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Chapter 1

Econ 190 chapter 1 exercise Production Possiblity Answers.doc

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Thompson Rivers University
ECON 1900
Nancy Carson

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. X Y 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 2 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 are available. 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 (b) Bagsof Peanuts −.75 Slope= =−.5 1.5 10 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). (d) Bags of Peanuts Income= $15 20 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
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