Economics (ECON) Work

Name_____________________________________________

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Portland State University Department of Economics EC 201 – Principles of Microeconomics Summer 2015 Instructor: Chantha Kim

Homework # 1*

Due 7/2/2015

 

1. Refer to Figure 1 below to answer the following,

 

a. At which point(s) is this society producing some of each type of output but still producing

inefficiently?

 

 

b. At which point(s) is this society producing efficiently with the available resources and

technology?

 

 

c. At which point(s) is the output combination currently unattainable with current available

resources and technology?

 

 

Figure 1 Production Possibilities for Trucks and Tanks

 

*Please complete ALL problems in this homework assignment, however, only 2-3 problems will be chosen to count towards

your Homework 1 score.

 

 

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2. Suppose that a society’s production possibilities is as follows.

Output per year

Possibility Food

(units)

Tractors

(units) A 0 and 30

B 4 and 28

C 8 and 25

D 12 and 21

E 16 and 15

F 20 and 8

G 24 and 0

 

 

a. Plot the PPF for this society in the graph below.

 

b. Is it possible for this society to produce 30 units of food per year?

 

 

c. Is it possible for this society to produce 30 units of tractors per year?

 

 

d. Suppose this society produces 20 units of food and 4 units of tractors per year. Is it operating on

the PPF? If not, what factors might account for this?

 

 

 

 

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e. Assume that you are operating at Possibility A. Interpolating from the table, what is the

opportunity cost of producing one additional unit of food?

 

 

 

 

 

f. Assume, instead, that you are operating at Possibility F. Interpolating from the table, what is the

opportunity cost of producing one additional unit of food?

 

 

 

 

 

 

3. Classify each of the following statements as positive or normative.

 

 

a. If the price of a product in a market decreases, then, other things equal, quantity demanded will increase.

b. There is a tradeoff between inflation and unemployment in the short run.

c. The U.S. income distribution is not fair.

d. U.S. workers deserve more liberal unemployment benefits.

e. If welfare benefits were reduced, then the country would be better off.

 

 

 

 

 

 

 

 

 

 

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4. Find the slope of the line connecting the points (6, 3) and ( 4,2) .

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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5. With a given amount of resources, Portugal’s and England’s production possibilities of cloth and wine

are given below. Answer the following questions using information derived from the table.

Portugal

 

England

Cloth Wine Cloth Wine

10 0 6 0

9 1 5 0.5

8 2 4 1

7 3 3 1.5

6 4 2 2

5 5 1 2.5

4 6 0 3

3 7

2 8

1 9

0 10

 

a. Referring to the table above, which country has an absolute advantage in the production of cloth?

 

 

 

b. Referring to the table above, which country has an absolute advantage in the production of wine?

 

 

 

c. Calculate the opportunity costs of one cloth and one wine for both Portugal and England.

Opportunity

cost of one Portugal England

Cloth

Wine

 

d. Which country has a comparative advantage, and therefore should specialize, in the production of

cloth?

 

 

 

e. Which country has a comparative advantage, and therefore should specialize, in the production of

wine?

 

 

 

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6. Alpha and Beta, two tiny islands off the east coast of Tricoli, produce pearls and pineapples. The following production possibilities schedules describe their potential output in tons per year:

 

 

 

 

 

a. Graph the PPF for each island in the figures above.

b. What is the opportunity cost of producing one additional pearl in Alpha? c. What is the opportunity cost of production one additional pearl in Beta?

 

 

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d. Which island has the absolute advantage in the production of pearls? e. Which island has the comparative advantage in the production of pearls? f. If Beta used all of its resources to produce only pearls, how many could it produce?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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[Bonus Question, 1 point extra credit]

The only two countries in the world, Alpha and Omega, face the following production possibilities

frontiers.

Alpha’s Production Possibilities Frontier Omega’s Production Possibilities Frontier

 

a. Assume that each country decides to use half of its resources in the production of each good.

Show these points on the graphs for each country as point A.

 

 

b. If these countries choose not to trade, what would be the total world production of popcorn and

peanuts?

 

 

 

c. Now suppose that each country decides to specialize in the good in which each has a comparative

advantage and produces only that good. By specializing, what is the total world production of each

product now?

 

 

 

d. Assume each country fully utilizes all of its resources to produce only the good in which it has a

comparative advantage. If each country decides to trade 100 units of popcorn for 100 units of

peanuts, show on the graphs the gain each country would receive from trade. Label these points B.

 

 

25 50 75 100 125 150 175 200 225 250 peanuts

25

50

75

100

125

150

175

200

225

250

275

300

popcorn

25 50 75 100 125 150 175 200 225 peanuts

25

50

75

100

125

150

175

200

225

250

275

300

popcorn