time. Julio should use
4. The change in work assignments appears optimal from a production standpoint. However,
there may be reasons why you should not adopt it. For example, if Chenyu spends all 8 hours
doing the same activity she might be more likely to strain the tendons in her hands, which could
ETHANOL AND PORK PRICES
Discussion Question Answers:
1 The Federal actions might also have an effect on the supply of corn. For example, it could spur
technological innovation that would increase supply. We focus on the demand side because the
Price of
Corn
Q
Corn Market
D1
S
P2
P1
S1
D
P1
P2
Price of
Pork
Q
Pork
The increase in corn prices increases the costs of growing hogs. This expected effect is a
price of pork.
Other factors affect the price of pork besides corn prices. As a manager you should conduct more
research on this issue before taking definitive action. Also it is important to consider the
magnitude and not just the direction of the effect. For example, while the legislation is likely to
promote an increase in pork prices it is important to consider whether the effect is likely to be
large or small. Managers can often access research papers on topics of this type, e.g., over the
The point of this application is that basic supply and demand analysis can help managers
NOBEL PRIZE-WINNER F. A. HAYEK ON THE “MIRACLE” OF THE PRICE
SYSTEM
Discussion Question Answer:
In classic market exchange, traders own the resources and bear the full wealth effects of their
actions (there are no agency problems). In firms, decision makers act on the behalf of others and
LABOR UNIONS AND A PROPOSED TAX ON LUXURY GOODS
Discussion Question Answers:
1. See the diagram below:
50 0.5 1 1.5 2 2.5 3 3.5 4 4.5
0
0.5
1
1.5
2
2.5
Quantity of Yachts
Price ($Millions)
Borne by Suppliers
High of dotted line = $25 thousand (the tax)
D1
D2
S
D1
D2
S
2. Placing a tax on consumers who purchase new yachts does not imply that they will
necessarily bear most of the tax. The tax will cause the demand curve to shift downward by the
3. Labor unions are likely to oppose the tax if it results in a substantial reduction in quantity of
yachts purchased and employment of unionized labor in the industry. The size of this effect
depends on the relative elasticities of the supply and demand curves. For example if demand
SHAREHOLDER VALUE AND MARKET EFFICIENCY
Discussion Question Answers:
1. The market value is likely to be variable over the life of the bond. The cash flows are fixed.
The market value of the bond is equal to the discounted value of the cash flows. This value will
3. No. The discount rate for a risky investment, such as a stock, is equal to the risk free rate plus
