Exploring Constraints and Costs

7. Some students are not familiar with the term "guns and butter" or "guns versus butter." Search for the Internet for these terms. What issues are being addressed with them today?

8. Crusoe can grow 100 bushels of grain each year. Draw his budget constraint for this year and next year if:

a) he is alone on an island. He can store grain but 10% of it will rot from the first year to the second. (Hint: the axes are consumption in year one and consumption in year two.)

b) he is living in a primitive barter economy. The only way to store his grain is in the local warehouse, which charges him 10% of what he has to store. However, nothing spoils. He can also borrow against next year's crop, but at a 20% interest rate (payable in grain.)

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