Download Solutions To Problem Set 1 (chp 1 Q1-7 / Chp 3 Q3-7)

Solutions to Problem set 1 (chp 1 Q1-7 / chp 3 Q3-7)
28 possible points
Chapter 1
1.
According to Figure 1.1, what is the opportunity cost of increasing consumer
output from OF to OD?
In figure 1.1, the move from OF to OD along the consumer goods axis
moves the economy from point X to point C on the production
possibilities curve. As a result, the economy must give up G minus E (1
point) military goods.
2.
Draw a production possibilities curve based on Table 1.1, labeling
combinations A-F. What is the opportunity cost of producing 100 missiles?
Production Possibilities Curve
Quantity of Houses
120
A
100
B
80
C
60
D
40
E
20
F
0
0
50
100
150
200
250
300
Quantity of Missiles
(1 point)
The opportunity cost of producing 100 missiles is a reduction in the production of
houses from 100 to 75, or a loss of 25 houses. (1 point)
3. Assume that it takes 4 hours of labor time to paint a room and 3 hours to sand a
floor. If all 24 hours were spent painting, how many rooms could be painted by
one worker? If a decision were made to sand two floors, how many painted
rooms would have to be given up? Illustrate with a production-possibilities
curve.
Production Possibilities Curve
Floors Sanded
10
8
6
4
2
0
0
1
2
3
4
5
6
7
Rooms Painted
(1 point)
If all 24 hours were spent painting, it would be possible to paint a total of six rooms
(24/4 = 6). If you wanted to sand two floors, it would take a total of six hours (3 hours
per floor x two floors). In these six hours, you could have painted 1½ rooms, thus the
opportunity cost of sanding two floors is not paining 1½ rooms (1 point)
4.
Suppose in problem 3 that a second worker became available. Illustrate the
resulting change in production possibilities. Now what would be the opportunity
cost of sanding two floors?
Production Possibilities Curve
18
16
Floors Sanded
14
12
10
8
6
4
2
0
0
2
4
6
8
10
12
14
Rooms Painted
(1 point)
Assuming the second worker is as productive as the first, a doubling of
the labor input allows you, in 24 hours, to paint and sand twice as many
rooms and floors. The opportunity cost of sanding two floors, however,
has remained unchanged. Opportunity cost is the value of what you
must give up in order to do the next best thing. Even though you now
have two workers, the opportunity cost of sanding two floors for either
worker is still 1½ floors (1 point).
5.
According to Figure 1.3, what is the cost of a war that increases military output
from M2 to M1? What is the opportunity cost of maintaining military output to
M1?
If military output increases from M2 to M1, then the decrease in output of
consumer goods is reduced from C2 to C1.
The opportunity cost of maintaining military output at M1 is the amount
of consumer goods forgone. At point S, there are many millions of men
and women on active military duty and additional millions of civilians
employed by the Department of Defense or military contractors. All of
this labor and other resources could be used to produce consumer goods
or public works.
(1 point total for either answer)
6.
On a single graph, draw production possibilities curves for 1945 and 2005 with
consumer goods and military goods as the output choices. Label points A and B to
approximate the choices made in each year (see Figure 1.2 for data).
.
B
2005
Consumer Goods
.
1945
A
Military Goods
(1 point)
Figure 1.2 suggests that, as a percentage of GDP, total military output
was higher in 1945 than in 2000. Thus, as suggested by point A, in
1945 the U.S. made a choice to produce a relatively high level of military
goods (nearly 40 percent). Since 1945 the U.S. economy has grown, as
demonstrated by an outward shift of the PPC, and military output as a
percentage of GDP has declined, to around 4 percent, as illustrated by
point B.
7.
Assume that the table on the next page describes the production possibilities
confronting an economy. Using that information:
a.
Draw the production-possibilities curve. Be sure to label each alternative
output combination (A through E).
b.
Calculate and illustrate on your graph the opportunity cost of building one
convenience store per week.
c.
What is the cost of producing a second convenience store? What might
account for the difference?
d.
Why can’t more of both outputs be produced?
e.
Which point on the curves is the most desired one? How will we find out?
Potential Weekly
Output Combinations
A
B
C
D
E
Homeless
Shelters
10
9
7
4
0
Convenience
Stores
0
1
2
3
4
a.
Convenience Stores
Production Possibilities Curve
4.5
E
4
3.5
D
3
2.5
2
1.5
C
B
1
0.5
0
A
0
2
4
6
8
10
12
Homeless Shelters
(1 point)
b.
The opportunity cost of producing the first convenience store is reducing the
production of homeless shelters from 10 to 9, or 1 homeless shelter (1 point).
c.
The opportunity cost of producing the second convenience store is to reduce the
production of homeless shelters from 9 to 7, or 2 homeless shelters (1 point).
d.
