Econ 190 Chapter 1 Exercise
1. The citizens of country A are able to produce only two products, X and Y. The
country has resources that are suitable for the production of X and other resources that
are suitable for producing Y only. Labour is the only resource used in both X and Y.
There are a total of 8 workers. The following table indicates the daily production of
both X and Y based on the number of workers allocated to that product.
Number of workers Daily Production Number of workers Daily Production
0 0 0 0
1 4 1 10
2 10 2 30
3 18 3 60
4 30 4 100
5 50 5 130
6 75 6 145
7 85 7 150
8 90 8 152
Construct the production Possibility curve for products X and Y
Remember that there are only eight workers, so if the level of production of good X
is 0 then all eight worker are in the production of good Y so the first point is (0,
152). If you move one worker out of the production of good Y and into good X then
you can produce 4 units of X and 150 units of Y so the next point is (4, 150). Next
have 6 workers producing good Y and 2 workers producing good X then you can
produce 10 units of X and 145 units of Y so the next point is (10, 145). Keep going in
this fashion for the remaining points.
2. Suppose the
management of Pinetree
furniture has calculated Cupboards
its production possibility
curve for its daily 8
production of cupboards
and tables as illustrated 6
below. If production is 4
currently at 6 cupboards
and 1 table, what is the
opportunity cost of
producing one more
table? 2 cupboards If 0 1 2 3 4 5 Tables production is currently at 4 cupboards and 2 tables, what is the opportunity cost of
producing one more table? 2 cupboards . What is significant about the shape of this
curve? The production possibility curve is a straight line and not bowed out from
the origin, so it exhibits Constant opportunity costs
From the text, End of Chapter 1, solutions to #5, 7, 10 - 13
1-5 (Key Question) Indicate whether each of the following statements applies to
microeconomics or macroeconomics:
a. The unemployment rate in Canada was 7.0 percent in January 2005.
b. A Canadian software firm discharged 15 workers last month and transferred the
work to India.
c. An unexpected freeze in central Florida reduced the citrus crop and caused the
price of oranges to rise.
d. Canadian output, adjusted for inflation, grew by 3.0 percent in 2004.
e. Last week the Scotia Bank lowered its interest rate on business loans by one-half
of 1 percentage point.
f. The consumer price index rose by 2.2 percent in 2005.
Macroeconomics: (a), (d), and (f)
Microeconomics: (b), (c), and (e)
1-7 (Key Question) Suppose you won $15 on a Lotto Canada ticket at the local 7-Eleven and
decided to spend all the winnings on candy bars and bags of peanuts. The price of candy
bars is $.75 and the price of peanuts is $1.50.
a. Construct a table showing the alternative combinations of the two products that
b. Plot the data in your table as a budget line in a graph. What is the slope of the
budget line? What is the opportunity cost of one more candy bar? Of one more
bag of peanuts? Do these opportunity costs rise, fall, or remain constant as each
additional unit of the product is purchased.
c. How, in general, would you decide which of the available combinations of candy
bars and bags of peanuts to buy?
d. Suppose that you had won $30 on your ticket, not $15. Show the $30 budget line
in your diagram. Why would this budget line be preferable to the old one?
(a) Consumption alternatives
Goods A B C D E F
Candy bars 0 4 8 12 16 20
Bags of peanuts 10 8 6 4 2 0
20 Candy Bars
The slope for the budget line above, with candy bars on the horizontal axis, is -0.5 (=
-P /P ). Note that the figure could also be drawn with bags of peanuts on the
horizontal axis. The slope of that budget line would be -2.
The opportunity cost of one more candy bar is ½ of a bag of peanuts. The
opportunity cost of one more bag of peanuts is 2 candy bars. These opportunity costs
are constant. They can be found by comparing any two of the consumption
alternatives for the two goods.
(c) The decision of how much of each to buy would involve weighing the marginal
benefits and marginal costs of the various alternatives. If, for example, the marginal
benefits of moving from alternative C to alternative D are greater than the marginal
costs, then this consumer should move to D (and then compare again with E, and so
forth, until MB=MC is attained).
10 Income= $30
20 40 Candy Bars
The budget line at $30 would be preferable because it would allow greater consumption
of both goods. 1-10 (Key Question) Below is a production possibilities table for consumer goods
(automobiles) and capital goods (forklifts):
Type of Production Production Alternatives
A B C D E
Automobiles 0 2 4 6 8
Forklifts 30 27 21 12 0
a. Show these data graphically. Upon what specific assumptions is this production
possibilities curve based?
b. If the economy is at point C, what is the cost of one more automobile? Of one more
forklift? Explain how the production possibilities curve reflects