ECON 103

Question 1

Below is a production possibilities table for consumer goods (automobiles) and capital goods (forklifts):

Type of Production	Production Alternatives
	A	B	C	D	E
Automobiles Forklifts	0 30	2 27	4 21	6 12	8 0

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?  Explain how the production possibilities curve reflects the law of increasing opportunity costs.

c. If the economy characterized by this production possibilities table and curve were producing 3 automobiles and 20 fork lifts, what could you conclude about its use of available resources?

d. What would production at a point outside the production possibilities curve indicate? What must occur before the economy can attain such a level of production?

Question 2

Explain how (if at all) each of the following affects the location of a country’s production possibilities curve:

a. The quality of education increases.

b. The number of unemployed workers increases.

c. A new technique improves the efficiency of extracting iron from ore.

d. A devastating earthquake destroys numerous production facilities.

Question 3

What effect will each of the following have on the demand for small automobiles such as the Mini Cooper and Smart car?

a. Small automobiles become more fashionable.

b. The price of large automobiles rises (with the price of small autos remaining the same).

c. Income declines and small autos are an inferior good.

d. Consumers anticipate the price of small autos will greatly come down in the near future.

e. The price of gasoline substantially drops.

Question 4

What effect will each of the following have on the supply of automobile tires?

a. A technological advance in the methods of producing tires.

b. A decline in the number of firms in the tire industry.

c. An increase in the price of rubber used in the production of tires.

d. The expectation that the equilibrium price of auto tires will be lower in the future than it is currently.

e. A decline in the price of large tires used for semi-trucks and earth hauling rigs (with no change in the price of auto tires). 

f. The levying of a per-unit tax in each auto tire sold.

g. The granting of a 50-cent-per-unit subsidy for each auto tire produced.

Question 5

How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market; that is do price and quantity rise, fall, remain unchanged, or are the answers indeterminate because they depend on the magnitudes of the shifts? Use supply and demand diagrams to verify your answers.

a. Supply decreases and demand is constant.

b. Demand decreases and supply is constant.

c. Supply increases and demand is constant.

d. Demand increases and supply increases.

e. Demand increases and supply is constant.

f. Supply increases and demand decreases.

g. Demand increases and supply decreases.

h. Demand decreases and supply decreases.

Question 6

You are told that a 10 percent increase in the price of a good has led to a 1 percent increase in the quantity supplied of the good after one month and a 25 percent increase in the quantity supplied after one year.

a. Is the supply of this good elastic, unit elastic, or inelastic after one month? Is this good likely to be produced using factors of production that are easily obtained? What is the price elasticity of supply of this good?

b. What is the elasticity of supply of this good after one year? Has the supply of this good become more elastic or less elastic? Why?

Question 7

The demand schedule for computer chips is given in the table.

Price (dollars per chip)	Quantity demanded (millions of chips per year)
200	50
250	45
300	40
350	35
400	30

a. What happens to total revenue if the price falls from $400 to $350 a chip?

b. What happens to total revenue if the price falls from $350 to $300 a chip?

c. At what price is total revenue at a maximum?

d. At an average price of $350, is the demand for chips elastic, inelastic, or unit elastic? Use the total revenue test to answer this question.

e. At $250 a chip, is the demand for chips elastic or inelastic? Use the total revenue test to answer this question.

Question 8

The table gives the supply schedule of long distance phone calls. Calculate the elasticity of supply when

Price (cents per minute)	Quantity supplied (millions of minutes per day)
10	200
20	400
30	600
40	800

a. The price falls from 40 cents to 30 cents a minute.

b. The average price is 20 cents a minute.

 

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