Business Economics
Problem Set 1
1. The Social Security system provides income for people over age 65. If a recipient of Social Security decides to work and earn some income, the amount he or she receives in Social Security benefits is typically reduced.
A. How does the provision of Social Security affect people’s incentive to save while working?
The provision of Social Security will decrease people’s income after tax this leads to people not to save incentives while working.
B. How does the reduction in benefits associated with higher earnings affect people’s incentive to work past age 65?
The people’s incentive to work past age 65 will be decreased because the income after tax is reduced when they work past age 65.
2. Imagine a society that produces military goods and consumer goods, which we’ll call “guns” and “butter.”
A. Draw a production possibilities frontier for guns and butter. Using the concept of opportunity cost, explain why it most likely has a bowed-out shape
The PPF graph is bow-shaped because of different resources with varying opportunity costs. The opportunity cost of butter depends on the quantity of butters and guns that economy is producing. The economy divides its resources between two industries, this yields other points on the PPF. The opportunity cost of butter is highest when the economy is producing much butter and fewer guns where the frontier is steep (Point B). When the economy is producing less butter and many guns, the frontier is flatter, and the opportunity cost of butter is low (Point A).
B. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient.
Regarding to above PPF graph, the point B is imposs ...