S. Payesteh ECO 203/204 Name _____________________

Homework #1

1. A production possibilities curve shows the amount of output:

a) an economy should produce
b) an economy could produce
c) consumers want to consume
d) producers want to produce

2. An economy producing a bundle inside its production possibilities curve is experiencing:

a) equilibrium
b) inflation
c) inefficient production
d) a deficit

3. Which of the following is most likely to cause a production possibilities curve to shift outward?

a) an increase in the education level of the population
b) a reduction in the production of capital goods
c) an increase in the production of consumption goods
d) a decrease in the unemployment rate of the economy

4. When an economy is on its production possibilities curve, increasing the production of one good:

a) shifts the production possibilities curve outward
b) shifts the production possibilities curve inward
c) reduces the unemployment rate
d) reduces the amount of the other good the economy can produce

5. When an economy’s resources are specialized, its production possibilities curve:

a) does not exist
b) is a downward-sloping straight line
c) is bowed
d) is upward sloping

6. An outward shift of an economy’s production possibilities curve is called:

a) lower unemployment
b) higher unemployment
c) increasing costs
d) economic growth

7. The best bundle for an economy to produce on its production possibilities curve is:

a) the bundle on the vertical axis
b) the bundle on the horizontal axis
c) the bundle in the middle of the production possibilities curve
d) something the production possibilities curve cannot determine

PROBLEMS

1.

The following data are combinations of two goods—guns and butter—that the economy of the United States of Econ (USE) can produce.

a) Plot the combinations of guns and butter on Figure 2.1. Label each point with its appropriate letter. Draw a production possibilities curve that has the typical “bowed” shaped and that goes through the most points. (Hint: The production possibilities curve will not go through all the points).

b) Which point represents a combination where there is unemployment?__________________

c) What is the opportunity cost of increasing the production of guns from 500 to 700? From 700 to 900? ____________________________________________

d) Which combination is better: B or D? C or F? _____________________________

e) Find a combination of guns and butter that the economy could not produce. Label it point G.

2. Beginning with the production possibilities curve in Figure 2.2, draw the new production possibilities curve after there has been a technological improvement that benefits only the wheat industry.

3. a) Using the production possibilities curve in Figure 2.3, what is the opportunity cost of increasing the production of bolts from 50 to 60? From 60 to 70? ______________________________________

b) What is different about the resources in the economies pictured in figure 2.3 and Figure 2.1?

_____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

ECO 203/204 Homework #1

4. a) The countries of Blue and Gold are identical in all respects in terms of how each country allocates its resources. Their identical production possibilities curves are pictured below. Blue and Gold are currently producing at point A on their respective production possibilities curves. Which economy will probably experience greater economic growth in the future? Explain. ____________________________

b) If the slower growing of the two countries wants to grow as fast as the faster growing one, what does it need to do with its resources? Indicate this on the country’s production possibilities curve in the graph below and designate the new point B. Also, indicate the opportunity cost of the decision to grow faster.

5. In the examples below, calculate the opportunity cost of producing each good in each economy and determine which economy has the comparative advantage in the production of each commodity?

a) In Italy each unit of labor can produce 1 carrot or 4 cucumbers. In France each unit of labor produces 2 carrots or 4 cucumbers.

b) A worker in Brazil can produce 5 pounds of coffee or 10 bushels of wheat, and a worker in Argentina can produce 2 pounds of coffee or 6 bushels of wheat.

c) An hour of work in Germany can produce 3 cakes or 3 tires, and in Sweden an hour of work produces 2 cakes or 4 tires.

6. Assume an individual worker in Spain is able to produce 2 hats or 2 belts and there are 200 such workers in Spain. In Portugal, an individual worker can produce 1 hat or 4 belts. There are also 200 workers in Portugal.

a) If Spain and Portugal initially do not trade and if half of the workers in each country are in hat production and the other half are in belt production, how many hats and belts would each economy produce?

b) Once Spain and Portugal agree to trade, which good does Spain specialize in and which good does Portugal specialize in? Explain.

c) Assume Spain uses all of its 200 workers to produce the good for which it has a comparative advantage and Portugal does the same with its 200 workers. Then Spain sends half of its output to Portugal in exchange for half of Portugal’s output. How many hats and belts do Spain and Portugal end up with?