Assignment:
Problem 1
Based on the following PPF table indicating the combination of goods produced by the Athletic Country:
|
Bats
|
Rackets
|
|
0
|
420
|
|
100
|
400
|
|
200
|
360
|
|
300
|
300
|
|
400
|
200
|
|
500
|
0
|
(a) Plotting rackets on the vertical axis and bats on the horizontal axis, draw the PPF for the Athletic Country.
(b) If Athletic Country currently produces 100 bats and 400 rackets, what is the opportunity cost of an additional 100 bats?
(c) If Athletic Country currently produces 300 bats and 300 rackets, what is the opportunity cost of an additional 100 bats?
(d) Why does the additional production of 100 bats in (c) cause a greater tradeoff than the additional production of 100 bats in (b)?
(e) Is the production of 200 bats and 200 rackets efficient? Explain.
(f) How would the PPF shift if the Athletic country were to experience technological innovation only in the production of bats? Show your answer in the graph plotted in (a).
Problem 2
Consider the market for eggs. For each of the events listed here,
1) State which of the determinants of market demand or supply is affected;
2) Indicate whether demand or supply increases or decreases, and show it on a diagram;
3) Indicate the effect on the equilibrium price and quantity of eggs and show it on your diagram.
(a) The surgeon general warns that high-cholesterol foods cause heart attack;
(b) The price of bacon, a complementary good, decreases;
(c) The price of chicken feed increases;
(d) A technological innovation reduces egg breakage during packing.
Problem 3
The following table gives hypothetical data for the quantity of two-bedroom rental apartments demanded and supplied in Peoria, Illinois:
|
Price (Monthly Rent)
|
Quantity demanded (thousands)
|
Quantity Supplied (thousands)
|
|
$800
|
30
|
10
|
|
$1,000
|
25
|
14
|
|
$1,200
|
22
|
17
|
|
$1,400
|
19
|
19
|
|
$1,600
|
17
|
21
|
|
$1,800
|
15
|
22
|
(a) Graph the demand and supply curves;
(b) Find the equilibrium price and quantity;
(c) If the actual price in this market were above the equilibrium price, what would be observed in the market? What would drive the market toward the equilibrium?
(d) If the actual price in this market were below the equilibrium price, what would be observed in the market? What would drive the market toward the equilibrium?
Problem 4
Do you agree or disagree with each of the following statements? Briefly explain your answers and illustrate each with supply and demand curves.
(a) The price of a good rises, causing the demand for another good to fall. Therefore, the two goods are substitutes.
(b) An increase in supply causes the price of a good to fall.
(c) During 2009, incomes fell sharply for many Americans. This change would likely lead to a decrease in the prices of both normal and inferior goods.
(d) Two normal goods cannot be substitutes for each other.
(e) If demand increases and supply increases at the same time, the equilibrium price will clearly rise.
(f) The price of good A falls. This causes an increase in the price of good B. Therefore, goods A and B are complements.