General Business 765, Lecture 3

Spring 2001

Answers to Homework #1

1. All of these terms have been covered in lecture: please consult your notes for definitions. Points awarded on the identification (one point) and the strength of your explanation of the term”s relevance (one point).

2. a. slope = ½; y-intercept = -5

b. slope = 4; y-intercept = 50

c. slope = 2; y-intercept = 24

d. slope = 2; y-intercept = -10

e. slope = -1/3; y-intercept = 10

3. a. (X, Y) = (10, 30)

b. (X, Y) = (231, 44)

c. (X, Y) = 9, -5)

4. Since this economy is not operating on its production possibility frontier it must either be operating inside its PPF which implies that it either has unemployment of resources or underemployment of its resources or it is producing beyond its production possibility frontier which is impossible given this country’s resources, technology and the time period that we are considering. Thus, the economy is producing at a point interior to the PPF and it not only is wasting resources, but the production it is giving up is lost forever. The country should seek to return to producing at a point that lies on its PPF where its resources are fully utilized. The country might want to consider implementing policies that would provide an incentive for employment to increase.

5. Given this country’s technology and the available resources this goal is not attainable: if the country wishes to shift its PPF out to the right it can strive to increase the level of technology available to them, increase its level of resources, or it can alter its current production decisions so that future production possibilities are enhanced (for instance, current production could provide relatively more capital goods and relatively less consumer goods if growth of the PPF is the country’s economic objective).

6. a. The maximum amount of good X this country can produce is 30 units.

b. The maximum amount of good Y this country can produce is 30 units.

c. The slope is equal to –1.

d. Constant opportunity cost

7. a. Uncertain: generally speaking we assume that PPFS are bowed out from the origin for individuals and countries due to specialization of resources: for the sake of simplicity in absolute and comparative advantage problems we assume that PPFs for each country are linear.

b. False. Opportunity cost is due to scarcity of resources: more of one good cannot be produced without less of another good being produced given a fixed level of resources and technology.

c. False. People are confronted with the problem of scarcity constantly and the fact that scarcity implies that there is an opportunity cost associated with every choice we make.

d. False. It is theoretically possible that one country’s PPF will have exactly the same slope as another country’s PPF thereby resulting in no comparative advantage in production for either country.

e. False. The concept of trade-offs is best illustrated by comparing two different points that are each on the PPF.

f. False. A positive viewpoint could support this argument: one need only count the ballots and at the end of counting it George W. Bush has a greater number of votes than does Al Gore than George W. Bush did win the election.

g. False. This is a normative viewpoint that reflects the opinion of the speaker and not objective observation.

h. False. See the article “The Accidental Theorist” in Krugman for an example.

8. Answers will vary.