Turgut Ozal University Department of Economics ECO 152 Spring 2014 Assist. Prof. Dr. Umut UNAL PART A - Definitions 1) Define these terms: Capital Production Comparative advantage Investment Production possibility frontier (PPF) Marginal rate of transformation (MRT) Command economy Laissez-faire economy Consumer sovereignty PROBLEM SET #2 PART B - Problems 2) Suppose that a simple society economy has only one resource, labor. Labor can be used to produce only two commodities-x, a necessity good (food), and Y, a luxury good (music and merriment). Suppose that the labor force consists of 100 workers. One laborer can produce either 5 units of necessity per month (by hunting and gathering) or 10 units of luxury per month (by writing songs, playing the guitar, dancing, etc.). a) On a graph, draw the economy s production possibility frontier (ppf). Put the necessity good on the horizontal axis. Where does the ppf intersect the Y-axis? Where does it intersect the X-axis? What do these points mean? b) Suppose the economy produced at a point inside the ppf. Give at least two reasons why this could occur. What could be done to move the economy to a point on the ppf? c) Suppose you succeeded in lifting your economy to a point on its ppf. What point would you choose? How might your small society decide the point at which it wanted to be? d) Once you have chosen a point on the ppf, you still need to decide how your society s product will be divided. If you were a dictator, how would you decide? What would happen if you left product distribution to the free market? 1
3) Evelyn is inviting Darcy to a party at which she will serve both single-strength chocolate ice cream and chili. Darcy values chili and ice cream at $6 for the first ounce, and each additional ounce is worth half as much as the previous one. Evelyn makes it clear to Darcy that he should feel comfortable eating as much chili and ice cream as he wishes. But Darcy s stomach holds only 10 cubic inches of food. Each ounce of chili or ice cream takes up 2 cubic inches of stomach space. a. What is the opportunity cost to Darcy of eating each ounce of chocolate ice cream? b. Now suppose that the first ounce of ice cream is worth $12 to Darcy, and each additional ounce is worth half as much as the previous one. How much ice cream and how much chili should Darcy eat? 4) Argentina and Brazil both produce milk and bread with labor. The labor input is measured in person-hours, milk is measured in gallons and bread is measured in loaves. The table below shows labor requirements to produce a unit of milk and bread in each country. (It is assumed that the labor requirements per unit of output in production remain the same irrespective of the quantity of the two goods produced.) Argentina Brazil 1 gallon of milk 10 4 1 loaf of bread 15 20 a. What is the opportunity cost of producing an extra gallon of milk in Argentina? In Brazil? b. What is the opportunity cost of producing an extra loaf of bread in Argentina? In Brazil? Part C- Discussion 5) As long as all resources are fully employed, and every firm in the economy is producing its output using the best available technology, the result will be efficient. Agree or disagree? 6) Briefly describe the trade-offs involved in each of the following decisions. Specifically, list some of the opportunity costs associated with the decision, paying particular attention to the trade-offs between present and future consumption. a) After a stressful senior year in high school, Sherice decides to take the summer off instead of working before going to college. b) Frank is overweight and decides to workout everyday and to go on a diet. 2
c) Mei is very diligent about taking her car in for routine maintenance, even though it takes two hours of her time and costs $100 four times each year. d) Jim is in a big hurry. He runs a red light on the way to work. 7) Suppose that in a three-hour block of time you can either make 2 batches of chocolate chip cookies or word-process 10 pages of text or any combination on a straight line connecting these two extremes. In contrast, your roommate John can either make 4 batches of cookies or word-process 5 pages of text in a three-hour block of time, or any combination on a straight line connecting these two extremes. Which of the following is correct? a. Your comparative advantage is in making cookies. b. John s comparative advantage is in word-processing text. c. Your comparative advantage is in word-processing text. d. None of the above. 8) Ted can cook 5 one-pound hams in one hour or he can cook a dozen eggs in an hour. Bill can cook 10 one-pound hams in one hour, or he can cook 3 dozens of eggs in one hour. Which statement below is true? a. Ted should specialize in cooking eggs and Bill should specialize in cooking ham. b. Ted has a comparative advantage in cooking ham, and Bill has an absolute advantage in cooking ham. c. Ted should perform both tasks because he is better than Bill at both. d. Bill has an absolute advantage in both tasks, and a comparative advantage in cooking ham. e. Bill has a comparative advantage in cooking hams. PART D Multiple Choices 9) During the summer you have made the decision to attend summer school, which precludes you from working at your usual summer job in which you normally earn $6000 for the summer. Your tuition cost is $3000, books and supplies cost $300, and room and board cost $1000. The opportunity cost of attending summer school is A) $10,300 B) $6,000 C) $4,300 D) $3,300 3
10) When university decides to increase the capacity of the football stadium instead of adding to the baseball stadium, it faces the A) What tradeoff. B) How tradeoff C) For whom tradeoff D) Macroeconomic question 11) An autoworker is considered and earns A) Labor; rent B) Entrepreneurship; wages C) Labor; wages D) Capital; rent 12) Which of the following is NOT an example of an opportunity cost? A) By spending Thursday night studying for an economics exam, a student was unable to complete a homework assignment for calculus class. B) Because David used all of his vacation time to paint his house, he was unable to visit the Caribbean last year. C) Because Mary is now being paid a higher wage, she can afford to buy a new car and also she is moving into a bigger apartment. D) By choosing to attend college, Jean was not able to continue working as an electrician; as a result, she gave up more than $85,000 in earnings while she was in college. 13) Which of the following is NOT one of the three big microeconomic questions? A) What goods and services are produced? B) How are goods and services produced? C) For whom are goods and services produced? D) Why are goods and services produced? 14) Consider a constant-slope production possibilities frontier with a vertical intercept of 40 potatoes and a horizontal intercept of 20 tomatoes. The opportunity cost of increasing tomato output from 10 to 11 is A) ½ potato B) 2 potatoes 4
C) 1 potato D) cannot be determined from the information given. trucks A F C B D E cars 15) According to the figure, the point where only cars are produced is A) A B) B C) C D) E 16) According to the figure, the optimal point for the economy is A) A B) B C) F D) indeterminate from the information given 17) According to the figure, which point cannot be obtained with the current state of technology? A) A B) B C) C D) F 18) According to the figure, the point where only trucks are produced is A) A B) B C) C D) E 19) According to the figure, a decrease in unemployment may be represented by the movement from A) B to A B) B to D C) C to D D) A to C 20) According to the figure, as the economy moves from Point A to Point D, the opportunity cost of cars, measured in terms of trucks, A) decreases B) increases C) remains constant D) initially increases, then decreases 21) According to the figure, as the economy moves from Point D to Point A, the opportunity cost of trucks, measured in terms of cars, A) increases B) increases C) remains constant D) initially increases, then decreases 5
22) Refer to the figure. The economy moves from Point B to Point D. This could be explained by A) a reduction in unemployment B) an improvement in technology C) an increase in economic growth D) a change in society s preferences for cars versus trucks. 6