Problem 1:
Below is a production possibilities table for consumer goods (food) and capital goods (machinery). Graph the data using Excel and then answer the following questions.
|
|
A
|
B
|
C
|
D
|
E
|
F
|
|
FOOD
|
0
|
10
|
20
|
30
|
40
|
50
|
|
MACHINES
|
150
|
140
|
120
|
90
|
50
|
0
|
1. What are the specific assumptions that underlie the production possibilities curve?
2. What would be the cost of more food if the economy is at point C? What would be the cost of producing more machinery? How does the shape of the production possibilities curve reflect the law of increasing opportunity costs?
3. What if this hypothetical economy were producing only 9 food and 130 machines and it was depicted by this production possibilities table and curve, what conclusions could be drawn about this economy's resource utilization?
4. Can this economy produce outside its current production possibilities? How can technological changes affect the production possibilities curve? How can international trade permit consumption above its production possibilities curve?
Problem 2
Evaluate each of the supply and demand scenarios below, answering the following questions:
- How will each affect equilibrium price and equilibrium quantity in a competitive market?
- Will price and quantity rise, fall, or be unchanged?
- Based on the magnitudes of the shifts, will the answers be indeterminate?
Provide an appropriate graph to illustrate each answer (this does not require use of Excel, although you may use it).
a. Demand decreases and supply is constant.
b. Demand increases and supply increases.
c. Supply decreases and demand is constant.
d. Supply increases and demand decreases.
e. Demand increases and supply decreases.
f. Demand decreases and supply decreases.
g. Demand increases and supply is constant.
Note that 'constant' means with no shift while 'increases' or 'decreases' means a shift occurs.
Problem 3:
Suppose that the demand and supply schedules for rental apartments in the city of Gotham are as given in the table below.
|
Rent
|
Demand
|
Supply
|
|
2,500.00
|
10000
|
15000
|
|
2,000.00
|
12500
|
12500
|
|
1,500.00
|
15000
|
10000
|
|
1,000.00
|
17500
|
7500
|
|
500.00
|
20000
|
5000
|
a. What is the market equilibrium rental price per month and the market equilibrium number of apartments demanded and supplied?
b. If the local government can enforce a rent-control law that sets the maximum monthly rent at $1500, will there be a surplus or a shortage? Of how many units? And how many units will actually be rented each month?
c. Suppose that a new government is elected that wants to keep out the poor. It declares that the minimum rent that can be charged is $2500 per month. If the government can enforce that price floor, will there be a surplus or a shortage? Of how many units? And how many units will actually be rented each month?
d. Suppose that the government wishes to decrease the market equilibrium monthly rent by increasing the supply the housing. Assuming that demand remains unchanged, by how many units of housing would the government have to increase the supply of housing in order to get the market equilibrium rental price to fall to $1500 per month? To $1000 per month? To $500 per month?