The following table describes the production possibilities

Economics 1301 Professor G. Mongiovi

Homework Exercise 1 Spring 2016
Due: Tuesday March 1

1. The following table describes the production possibilities for a particular economy:

Opp. cost of a

Opp. cost of a

Production

unit of good 2 in

unit of good 1 in

alternative

Good 1

Good2

terms of good 1

terms of good 2

A

650

0

B

600

200

C

500

400

D

300

600

E

0

800

Calculate the opportunity costs of the two goods and fill in the last two columns of the table. Graph the Production Possibility Frontier for this economy. Starting from position C, what is the opportunity cost of producing one additional unit of good 2? Starting from production alternative C, what is the opportunity cost of producing an additional unit of good 1? Starting at production alternative B, what is the opportunity cost of an additional unit of good 2?

2. Use supply & demand curves to explain what might happen in the market for bicycles if the price of gasoline increases.

3. The demand curve for a particular good is given by the equation Qd = 5000 – 20P. The supply curve is Qs = –500 + 30P. What are the equilibrium price and quantity for this product. Use a diagram to illustrate the solution. If the supply curve shifts to Qs = –200 + 30P, what will be the new solution? In the same diagram, illustrate the change in the equilibrium position.

4. Two countries are capable of producing corn and blankets. Let’s assume they can produce the two goods using labor alone, and that each country has at its disposal 100 units of labor. In Country A, the production of a ton of corn requires 10 units of labor per year, and the production of ton of blankets requires 5 units of labor per year. In Country B, the production of a ton of corn requires 6.25 units of labor per year, and the production of ton of blankets requires 10 units of labor per year. (i) Draw the production possibilities frontiers for the two countries, and the global production possibilities frontier for the combined activity of the two economies. (ii) Identify the comparative advantage of each country, explaining how you arrived at your answer.