ECO 201 Problems Chapter 1, Fall 2013

Handout Chapter 1: Limits, Alternatives, and Choices TEXTBOOK: QUESTIONS (1,5,7) PROBLEM 1: Below is a production possibilities table for consumer goods (automobiles) and capital goods (Forklifts) Type of Production Production Alternatives A B C D E Automobiles 0 2 4 6 8 Forklifts 30 27 21 12 0 1. Show these data graphically. Upon what specific assumptions is this production possibilities curve based? 2. If the economy is at point C, what is the cost of two more automobiles? Of six more forklifts? Explain how the production possibilities curve reflects the law of increasing opportunity costs. 3. If the economy characterized by this production possibilities table and curve were producing 3 automobiles and 20 fork lifts, what could you conclude about its use of available resources? 4. What would production at a point outside the production possibilities curve indicate? What must occur before the economy can attain such a level of production? 5. Suppose improvement occurs in the technology of producing forklifts but not in the technology of producing automobiles. Draw the new production possibilities curve. Now assume that a technological advance occurs in producing automobiles but not in producing forklifts. Draw the new production possibilities curve. Now draw a production possibilities curve that reflects technological improvement in the production of both products. 6. Explain how (if at all) each of the following affects the location of a country’s production possibilities curve: a. The quality of education increases. b. The number of unemployed workers increases. c. A devastating earthquake destroys numerous production facilities. PROBLEM 2: The following data show the different combinations of coffee and cars that can be produced by an economy, given a particular amount of resources, and a particular state of technology. Draw the corresponding production possibility frontier to answer the questions below: Type of Production Production Alternatives A B C D E F Coffee (tons) 100 80 60 40 20 0 Cars (units) 0 8 12 15 17 18 1. Given the production possibility frontier above, can the economy produce the combination of 50 tons of coffee and 5 units of cars? What does this combination suggest about the use of the resources? Are they fully utilized? 2. Given the production possibility frontier above, can the economy produce the combination of 80 tons of coffee and 12 units of cars, and why? 3. What is the opportunity cost of increasing coffee production from 40 to 60 tons per year, assuming that resources are fully utilized? 4. What would be the cost of producing 3 additional units of cars if this economy were currently producing 80 tons of coffee and 5 units of car? Explain. 5. What would happen to the production possibility frontier if a new production technique allows cars production to double? On the same graph, draw the new production possibility frontier. 6. What would happen to the production possibility frontier, if the resources available to the economy were to increase? Explain. PROBLEM 3: You can either spend Spring Break working for $80 per day for five days or go to Italy for the week. If you stay home and work, your expenses will total about $100. If you go to Italy, the airfare, hotel, food, and miscellaneous expenses will be about $700. What’s your opportunity cost of going to Italy?