It is not possible to produce more of both outputs because resources are scarce
(1 point). Thus, assuming that all resources are efficiently used, i.e., we are on the
production- possibilities curve, to produce more convenience stores requires taking
resources from the production of homeless shelters, and vice versa. To produce more of
both would require either finding more resources or developing new technology that
allows for existing resources to be used more efficiently, i.e., the production-possibilities
curve would shift outward.
e.
With the available information, it is not possible (1 point) to tell which point is the
most desired. This point depends on the tastes and preferences of the society that is
producing the items. In general, the combination that is most desired is that combination
which offers the most amount of satisfaction for consumers while maximizing profits for
producers. This point will be discovered through the interaction of market forces.
Chapter 3
3.
Given the following data, (a) construct market supply and demand curves and
identify the equilibrium price; and (b) identify the amount of shortage or surplus that
would exist at a price of $4.
Participant
Price
Supply Side
Alice
Butch
Connie
Dutch
Ellen
Market Total
Participant
Price
Demand Side
Al
Betsy
Casey
Daisy
Eddie
Market Total
Quantity Supplied (per week)
$5
$4
$3
$2
$1
3
7
6
6
4
26
3
5
4
5
2
19
3
4
3
4
2
16
3
4
3
3
2
15
3
2
1
0
1
7
Quantity Demanded (per week)
$5
$4
$3
$2
$1
1
0
2
1
1
5
2
1
2
3
2
10
3
1
3
4
2
13
4
1
3
4
3
15
5
2
4
6
5
22
Supply and Demand
Price (per unit)
$6
Supply
$5
$4
Demand 2
(for problem
#4)
$3
$2
$1
Demand 1
$0
0
5
10
15
20
25
30
Quantity (per week)
(1 point)
(a)
Equilibrium price is $2. (1 point)
(b)
At a price of $4, there would be a surplus of 9 (1 point), the difference between
the market quantity supplied of 19 and the market quantity demanded of 10.
4.
Suppose that the good described in problem 3 became so popular that every
consumer demanded one additional unit at every price. Illustrate this increase in market
demand and identify the new equilibrium. (1 point) Which curve has shifted? Along
which curve has there been a movement of price and quantity?
The market demand curve will shift to the right by 5 units at every price.
Given this new demand curve, the new equilibrium will be approximately
$3.50 and 17 units. The increase in price results in a movement along the
supply curve, resulting in an increase in quantity supplied.
5.
Illustrate each of the following events with supply or demand shifts in the
domestic car market:
a.
The U.S. economy falls into a recession.
b.
U.S. autoworkers go on strike.
c.
Imported cars become more expensive.
d.
The price of gasoline increases.
S2, part b
Price
S1
D3
D1
D2, parts a and d
Quantity
(a)
This would result in a decrease in demand (leftward shift of the demand
curve) due to a decline in buyer income. (1 point)
(b)
This would result in a decrease in supply (leftward shift of the supply curve) due
to reduced ability to produce output. (1 point)
(c)
This would result in an increase in demand (rightward shift of the demand curve)
as consumers substitute relatively less expensive domestic cars for the now relatively
higher priced imported cars. (1 point)
(d)
This would result in a decrease in demand (leftward shift of the demand curve)
due to a higher price of a complementary good, gasoline. (1 point)
6.
Show graphically how the release of Strategic Petroleum Reserves would affect
gasoline prices and consumption (see Headline on p. 71).
(1 point)
Supply
Supply 2
P1
P2
Demand
Q1
Q2
Quantity (gallons per day)
Release of Strategic Petroleum Reserves would increase the supply of gasoline available,
leading to lower gas prices and more consumption (1 point), ceteris paribus.
7.
Assume the following data describe the gasoline market.
Price per gallon
$1.00 1.25 1.50 1.75 2.00 2.25 2.50
Quantity Demanded 26
25
24
23
22
21
20
Quantity Supplied
16
20
24
28
32
36
40
a.
b.
c.
d.
a.
What is the equilibrium price?
If the quantity supplied at every price is reduced by 5 gallons, what will
the new equilibrium price be?
If the government freezes the price of gasoline at its initial price, how
much of a surplus or shortage will exist when supply is reduced as
described above?
Illustrate your answers on a graph.
The equilibrium price is $1.50 where Qs=Qd. (1 point)
b.
If the quantity supplied at every price is reduced by 5 gallons, the new
equilibrium price would be $1.75. (1 point)
c.
If the government freezes the price of gasoline at its initial price of $1.50, the
reduction in supply will result in a shortage of gasoline of 5 gallons (1 point) (24 – 19).
Supply and Demand
Price per gallon
(1 point)
2.75
2.5
2.25
2
1.75
1.5
1.25
1
0.75
0.5
0.25
0
Supply 2
Supply 1
Demand
0
10
20
30
Quantity
40
50