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Question 1
TABLE 1 contains the production possibilities data for capital goods and consumer goods in the economy of New Harmony.
| A | B | C | D | E | |
| Capital goods | 0 | 8 | 14 | 18 | 20 |
| Consumer goods | 30 | 27 | 21 | 12 | 0 |
a) Draw the production possibilities curve for New Harmony. Label it PP1. Label each of the five output combinations with the letters A through E. Label consumer goods on the vertical axis and capital goods on the horizontal axis.
b) Assume people of New Harmony have decided to produce 12 units of consumer goods. How many units of capital good could be produced?
c) Assume that the people of New Harmony have decided to produce 11 units of capital goods. Approximately (And I know it doesn’t line up perfectly but make an educated guess) how many units of consumer goods can be produced?
d) What is the opportunity cost of the first 14 capital goods produced?
e) Assuming the economy is producing at point C, what is the cost of 6 additional consumer goods?
f) Discuss what law applies here? (Hint: Why is the Production Possibilities Curve downward)
g) In your own words, discuss the importance of scarcity, choice and opportunity cost for decision-making purposes
Question 2
TABLE 2 shows the production possibilities between rice and beef
| A | B | C | D | E | |
| Rice | 0 | 50 | 90 | 120 | 140 |
| Beef | 50 | 45 | 35 | 20 | 0 |
a) What is the opportunity cost of producing 90 rice? (Hint: Answer should be in terms of what is given up. So the cost of producing 90 rice is how much beef is given up)
b) What is the opportunity cost of going from possibility C to possibility D?
c) What is the opportunity cost of going from possibility D to possibility C?
g) Draw the production possibilities curve. Label it PP1. Label each of the five output combinations with the letters a through e. Label beef on the vertical axis and rice on the horizontal axis.
f) Discuss the effect from a technological change and economic growth and how it will impact our 2-good model.
Question 3
TABLE 2 shows production possibilities between wheat and cars
| A | B | C | D | E | F | |
| Wheat | 0 | 20 | 35 | 45 | 50 | 52 |
| Cars | 21 | 20 | 18 | 14 | 8 | 0 |
a) If 16 cars are produced, approximately how much wheat is produced?
b) If current production is at combination C, what is the cost of 10 more wheat?
c) If current production is at combination D, what is the cost of 4 more cars?
d) Assume there is a technology change that only affects the car industry. Label this shift PPC2. (Label cars on the vertical axis and wheat on the horizontal axis and label the original production possibility curve PPC1)
Question 4
If and
, what are the equilibrium values of price and quantity? Please provide a graph with price on the vertical axis and quantity on the horizontal axis showing the equilibrium price and equilibrium quantity.
Question 5
- If
=100−5𝑃and
10+𝑃, what are the equilibrium prices and quantity?
- If demand increases by 12 and price remains the same as in (a), will there be a shortage or surplus? And by how much?
- If demand increases by 12, what will be the new equilibrium price and quantity?
Question 6
Assume the market for peanut butter is initially in equilibrium.
- Draw a demand and supply diagram to illustrate the initial equilibrium.
- Explain and graph the impact on the peanut butter market if there is a decrease in consumer incomes?
- What would occur to the demand for Strawberry jam? (Hint: Jam is either a substitute or compliment)
Question 7
Assume the market for gasoline is initially in equilibrium.
a) Draw a demand and supply diagram to illustrate the initial equilibrium.
b) Explain and graph the impact on the market if there is simultaneously a decrease in population and an increase in business taxes. (Hint: neither demand nor supply dominate)
Question 8
Discuss with graph the effect of a:
- price ceiling
- price floor.
(Hint: draw supply and demand with a price floor and tell me if the price floor is effective above or below the equilibrium price. Do the same with a price ceiling. Also show on the graph where the equilibrium price and quantity are. Do one graph for a ceiling and one graph with a floor, along with the explanation described above)
Question 9
Define price elasticity of demand. What does it mean if the coefficient of price elasticity of demand is less than one? Define price elasticity of supply and what does it mean if the coefficient is greater than one? Draw graphs for each elasticity and be sure to draw the correct slope (steeper or flatter slope)
Question 10
Explain why the price elasticity of demand for carrots is different than the price elasticity of demand for cigarettes. Use discussion and/or graphs to complete the question.
Question 11
Suppose income increases from $48,000 to $52,000 and the quantity of Kraft macaroni increased from 156 to 164 units per week. a) What is the income elasticity of demand for macaroni? b) What does this suggest about the product? Hint: what does the coefficient mean?
Question 12
Suppose that the price of President’s Choice macaroni and cheese decreased from $9 to $7 per case, and at the same time, the quantity of Kraft macaroni and cheese dropped from 192 to 128 cases. a) What is the cross-elasticity of demand between the two products? b) What is the relationship between the two products?
Question 13
Define the following with discussion and formula if applicable
a) Marginal utility
b) Law of diminishing utility
c) Substitution effect
d) Income effect
Question 14
a) Using graph and explanation. Draw, label and explain consumer surplus. On your graph label the area that is consumer surplus.
b) Discuss and explain what price discrimination means. Give examples and ways that firms can price discriminate.
