Assignment 1: Resource Allocation, Trade and Demand
1. An economy has only one member Robinson Crusoe. Robinson allocates his time between fishing and collecting fruits. One hour spent finishing yields 4 fish. One hour spent collecting fruits yields 8 fruits. Robinson decided to work 8 hours a day.
a. Draw Robinson’s daily Production Possibility Frontier (PPF) with the number of fish on the horizontal axis and the number of fruits on the vertical axis. Label your diagram carefully.
b. For each of the following combinations of fruits and fish determine whether it is efficient, feasible or infeasible:
28 fish/day, 16 fruits/day
16 fish/day, 32 fruits/day
18 fish/day, 24 fruits/day
2. Alice and Bob repair computers. It takes Alice 4 hrs. to repair a monitor and 2 hrs. to repair a hard drive (HD). It takes Bob 6 hrs. to repair a monitor and 2 hrs. to repair an HD. Today they have only broken monitors and HDs in their shop and 8 hours to work.
a. Draw two PPFs, one for Alice and one for Bob with the number of HDs repaired on the vertical axis and the number of monitors repaired on the horizontal axis. Label your diagram carefully. (Hint: it is possible to repair only fractions of devices – leaving some work for the next day).
b. What is the opportunity cost of repairing a monitor for Alice and what is the opportunity cost for Bob?
c. If each person specializes in repairing only one device (e.g. Bob repairs only monitors and Alice repairs only HDs), can they repair more devices than they would if each worked on her or his own? For simplicity, assume that half of the total output is attributed to each person, although Alice does relatively more work. Try both scenarios. Show your conclusion using the PPFs you drew in part a. of this question. Explain using the terms “comparative advantage” and “absolute advantage”.
3. Jill and Jack are plumbers. It takes Jack 10 minutes to unclog a drain and 2 minutes to fix a leaking tap. It takes Jill 3 minutes to unclog a drain and 30 seconds to fix a leaking tap. Determine for each of the following statements if it is True or False. (Hint: suppose that each person works for only 1 hour and draw the two PPFs with the number of unclogged drains on the horizontal axis and the number of fixed taps on the vertical axis).
a. Jill has a comparative benefit at fixing leaking taps.
b. Jill has a comparative benefit at all tasks as she can do both of them faster than Jack.
c. Jill has an absolute benefit at unclogging drains and fixing leaking taps, as she can do both of them faster than Jack.
d. Jack has a comparative benefit at unclogging drains.
4. Which of the following shows the law of demand?
a. John buys more pretzels at $1.50 each since he got a $1 raise at work.
b. Melissa buys fewer muffins at $0.75 each than at $1 each.
c. Dave buys more donuts at $0.25 each than at $0.50 each.
d. Kendra buys fewer Snickers at $0.60 each since the price of Milky Way’s fell to $0.50 each.
5. The table shows individual demand schedules for the market.
Price of the Good Aaron Angela Austin Alyssa
$0.00 20 16 10 8
0.50 18 12 6 6
1.00 14 10 2 5
1.50 12 8 0 4
2.00 6 6 0 2
2.50 0 4 0 0
I. When the price of the good is $1.00, the quantity demanded in this market would be
a. 42 units.
b. 31 units.
c. 24 units.
d. 14 units.
II. If the price increases from $1.00 to $1.50,
a. the market demand raises by 20 units.
b. the quantity demanded in market decreases by 2 units.
c. individual demands will raise.
d. the quantity demanded in the market decreases by 7 units.
6. You lose your job and as a result, you purchase fewer mystery books. This shows that you consider mystery books to be a/an
a. normal good.
b. inferior good.
c. luxury good.
d. complementary good.
7. Currently you buy 6 packages of hot dogs a month. You will be graduating in
December and will start your latest job January 2nd. You have no plans to buy hot dogs in January. For you, hot dogs are
a. a "student-only" good.
b. a normal good.
c. an inferior good.
d. a consumer good.
8. Assume that a decrease in price of X results in less of good Y sold. This would mean that X and Y are
a. complement goods.
b. normal goods.
c. inferior goods.
d. substitute goods.
e. unwanted goods.