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DEPARTMENT

 OF  ECONOMICS  
University of the West Indies
ECON1011:  Principles   of  Economics  
DEPARTMENT OF ECONOMICS
ECON 3006: International Trade
Problem  Set  1:  The  Core  Principles  

1. Why  do  most  governments  have  a  policy  of  not  negotiating  with  kidnappers?  Why  do  relatives  of  
kidnap  victims  not  have  the  same  policy?  

2. Renee  used  to  work  at  an  accounting  firm  where  she  earned  $3  million  a  year.  After  saving  up,  
she  invested  $20  million  in  her  own  accounting  consultancy.  Her  profit  is  $4  million  a  year,  which  
Renee  receives  as  her  only  compensation.  She  concludes  that  the  investment  paid  off  because  the  
20  percent  return  that  the  profit  represents  is  much  better  than  the  8  percent  interest  the  bank  
was  paying  on  her  savings  account.  Explain  why  her  conclusion  is  wrong.  

3. If  you  were  working  full-­‐time  now,  you  could  earn  $150,000  per  year.    In  your  current  part-­‐time  
job,  you  earn  $50,000  per  year.  At  your  school,  the  annual  cost  of  tuition,  books,  and  other  fees  is  
$30,000.  What  is  the  opportunity  cost  of  completing  your  education?  

4. Kingston  often  suffers  from  a  water  shortage  that  results  in  lock-­‐offs  and  restrictions  on  water  
use.  How  would  an  economist  analyze  and  solve  this  problem?  

5. From  the  dozen  seeds  you  planted  in  a  small  flower  bed  in  front  of  your  house,  ten  of  them  
germinated  and  grew  into  plants.  Liking  how  they  look,  you  planted  another  dozen  seeds  in  the  
same  bed.  This  time,  only  seven  of  the  seeds  grew  into  plants.  
a) What  is  the  marginal  product  of  the  first  planting?  The  second  planting?  
b) Comparing  the  two  values  of  the  marginal  product  exemplifies  which  economic  property?  

6. Why  does  your  doctor  have  a  nurse  take  your  vital  signs  (temperature,  blood  pressure)  instead  
of  doing  it  himself  and  saving  money?  

7. Kristen  and  Anna  live  in  Montego  Bay  where  they  make  wristbands  and  sandals  and  sell  them  to  
tourists  on  the  beach.  Kristen  can  make  15  wristbands  per  hour  but  only  3  sandals.  Anna  is  a  bit  
slower  and  can  make  only  12  wristbands  or  2  sandals  in  an  hour.  
a) Who  has  the  absolute  advantage  in  the  production  of  sandals?  Of  wristbands?  
b) Who  has  the  comparative  advantage  in  the  production  of  sandals?  Of  wristbands?  

January 2013