1. Refer to Figure 1 below to answer the following,
a. At which point(s) is this society producing some of each type of output but still producing inefficiently?
b. At which point(s) is this society producing efficiently with the available resources and technology?
c. At which point(s) is the output combination currently unattainable with current available resources and technology?
Figure 1 Production Possibilities for Trucks and Tanks
2. Suppose that a society's production possibilities is as follows.
| |
Output per year |
| Possibility |
Food |
Tractors |
| A |
0 |
30 |
| B |
4 |
28 |
| C |
8 |
25 |
| D |
12 |
21 |
| E |
16 |
15 |
| F |
20 |
8 |
| G |
24 |
0 |
a. Plot the PPF for this society in the graph below.
b. Is it possible for this society to produce 30 units of food per year?
c. Is it possible for this society to produce 30 units of tractors per year?
d. Suppose this society produces 20 units of food and 4 units of tractors per year. Is it operating on the PPF? If not, what factors might account for this?
e. Assume that you are operating at Possibility A. Interpolating from the table, what is the opportunity cost of producing one additional unit of food?
f. Assume, instead, that you are operating at Possibility F. Interpolating from the table, what is the opportunity cost of producing one additional unit of food?
3. Classify each of the following statements as positive or normative.
a. If the price of a product in a market decreases, then, other things equal, quantity demanded will increase.
b. There is a tradeoff between inflation and unemployment in the short run.
c. The U.S. income distribution is not fair.
d. U.S. workers deserve more liberal unemployment benefits.
e. If welfare benefits were reduced, then the country would be better off.
4. Find the slope of the line connecting the points (6, - 3) and (-4,2).
5. With a given amount of resources, Portugal's and England's production possibilities of cloth and wine are given below. Answer the following questions using information derived from the table.
| Portugal |
England |
|
| Cloth |
Wine |
Cloth |
Wine |
| 10 |
0 |
6 |
0 |
| 9 |
1 |
5 |
0.5 |
| 8 |
2 |
4 |
1 |
| 7 |
3 |
3 |
1.5 |
| 6 |
4 |
2 |
2 |
| 5 |
5 |
1 |
2.5 |
| 4 |
6 |
0 |
3 |
| 3 |
7 |
|
|
| 2 |
8 |
|
|
| 1 |
9 |
|
|
| 0 |
10 |
|
|
a. Referring to the table above, which country has an absolute advantage in the production of cloth?
b. Referring to the table above, which country has an absolute advantage in the production of wine?
c. Calculate the opportunity costs of one cloth and one wine for both Portugal and England.
| Opportunity cost of one |
Portugal |
England |
| Cloth |
|
|
| Wine |
|
|
d. Which country has a comparative advantage, and therefore should specialize, in the production of cloth?
e. Which country has a comparative advantage, and therefore should specialize, in the production of wine?
6. Alpha and Beta, two tiny islands off the east coast of Tricoli, produce pearls and pineapples. The following production possibilities schedules describe their potential output in tons per year:
a. Graph the PPF for each island in the figures above.
b. What is the opportunity cost of producing one additional pearl in Alpha?
c. What is the opportunity cost of production one additional pearl in Beta?
d. Which island has the absolute advantage in the production of pearls?
e. Which island has the comparative advantage in the production of pearls?
f. If Beta used all of its resources to produce only pearls, how many could it produce?
The only two countries in the world, Alpha and Omega, face the following production possibilities frontiers.
a. Assume that each country decides to use half of its resources in the production of each good. Show these points on the graphs for each country as point A.
b. If these countries choose not to trade, what would be the total world production of popcorn and peanuts?
c. Now suppose that each country decides to specialize in the good in which each has a comparative advantage and produces only that good. By specializing, what is the total world production of each product now?
d. Assume each country fully utilizes all of its resources to produce only the good in which it has a comparative advantage. If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country would receive from trade. Label these points B.