1. Ted Mosby really enjoys architecture books and renaissance fairs. Working as a visiting professor teaching architecture at the local university pays him $45,000 per year. Assuming that he spends all of his money on only architecture books and renaissance fairs, please answer the following questions:
a. If the price of architecture books is $150, and the price of admission into renaissance fairs is $20/each, draw a diagram showing Ted’s budget constraint, being sure to indicate on your diagram both the maximum number of architecture books he can purchase, and the maximum number of renaissance fairs that he can visit.
. Suppose that Ted purchases 150 architecture books, and visits 1500 renaissance fairs. Show this point on your diagram and add an indifference curve illustrating this choice. What can you infer about Ted and his choice?
c. Now suppose that the price of renaissance fairs drops to $15 per visit. Draw in Ted’s new budget constraint and his new optimal consumption of
architecture books and renaissance fairs, assuming that he spends all of his money.
d. Finally, assume that Ted gets a second job, designing Goliath National Bank’s new building. This job pays him an additional $20,000 per year. Show how this would alter his budget constraint and his optimal consumption (i.e. use an indifference curve to show his new optimal choice) of architecture books and renaissance fairs (assume that admission is still $15 per visit). (hint: you may want to use a fresh graph for this one as your graph from a-c is probably hard to read by now)
2. Marshall “Beercules” Erikson has always wanted to be a lawyer specializing in environmental causes. However, he is concerned about how the following events will impact the market for environmental lawyers. Specifically, he wants to know what impact the following events both individually, and cumulatively, will have on the market for environmental lawyers (i.e. your answer should state that event x will cause the equili
ium price to ______ and the equili
ium quantity to _______ and cumulatively, events x, y and z will cause the equili
ium price to _______ and the equili
ium quantity to _______). The events are: 1) politicians abolish the Environmental Protection Agency (EPA) hoping to reduce regulations on businesses, 2) incomes decrease and environmental lawyers are normal goods, 3) law schools lower their tuition to students because of the slow economy, and 4) two of the largest firms specializing in environmental law have their companies go out of business, and all of their lawyers thrown into prison for fraud. Illustrate your answers with at least one graph.
3. Lilly and Robin “Sparkles” have to write poems and knit quilts as part of a contest to win tickets to Hawaii. The contest stipulates that the two people who have the most poems and quilts by the end of the day will each win a trip to Hawaii. Lilly and Robin think that they can probably have the best shot at winning if they specialize and then trade one good for another. They know that Lilly can write 11 poems in 20 minutes and knit 2 quilts in 100 minutes. Robin can write 5 poems in 10 minutes and knit 3 quilts in 160 minutes. Please answer the following questions using this information:
e. Who has the absolute advantage in which good? Illustrate your answer by showing both Lilly’s production possibilities frontier and Robin’s production possibilities frontier.
f. Who has the comparative advantage in which task? Who should specialize in what task? (hint: use comparative advantage in your answer).
g. What would the price of 1 quilt be in terms of poems?