Download ECO 100Y INTRODUCTION TO ECONOMICS

Prof. Gustavo Indart
Department of Economics
University of Toronto
ECO 100Y
INTRODUCTION TO ECONOMICS
Solutions to Problem Set 1
1. a) 40 tonnes of Food
b) 20 tonnes of Clothing
c) D is not attainable with present resources and technology
d) A is preferable since B represents unemployed resources
e) A and C are both maximum output combinations so that we can't choose
between them without information on societal wants
f) Technological change.
2. a) See Graph
b) i) 1 unit of Qr ii) 7 units of Qr
c) Any point below PPC
d) PPCt on graph
e) PPCL on graph
f) Opportunity Cost is constant because
the resource units do not differ in output
g) Resource cost is the cost measured in
resources used whereas opportunity cost
is the cost of the best foregone option
(i.e., measured in the commodity given
up)
3. a) 20 thousand tonnes of Steel.
b) 2 thousand Loaves of Bread [(40 million Loaves)/20 thousand tonnes)]
c) 1 million loaves of Bread cost 5/4 thousand tonnes of Steel
d) Steel intercept = 150 tonnes. Bread intercept = 250 Loaves
e) Gross Investment > Depreciation
=> Net Investment
=> Capital Accumulation => Increased PPC
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4. Technological change has made it possible to
produce much more agricultural output with the
same quantities of resources, but hardly any
more non-agricultural output with the same
quantities of resources. The production
possibility curve has shifted outward as in the
diagram below.
Suppose that the economy was originally at A,
producing 0A of agricultural output and ON of
non-agricultural output.
According to Basil the new equilibrium is higher than A (increased non-agricultural
output) but not much to the right of A (very little increase in agricultural output). The
new equilibrium is at a point like B.
This shows that there are different ways of taking advantage of increased
productivity in agriculture. One way is use the same resources to produce more
agricultural output, e.g., at point C. At B, however, production of about the same
quantity of agricultural output as before requires fewer resources (since productivity
is up) and the left-over resources are producing extra non-agricultural output.
5. a) 1 unit of Capital Goods [(5 Capital
Goods)/(5 Consumer Goods)]
b) 19 units of Consumer Goods
c) No opportunity cost since merely
using
unemployed resources
d) Between options D and F.
e) PPCt on graph
f) PPCw on graph
g) Net Investment
= Capital Output - Depreciation
i) Net Investment
= 10 units of Capital => Increased PPC
ii) Net Investment = -5 units of Capital => Decreased PPC
iii) Net Investment = 0 units of Capital => No change in PPC
6. a) PPC0 on graph
b) PPC1 on graph
c) Compare Q0 and Q1
d) Opportunity Cost would not change since
output doubles for each commodity
PPC1
Q0
PPC0
Q1
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7. a) Maximum Food = 1800 – 3(0) = 1800
b) Maximum Lumber = 1800/3 = 600
c) The equation is linear so opportunity Cost is constant. The opportunity cost per
unit of lumber per unit is –(-3) = 3 Food. Increasing lumber from 500 to 600 units
costs 100*3 = 300 units of Food. The opportunity cost per unit of food = -(1/-3) =
1/3 lumber
d) The country can produce 1800 – 3(400) = 600 units of food if it produces 400
units of lumber or (1800 – 400)/3 = 466 2/3 units of lumber if it produces 400 units
of food. Hence the country is below the PPC at (400, 400).
There is no opportunity cost in moving from (400F, 400L) to (600F, 400L) because
the economy uses unemployed resources.
The country can produce (600F, 400L) but not (700F, 400L) which is above the
PPC.
e) This simplest numbers for calculation here are the maximum values. The output
of lumber per unit of resource is 600/300 = 2. The output of food per unit of
resource is 1800/300 = 6.
f) e) gives us the output per unit of resource. The country would need 600/2 = 300
units of resource to produce 600L and 600/6 = 100 units of resource to produce
600F. The total resources necessary is therefore 400.
g) A 50% increase in productivity for food means that maximum food (no lumber) =
1800*1.5 = 2700 and that the opportunity cost of food per unit of lumber is now
1.5*3 = 4.5. The new PPC curve has a new Food intercept of 2700 and an
unchanged lumber intercept of 600 giving a slope of -4.5. The new equation is F =
2700 – 4.5L.
8. a) The consumer price index in year t is equal to the cost of the consumption basket
in year t divided by the cost of the consumption basket in the base year (year 1)
times 100. The cost of the consumption basket in year 1 is 10 x $20 plus 2 x $400
plus 1 x $40 or $1,040. The cost of the consumption basket in year 2 is 10 x $21
plus 2 x $440 plus 1 x $38 or $1,128. Therefore, the price index in year 2 is $1,128 ÷
$1,040 x 100 or 108.5 approximately. Since the price index in year 1 is 100, the rate
of inflation in year 2 is 8.5%.
b) The cost of the consumption basket in year 3 is 10 x $22 plus 2 x $429 plus 1 x
$39 or $1,117. The consumer price index in year 3 is $1,117 ÷ $1,040 x 100 or
107.4. The rate of inflation in year 3 is thus (107.4 – 108.5) ÷ 108.5 x 100 or -1.01%
(deflation – negative rate of inflation).