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Problem Set 1 - Principles of Microeconomics | ECON 206, Assignments of Microeconomics

Shepherd UniversityMicroeconomics

Material Type: Assignment; Class: Prin of Microeconomics; Subject: Economics; University: Shepherd University; Term: Spring 2009;

Typology: Assignments

Pre 2010

Uploaded on 08/19/2009

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koofers-user-e3p 🇺🇸

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PROBLEM SET 1
Problems for Chapters 1 and 3
1. Assume that the schedule below describes the production possibilities
confronting and economy.
Potential Weekly Output Combinations Using All Resources
Pianos Stereos
A 10 0
B 9 1
C 7 2
D 4 3
E 0 4
Using the information in the table:
a. Draw the production possibilities curve on a diagram like that below.
Pianos
Stereos
Be sure to label each alternative output combination (A through E).
b. Calculate and illustrate on your graph the opportunity cost of producing
one stereo per week.
c. What is the cost of producing a second stereo? What accounts for the
difference in the opportunity costs of the first and the second stereo?
d. Which point on the curve is the most desired one? How will we find
out?
e. What would happen to the production possibilities curve if additional
factors of production became available? Illustrate.
pf3
pf4
pf5
pf8
pf9

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PROBLEM SET 1

Problems for Chapters 1 and 3

  1. Assume that the schedule below describes the production possibilities confronting and economy. Potential Weekly Output Combinations Using All Resources Pianos Stereos A 10 0 B 9 1 C 7 2 D 4 3 E 0 4 Using the information in the table: a. Draw the production possibilities curve on a diagram like that below. Pianos Stereos Be sure to label each alternative output combination (A through E). b. Calculate and illustrate on your graph the opportunity cost of producing one stereo per week. c. What is the cost of producing a second stereo? What accounts for the difference in the opportunity costs of the first and the second stereo? d. Which point on the curve is the most desired one? How will we find out? e. What would happen to the production possibilities curve if additional factors of production became available? Illustrate.
  1. Engineers are in short supply in the United States. This forces a choice between employing engineers to produce defense goods and employing them as professors to educate students. Suppose the schedule below describes the tradeoff between the number of students trained by scientists each year and the number of defense programs undertaken. Potential Annual Output Combinations Using All Resources Number of students (millions per year) Number of defense programs A 0 27 B 2 24 C 4 18 D 6 10 E 8 0 a. Draw the production possibilities curve showing the tradeoff between the number of students educated and the number of defense programs on a graph like that below. Number of defense programs Number of students Label each of the five output combinations (A through E). b. Calculate and illustrate on your production possibilities curve the opportunity cost of educating 2 million students (rather than 0), of increasing the number students from 2 million to 4 million, of increasing the number students from 4 million to 6 million, and of increasing the number students from 6 million to 8 million students per year. c. Why does the opportunity cost change?
  1. The following events shift either the supply or demand curve for American-made sedan-type automobiles. For each event, draw an initial set of market supply and demand curves. Then illustrate each of the following events, labeling the new equilibrium price and quantity. a. In 1929 a depression began in the United States that severely curtailed purchases of automobiles. b. Serious strikes hit the auto industry during the 1930’s. c. During World War II, producers of automobiles converted their factories to production of tanks and other vehicles for the military. d. In the 1960’s small, cheap foreign cars began to appear and gain market share in the U.S. e. In 1973 and again in 1978, oil prices rose dramatically. ( HINT : Think about what happens to the price of gasoline, a good that complements automobiles). f. From 1982 to 1985, the U.S. government used import quotas to restrict the number of cars that Americans could buy from Japanese producers. g. To gear up to compete with foreign automobile producers, American car producers began to automate so as to increase productivity in the automobile industry. h. Pickup trucks, minivans, and recreation vehicles gained popularity in the 1980’s and many families bought such vehicles rather than sedan- type automobiles. TEXTBOOK, p. P2 (colored pages in back of book): #7; p. P5: #3, P6: #

SELECTED ANSWERS

  1. a. Pianos A 10 E 0 4 Stereos b. Opportunity cost of first stereo = 1 piano. c. Opportunity cost of second stereo = 2 pianos. Reason for difference: resources are not perfectly suited to each industry. d. All are equally desirable in the sense that they are efficient. Society must choose which point to produce, and, by definition, the point society chooses to produce must be the most desirable. e. Pianos A 10 E 0 4 Stereos
  2. a. Number of defense programs A 27 E 0 8 Number of students b. Opportunity cost of 0-2 million students = 3 defense programs. Opportunity cost of 2-4 million students = 6 defense programs. Opportunity cost of 4-6 million students = 8 defense programs. Opportunity cost of 6-8 million students = 10 defense programs. c. See answer to #1c.

III. Price (P) S P 1 A D Q 1 Quantity (Q) IV. Price (P) S P 1 A D Q 1 Quantity (Q)

  1. The situation indicates that there is excess demand for (a shortage of) tickets at the price of $35. Thus, $35 is not the equilibrium price. The equilibrium price would be above $35. Price (P) S P 1 A $35 (^) excess demand D QS Q 1 QD Quantity (Q) Equil. price

Result (see graphs in answer to #3)) Graphic Change Change in Equilibrium Price Change in Equilibrium Quantity a. II Demand curve shifts left decrease decrease b. IV Supply curve shifts left increase decrease c. IV Supply curve shifts left increase decrease d. II Demand curve shifts left decrease decrease e. II Demand curve shifts left decrease decrease f. I Demand curve shifts right increase increase g. III Supply curve shifts right decrease increase h. II Demand curve shifts left decrease decrease