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Limits Alternatives and Choices

  1. To the right is a production possibilities table for consumer goods (automobiles) and capital goods ( forklifts) :

a . Show these data graphically . Upon what specific assumptions is this production possibilities curve based ?

b. If the economy is at point C , What is the cost of one more automobile ? Of one more forklift ? Which characteristics
of the production possibilitiescurve reflects the law of increasing opportunity cost : its shape or its length ?

c . If the economy characterizedby this productin possibilities table and curve were producing 3 automobiles and 20 forklifts , what could you conclude about its use of its available resources ?

d . Is production at a point outside the production possibilities curve currently possible ? Could a future advance in technology allow production beyond the current production possibilities curve ? Could international trade allow a country to consume beyond its current production possibilities curve ?

PRODUCTION ALTERNATIVES

Type of Production ABC D E
Automobiles 02468
Forklifts302721120

SAMPLE ANSWER:

The two main determinants of the position of the PPC at any given time are the state of technology and management expertise (which are reflected in the available production functions) and the available quantities and productivity of factors of production. Only points on or within a PPC are actually possible to achieve in the short run. In the long run, if technology improves or if the productivity or supply of factors of production increases, the economy’s capacity to produce
both goods increases, i.e., economic growth occurs. This increase is shown by a shift of the production-possibility frontier to the right. Conversely, a natural, military or ecological disaster might move the PPF to the left, in response to a reduction in an economy’s productivity. Thus all points on or within the curve is part of the production set, i.e., combinations of goods that the economy could potentially produce.

3 . Look back at the figure 2 , which shows the inverse relationship between ticket prices and game attendance at Gigantic State University .

a . Ineterpret the meaning of both the slope and the intercept .

b . If the slope of the line were steeper , what would that say about the amount by which ticket sales respond to increases in ticket prices ?

c . If the slope of the line stayed the samebut the intercept increased , what can you say about the amount by which ticket sales respond to increases in ticket prices ?

4 . Let’s put dollar amounts on the flows in the circular flow diagram of figure 2.2.

a . Suppose that business buy a total of $ 100 billion of the four resources ( labor , land , capital and entrepreneurial ability ) from households . If households recieve $ 60 billion in wages , $ 10 billion in rent and $ 20 billion in interest , how muchare households paid for providing entreprencurial ability ?

b . If household spend $ 55 billion on goods and $ 45 billion on services , how much in revenues do business recieve in the product market ?

7 . Suppose that the demand and supply schedules for rental apartments in the city of gotham are as given in the table below .

Monthly rent Apartments DemandedApartments Supplied
$250010,00015,000
200012,50012,500
150015,00010,000
100017,5007,500
50020,0005000

a . What is the market equilibrium rental price per month and the market equilibrium number of apartments demanded and supplied?

b . If the local government can enforce a rent – control law that sets the maximum monthly rent at $ 1500 , will there be a surplus or asortage? Of how many units ? And how many units willactually be rented each month?

c . Suppose that a new government is elected that wants to keep out the poor . It declares that the minimum rent that can be enforce that price floor , will there be a surplus or a shortage ? Of how many units ? And how many units willactually be rented each month ?

d . Suppose that the government wishes to decrease the market equilibrium monthly rent by increasing the supply of housing . Assuming that demand remains unchanged , by how many units of housing would the government have to increase the supply of housing in order to get the market equilibrium rental price to fall to $ 1500 per month ? To $1000 per month ? To $ 1000 per month ? To $ 500 per month .

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