Download Problem Set 1

Economics 101
Spring 2002
Section 5-Alley
Problem Set #1
Due Date: Wednesday, February 6, 2002
1.
Give two examples of each of the following types of inputs for a producer who makes desks, chairs,
and file cabinets for home office use.
a.
b.
c.
2.
3.
Capital
Expendable
Capital service
Consider the following decision situations. In each, identify the opportunity cost of each of the
alternative choices.
a.
A lawyer who is deciding whether to take a case defending an indigent terrorist who will pay
nothing but will bring a lot of publicity to the lawyer’s firm, or to take a rather routine but
expensive divorce case that promises a huge fee but little publicity for the firm.
b.
A business man who has an illegal moonshine business who is deciding whether to operate his
business for another year with expected net returns of $70,000 or lease the business to his nephew
for $40,000 a year and work as a black jack dealer for $20,000 per year.
c.
A student who is considering a full time job for the coming year at $19,000 and cutting back on
his hours of credit from 16 per semester to 10 per semester. An alternative part time job
compatible with 16 credit hours pays $7,000 per year.
Robinson Crusoe and Man Friday live on an island. The following table represents their output in a
day of work.
Fish
Cassava
Robinson Crusoe
5
20
Man Friday
8
24
a.
b.
c.
d.
4.
Who has an absolute advantage in the production of fish?
Who has an absolute advantage in the production of cassava?
Who has a comparative advantage in digging cassava?
Who has a comparative advantage in fishing?
Consider the following data.
Tennis Shoes
43
42
40
36
30
22
12
0
a.
b.
c.
d.
Basketball Shoes
0
7
13
18
22
25
27
28
What is the opportunity cost of 6 more tennis shoes when the firm is already producing 30?
What is the opportunity cost of 2 more tennis shoes when the firm is already producing 40?
What is the opportunity cost of 8 more tennis shoes when the firm is already producing 22?
What is happening to the opportunity cost of tennis shoes as the quantity produced goes up?
The PPF graph below should be used for 6, 7, and 8.
5.
Which point is not feasible?
6.
When the firm is producing between 2 and 4 shirts, what is the opportunity cost of one more blouse?
7.
When the firm is producing between 0 and 14 blouses, what is the opportunity cost of one more
blouse?
Blouses
Production Possibility Set
26
24
22
20
18
16
14
12
10
8
6
4
2
0
A
B
E
D
C
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
6
6.5
Shirts
8.
Draw a production possibility frontier (boundary of P(x)) and give an example of a pair of goods for
a.
b.
9.
the case where there is increasing opportunity cost.
the case where there is constant opportunity cost.
Consider the market for personal desktop computers. In a supply and demand diagram show a demand
curve and a supply curve. Label them D1 and S1 respectively. For each of the following situations
show the appropriate change in the curves, and indicate what will happen to the equilibrium price.
(Draw a separate graph for each situation.)
a.
b.
c.
d.
e.
The government announces that having a computer at home increases a student’s GPA by
0.75 points.
The economy goes into a recession and the income of most individuals falls.
Dell finds a way to make PC’s at half the cost.
Intel increases the price at which they sell processor chips to computer manufactures by
50%.
Sony introduces a laptop that weighs ½ pound and has all of the features of the current
desktop computers at half the price of a desktop computer.
10. For each of the following supply and demand curves, find the equilibrium price and quantity.
a. D = 20 – 2P
S = 2P – 8
b. D = 40 – 2P
S = 2P – 8
c. D = 40 – P
S = 2P – 8
d. D = 20 – 2P
S = 2P – 4
e. D = 40 – 2P
S = 2P – 4
11. In a supply and demand diagram, show what will happen if the government imposes a binding price
ceiling on all carbonated beverages that come in cans.
Consider the following diagrams for questions 12-13. In all cases the initial situation is at S0 and D0.
P
B
A
P
S1
S0
S0
P0
D1
Q0
D0
D0
Q
12. Consider panel A. This represents
a. a decrease in demand and a decrease in supply.
b. a decrease in price and an increase in supply.
c. a decrease in demand and a decrease in the quantity supplied.
d. a decrease in supply.
e. a decrease in the quantity demanded and a decrease in supply.
13. Consider panel B. This represents
a. an increase in demand and a decrease in the quantity supplied.
b. a decrease in the quantity supplied and an increase in price.
c. an increase in the quantity demanded and a decrease in supply.
d. a decrease in supply and an increase in demand.
e. a and d.
Suggested Study Guide Problems:
Note: These do not need to be handed in.
Skills and Tools 1-1, 1-2, 1-3, 2-1, 2-2, 2-5, 3-1, 3-4, 3-5, 3-6
D1
Q