What are the concerns regarding income inequality?

Microeconomics Problem Set # 3
1. Wealth and income inequality, exacerbated by COVID 19 is becoming a serious concern for most
economists. What are the concerns regarding income inequality? Why is it a market failure?
What could be done to combat income inequality? Explain in a 3-5 paragraph essay. Make sure
you define your economic terms and use economic, not emotional arguments.
2. Fill in the following table, graph marginal and total utility of pizza and the total and marginal utility
of cupcakes and answer the following questions:
Quantity
Of
brownies
Total Utility
Of brownies
Marginal Utility
of brownies
Number of
slices of pizza
Total utility
of pizza
Marginal utility
of pizza
0 0 ——– 0 0 ———
1 24 1 10
2 44 2 18
3 62 3 25
4 16 4 6
5 12 5 5
6 6 6 4
a. If you have a budget of $10 and the pizza cost $1 and brownies cost $2 each, what is the
consumer optimum?
b. What if your budget increases to $14, what is your consumer optimum?
c. What if your budget increases to $16, what is your consumer optimum?
3. Explain and give examples of the adverse selection, moral hazard, and principal-agent problems.
Why are these issues important when we discuss health care? What can be done to off-set these
problems? in a 3-5 paragraph essay.
4. How does the Law of Comparative advantage lead to trade efficiencies? What reasons might a
nation have to enact trade barriers? What is the impact of trade barriers? Explain these concepts
in a 3-5 paragraph essay.
5. Suppose that when Japan puts all of its resources into the production of textiles it can produce
200,000 units of textiles and if it puts all of its resources into furniture it can produce 200,000 units
of furniture. If Vietnam puts all of its resources into textiles it can produce 100,000 units of textiles
and if it puts all of its resources into the production of furniture it can produce 25,000 units of
furniture. Draw the Production Possibilities curve for each country and answer the following
questions.
a. What is the opportunity cost of one unit of textile and one unit of furniture for each
country?
b. Which country has the absolute advantage to produce textiles? Which country has the
absolute advantage to produce and furniture?
c. Which country has the comparative advantage to produce textiles? Which country has
the comparative advantage to produce and furniture?

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