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ECO1010 / UGC251Q (Section D & F)

Perspectives in Economics
Assignment 1

Ch. 1
1. (pp. 16 Q5) The company that you manage has invested $5 million in developing a
new product, but the development is not quite finished. At a recent meeting, your
salespeople report that the introduction of new products by your competitor has
reduced the expected sales of your new product from 10 million to $3 million. If it
would 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?
(Hint: what the MC and MB of your current decision?)

Ch. 2
2. Hong Kong’s crime rate is quite low comparing to other major cities in the world.
Do you think that the Government should put even more resources to reduce the
crime rate? Should the Government aim at achieving a zero crime rate? Why?

3. China has become ‘the world’s factory’ at the expense of severe pollution. There
is a claim saying that such pollution is reasonable, and should not be prohibited.
What is the rationale of the claim? What is the condition for such claim to be true?

Ch. 3
4. (pp.58 Q3) American and Japanese workers can each produce 4 cars a year. An
American worker can produce 10 tons f grain a year, whereas a Japanese worker
can produce 5 tons of grain a year. To keep things simple, assume that each
country has 100 million workers.
a. For this situation, construct a table analogous to Table 1 in our lecture notes
(slide 8, Ch. 3).
b. Graph the production possibilities frontier of the American and Japanese
c. For the U.S, what is the opportunity cost of a car? Of grain? For Japan,
what’s the opportunity cost of a car? Of grain? Put this information in a
table analogous to Table 3 (slide 27, Ch. 3).
d. Which country has an absolute advantage in producing cars? In producing
e. Which country has a comparative advantage in producing cars? In
producing grain?
f. Without trade, half of each country’s workers produce cars and half produce
grain. What quantities of cars and grain does each country produce?
g. Starting from a position without trade, give an example in which trade
makes each country better off.

5. (pp. 58 Q6) Consider a professor who is writing a book. The professor can both
write the chapters and gather the needed data faster than anyone else. Still, he pays
a student to collect data at the library. Is this sensible? Explain.

6. (pp. 59 Q10) Are the following statements true or false? Give reason for your
a. “Certain very talented people have a comparative advantage in everything
they do.”
b. “If a certain trade is good for one person, it can’t be good for the other one.”

Ch. 4
7. (pp.86 Q1) Explain each of the following statements using supply-and-demand
a. When a cold snap hits Florida, the price of orange juice rises in
supermarkets throughout the country.
b. When a war breaks out in the Middle East, the price of gasoline rises, while
the price of a used, gas-guzzling car falls.

8. (pp. 87 Q8) A tax reduces the supply of cigarette. Think about the markets for
other tobacco products such as cigars and chewing tobacco.
a. Are these goods substitutes or complements for cigarettes?
b. Using a supply-and-demand diagram, show what happens in the markets for
cigars and chewing tobacco if the tax on cigarettes is increased.
c. If policymakers wanted to reduce total tobacco consumption, what policies
could they combine with the cigarette tax?