Find the opportunity cost of an additional shirt and the opportunity cost of an additional belt if the economy is currently producing 100 shirts and 150 belts. (1 point)
ECO 304K
INTRO MICRO
FALL 2014
Hickenbottom
HOMEWORK #1
(Due September 17th at 11am)
1. The country of Remulak, with fixed resources and state of technology, can produce the following combination of shirts and pants.
SHIRTS BELTS SHIRTS BELTS SHIRTS BELTS
180 0 120 120 60 195
160 45 100 150 40 210
140 85 80 175 20 220
0 225
a) Find the opportunity cost of an additional shirt and the opportunity cost of an additional belt if the economy is currently producing 100 shirts and 150 belts. (1 point)
b) Draw the PPF with shirts graphed on the
horizontal axis.
Find the MRT for the PPF between shirt production of 80 and 100. Explain why this answer is consistent with
your answer to (a). (1 point)
2. There is an economy consisting of only two people, Fred and Robin, who produce and consume two goods: gallons of juice and gallons of beer. In 1 week, Robin can produce 25 gallons of juice or 5 gallons of beer. Fred can produce 12 gallons of juice or 4 gallons of beer. Assume both goods can be produced in continuous quantities.
- Determine who has the comparative advantage in each good. Show the numbers that led to this conclusion. (1 point)
- Draw the PPF for the economy with gallons of juice on the vertical axis. Be sure to specifically label both intercepts, give the MRT at every point and give the specific coordinates of any point where the MRT changes. (1 point)
- Explain why Robin having 18 gallons of juice and 2 gallons of beer and Fred having 10 gallons of juice and 1 gallon of beer is not possible without trade. Give the production of each person and the trade that makes this outcome possible. (1 point)
3. The wood used to make pickets for wooden fences usually comes from soft wood trees like pine. Wooden fence posts come from harder woods since they must be more durable. An infestation of bark beetles has killed hundreds of thousands of pine trees in the US. The bark beetle only attacks pine trees.
- Draw a supply and demand diagram to show the effect of this information on the market for wooden fence pickets. Be specific about which curve you shifted, why you shifted it, and what happens to the equilibrium price and quantity of pickets. (1 point)
- Given your conclusion in (a), draw a supply and demand diagram to show the effect of this information on the market for wooden fence posts, and chain link fence (note: This requires two new pictures). For each market, be specific about which curve you shifted, why you shifted it, and what happens to the equilibrium price and quantity for of the good in that market. (2 points)
4. Bill Clinton and Donald Trump are the only two people in the world who buy silk, red boxers with the custom made “peek-a-boo” flap. Each person’s current demand for these boxers, as well as the market supply is given below:
Bill The Donald Supply
P Q P Q P Q
10 1 10 3 2 1
8 2 8 5 4 3
6 3 6 7 6 5
4 4 4 9 8 7
2 5 2 11 10 9
a) Draw a picture of the market demand and supply. Find the equilibrium price and quantity. (1 point)
b) Assume that Bill’s demand, and the market supply remains the same, but a severe downturn in the real estate market changes Trump’s demand. As a result of this change, the new market price becomes 6. Explain in general, what happened to The Donald’s demand and why. Then find a specific value for his quantity demanded at the new equilibrium price. Does this data indicate that the boxers are a normal or inferior good for Mr. Trump? Why? (1 point)
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