1. Tamara earns $8 an hour and works 60 hours/week. Draw her labor-leisure budget constraint. What determines its slope? How does the position and slope of her budget constraint change if her wage increases to $16 per hour?
2. Adrienne wins a lottery prize of $5,000. The current interest rate is 5%. She could spend the money now or invest it for 10 years and spend it then. Draw her intertemporal budget constraint and illustrate some of her choices. Also create a table for some of her choices. How would a higher interest rate alter her budget constraint?
3. ProduceCom and MakeItCom are two companies of identical size in two different countries, one with a high inflation rate and one with a low inflation rate. ProduceCom is in a country where the inflation rate is 12% and it needs to pay an interest rate of 17% when it borrows. MakeItCom is in a country where the inflation rate is 3%, but it needs to pay a rate of 9% when it borrows. If the time value of money is the same in both economies, which company is being charged a higher risk premium?
4. Use the ideas of opportunity cost, marginal analysis, and sunk cost to give advice to the following people:
a. When Ursula goes to an all-you-can-eat buffet, she eats so much that she is sick for two days. But she says it's OK, because it didn't cost her anything extra. Your advice?
b. Victor is thinking about starting a small business selling baseball caps in the shopping mall. He tells you that if he makes a financial investment of $10,000 and works full-time for a year, he can earn $20,000 per year. Since the gain of $20,000 exceeds the $10,000 he invests, this seems like a good idea to him. Your advice?
c. Xavier works at a U.S. post office in a large city, which is located in a lovely old building in a prime downtown location. He says that it's a great deal, because the building was bought and paid for many years ago and so it now has zero cost. Your comment?
d. Yolanda works for a company that spends $20,000 on surveys to decide whether to launch a new product. Then it decides that it needs to launch the product to earn back the money it spent on the surveys. Your advice?
e. Zachariah decides that his favorite food is grapes; therefore, he decides that he will eat nothing but grapes from now on. Your advice?
5. Use the ideas of opportunity cost, marginal analysis, and sunk cost to give advice to these people:
a. Raymond always goes to his office to work for 3 hours on Sunday afternoon, although his job doesn't require him to do so and he doesn't get paid extra, because his company serves a free lunch to anyone who shows up on Sunday. What is your advice about the true cost of Raymond's lunch?
b. You are graduating from college and you want to sell your computer. You have paid $750 to install additional software in the last year. You could sell your computer for $3000. However, if you upgraded the amount of computer memory you could sell it for $3500. It can be upgraded for $350. Should you sell your computer as is, or should you upgrade the hard memory?
c. Wanda is at a vacation resort where a day-long sailing trip is included in the price she has paid for the room. Sailing makes Wanda sick, but she figures that since she has paid for the trip, she ought to take it. Your advice?
d. A state government decides that it needs to improve transportation, so it passes a law that requires all other spending to be frozen at current levels, and all increases in state spending to be devoted to building roads and improving mass transit for the next five years. Your comment?
6. The Xotic firm announces that it expects sales revenues to climb in the next year from $8 million to $10 million, and profits to climb from $1.5 million to $2 million. How much does it expect total costs to increase from this year to next?