microeconomics

ECO205. Principles of Macroeconomics

Assignment 1. Due 01/26/2018

Question 1. Rationality and opportunity cost.

Ford Motor Co has just fired their longtime CEO Mark Fields and replaced him with James Hackett. Mr. Hackett now considers two strategies: he can (1) continue making 5 sedans and 5 trucks a year at the cost of $800 like Mark Fields did, or (2) make 7 trucks and zero sedans a year at the cost of $650.

A sedan sells at $100, a truck sells at $120.

(a) Calculate the payoff of the strategy (1). Use the formula

Payoff = benefit – direct_cost

(b) Calculate the payoff of the strategy (2)

(c) Calculate the full economic cost of switching to strategy (2). Use the formula Full_econ_cost = direct_cost + payoff_of_best_alternative

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(d) Perform cost-benefit analysis of strategy (2) to determine if it is rational to switch to producing trucks only. Remember that it is rational to take the action if its benefit outweighs its full economic cost.

Question 2. Marginal effect. Pull up the following article

https://www.nytimes.com/interactive/2017/04/02/technology/uber-drivers-psychologicaltricks.html

Scroll about eight paragraphs down, to the simulation titled: “Faster pickup times mean more idle drivers.”

(a) There are two variables in the simulation. Identify the function (the variable that matters, but outside of Uber’s control) and the factor (the variable that does not matter, but is under Uber’s control)

Y is …

X is …

(b) Run the simulation to fill out the table below. The formula for marginal effect is:

MEy  yB
yA

x xB xA

Observation

# drivers

Waiting time

Marginal effect

A

50

————-

B

75

C

125

D

250

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