Problem Set 1

(09/16/02)

(Problem sets are not to be turned in. Answers will be given at the end of the week.)

 1. Which of the following is a normative economic statement?

A) Next year’s inflation rate will be under 4 percent.

B) Consumers will buy more gasoline over the Christmas holiday even if the price of gas is 10 cents higher than it was during the Thanksgiving holiday.

C) The government’s cuts in welfare spending impose an unfair hardship on the poor.

D) The current butter surplus is the result of federal policies.

 2. One point on a PPF (point A) shows production levels at 50 tons of coffee and 100 tons of bananas. Remaining on the PPF, an increase of banana production to 140 tons shows coffee production at 30 tons (point B). Still remaining on the PPF, we see that coffee production at 10 tons allows banana production at 160 tons (point C). The opportunity cost of a ton of bananas is

(You can assume the PPF between AB and BC is linear if necessary) 

A) constant because coffee production decreased by the same amount each time.

B) decreasing, since the increase in banana production is less at each successive point considered (point A to B to C).

C) 16 to 1, that is for every 1 ton of coffee given up banana production will increase by 16 tons.

D) increasing from 1/2 ton of coffee to 1 ton of coffee per ton of bananas as production moves from point A to B to C. 

3.A factory produces both CD players and radios. A technological advance makes it possible to produce more CD players without increasing the amount of labor or capital used to produce them. There is no technological advance in radio making.

The factory continues to produce both CD players and radios. As a result of the technological advance, the factory can 

A) produce more CD players at a lower opportunity cost but cannot produce more radios.

B) produce more CD players at a higher opportunity cost, but cannot produce more radios.

C) produce more CD players and radios, and the opportunity cost of producing radios is generally lower.

D) produce more CD players and radios, but the opportunity cost of producing radios is generally higher.

4.On the same coordinate graph,

a) graph the line given by the equation y=5-3x, with y on the vertical axis.

b) graph the line given by the equation x=3+y, with y on the vertical axis.

c) find the y-intercept for both lines.

d) solve algebraically for the values of x and y where these two lines cross.

e) find the equation for the line with the same slope as the one in part a, but having a y-intercept that is 5 units higher. Graph this line along with the others. 

5. Two people, Bill and Tom, can produce either apples or oranges. Their production abilities are illustrated in the table. Assume both of them can work up to10 hours a day. If they work less than 10 hours, the time left has no value. Assume there is no trade between them. 

	Apples/hour	Oranges/hour
Bill	6	3
Tom	6	1

 Currently Bill is producing 36 apples and 9 oranges while Tom is producing 30 apples and 5 oranges everyday.

a) Graph the PPFs for Bill and Tom respectively (for one day with 10 hours of work). Put apples on the vertical axis and oranges on the horizontal axis.

b) Do Bill and Tom work efficiently in terms of their utilization of their own resources?

 Now assume both of them are producing on their PPFs:

c) What is the opportunity cost of producing one more apple for Bill?

d) What is the opportunity cost of producing one more orange for Bill?

e) What is the opportunity cost of producing one more apple for Tom?

f) What is the opportunity cost of producing one more orange for Tom?

g) Who has the absolute advantage in producing oranges?

h) Who has the comparative advantage in producing oranges?