1))Assume that there are only two inputs (labor and natural resources) producing two goods (movies and gasoline) with no improvement in society’s technology over time.
Further, assume that natural resources are being rapidly depleted.
What would happen to the Production Possibility Frontier over time? How would invention and technological improvement modify your answer? Graph the PPF for each scenario to illustrate.
2))) Problem 1: At a recent meeting, the president and the CEO of Production, Inc.
got into a heated argument about whether or not to shut down the company’s plant in Flint, Michigan.
The plant currently loses $50,000/month.
The president of Production, Inc.
argued that the plant should continue to operate until a buyer is found for the facility.
This argument was based on the fact that the plant’s fixed costs are $61,000/month.
The CEO disagreed over this point, arguing that fixed costs do not matter in making the shutdown decision.
Consider both sides of the argument and come to a decision of whether to close the plant or continue to operate it.
How would you explain to either the president or the CEO that he or she is wrong?
Problem 2: A monopolist has determined that marginal revenue is $2.
00 and average cost is $1.
It has also determined that the lowest sustainable average cost is $1.
To maximize profit, should the firm lower its price, increase its price, or leave the price unchanged? How would you change your response if marginal revenue is $1.
50? Explain your responses.