Econ 100.1 Exercise 1 & 2 Answer Key

Economics 100.1 Exercise 1 ANSWER KEY PART I A production possibilities table for two commodities, food and clothing, is found below. The table is constructed given the resources of the society and the existing state of technology. Food is measured in 100,000 metric tons and clothing in units of 100,000. Combination A B C D E F G H

Food 0 7 13 18 22 25 27 28

Clothing 7 6 5 4 3 2 1 0

∆Food ------7 6 5 4 3 2 1

∆Clothing -------1 -1 -1 -1 -1 -1 -1

∆Clothing/∆Food -------0.14 -0.17 -0.20 -0.25 -0.33 -0.50 -1.00

a) Plot the data using food on the horizontal axis and clothing on the vertical axis to obtain the PPF.

b) Would it be possible for the economy to produce 13 units of food and 5 units of clothing at any one time? Why or why not? Yes, the required resources to produce the said combination of food and clothing are within the available resources in the economy (the combination is along the PPF). c) Would it be possible for the economy to produce 18 units of food and 5 units of clothing at any one time? Why or why not? No, the required resources in the economy is insufficient to produce the combination, the point is outside thre PPF. d) What happens to the PPF if there is an increase in the available resources, e.g. workers and capital, used in the production of food and clothing? The entire PPF will shift outward. e) Suppose a new technique was discovered that allowed food manufacturers to increase their output. Illustrate what happens to the PPF if the economy finds a way to enhance the production of food only.

f)

Complete the table above. Explain the trend in the cost of producing the first up to the seventh unit of clothing in this economy. Is the trend related to the concept of “increasing opportunity cost”. Why or why not? The opportunity cost of producing clothing must be solved first. That is, obtaining the change in food over the change in clothing. You’ll see that the cost of producing the 1st to the 7th unit of clothing in terms of food is increasing in absolute terms, hence related to the concept of increasing opportunity cost.

PART II Assume the PPF of Angelica Jolly in making movies and salad dressing is given by this figure. Assume also that she is intimately involved in the production of her salad dressing (she surely has other people make it for her, but assuming that would ruin this problem). What effect would the following events have on this graph? Show your answers graphically. a) She gets more efficient cooking equipment for her famous salad dressing.

b) She decides that now that she's in her 70’s she needs to take a nap during the day.

c) She decides she'd rather make more salad dressing and fewer movies.

d) Today's movies start to take more time to shoot per film.

e) Usually Angelica's business sense is sharpest in the morning and her acting ability is sharpest in the afternoon. But Angelica inadvertently acts in the morning and makes salad dressing in the afternoon.

PART III Assume that in your Farmville™ account, you produce only two goods, milk and artichokes, with labor coins as production input (all other inputs in caeteris paribus). Suppose the total labor coin hour available in your account is worth 2000. If it takes 1/2 labor coin hour to produce a unit of milk while 8 labor coin hours to produce an artichoke. Construct the PPF of your Farmville™. What is the opportunity cost of producing more artichokes? how about more milk?

Milk 4000 3840 3200 3040 2720 2560 2400 2080 1600 1280 800 320 80 0

change in Artichokes milk 0 10 50 60 80 90 100 120 150 170 200 230 245 250

-160 -640 -160 -320 -160 -160 -320 -480 -320 -480 -480 -240 -80

change in artichokes 10 40 10 20 10 10 20 30 20 30 30 15 5

OC of producing more artichokes -16 -16 -16 -16 -16 -16 -16 -16 -16 -16 -16 -16 -16

OC of producing more milk -0.0625 -0.0625 -0.0625 -0.0625 -0.0625 -0.0625 -0.0625 -0.0625 -0.0625 -0.0625 -0.0625 -0.0625 -0.0625

PART IV 1. In a televised debate, one economist commented that food prices were high because of weather-related factors. Another economist commented that prices were high to induce consumers to increase spending on other goods. Which of the statements is normative and which is positive? Explain. The first economists who said that prices were high because of weather-related factors used positive economics while the latter used normative economics. The latter is normative since the economist

used subjective evaluation of price behavior and prescribing that high food prices were set to induce consumption spending. 2. Comment on this: Scarcity is implies that all choices entail some costs in the form of tradeoffs. With scarce resources, individual, firm, or any other economic actor has to choose from its array of wants and needs to address. Choosing one implies forgoing other choices, or what we call the tradeoff. The cost of making a decision or choice is the value of the next best and unselected choice.

Economics 100.1 Exercise 2 ANSWER KEY Part I. 5 Effective demand 10 Increase in supply 3 Consumer income 2 Technology 6 Prices of substitutes 1 Immigration 4 The law of diminishing returns 7 Equilibrium level of output 9 Surplus 8 Decrease in quantity supplied Part II. F (1) F (2) F (3) T (4) F (5) T (6) F (7) T (8) Part III. (a) Increases, 2 thousand (b) Decreases, 4 thousand (c) (insert your graph here) (d) P 1.20, 6 thousand (e) P 0 (f) ms = 0.2, md = -0.3 (g) Demand will shift to the left since consumers will now prefer to buy more of red meat (shift factor: change in tastes and preferences) (h) (on the same diagram, demand curve will shift to the left) (i) Approximately, P 0.96, 4.8 thousand pounds (j) If it is the price of tilapia that changed (k) If the DOH announces that it is eating tilapia that prevents illnesses like cancer. Part IV. (refer to diagrams below) Market D or S L or R Change (a) D L (b) (c)

S D

L R

(d)

D

L

(e) (f) (g)

S D S

L R R

(h)

Depends on which curve shifts more

Shift Factor

Price will be

Diagram

Lower

Output will be Lower

Change in tastes ↑ in costs ↑ in # of buyers ↓ in p of substitute ↑ in costs ↑ in income ↑ in technology N/A

↑ ↑

↓ ↑

D A

↓

↓

B

↑ ↑ ↓

↓ ↑ ↑

D A C

Depends on which curve shifts more

B

Different scenarios

P

P

S

S

D

D’

D’

D Q

(A)

P

S

(C)

Q

(B)

P

S’

S’

S

D

D Q

(D)

Q