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Problem Set #2

# Problem Set #2 - ECON 162B-90 91 Fall 2007 PROBLEM SET...

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ECON 162B-90, 91 Allison Kim Fall 2007 due: September 21 PROBLEM SET NUMBER TWO 1. Suppose that you are planning a Halloween party where you will serve doughnuts and apple cider. You have two hours to prepare for the party. Suppose that in one hour you can produce ten doughnuts or two gallons of apple cider. a. Draw your production possibilities curve for two hours of time. Put doughnuts on the vertical axis. Why is your PPC linear? See attached. b. On a separate graph, show the effect of increasing your amount of time from two hours to three hours. Draw both the original and new PPCs. See attached. c. Going back to two hours of time, suppose that you invent an apple press that doubles the amount of cider you can produce per hour. How does the PPC change? Draw both the original and new PPCs. See attached. 2. Your roommate Pat decides to help with the party. The amounts of doughnuts and apple cider which can be produced in an hour (if all resources are devoted to that good) are shown by the following table: YOU PAT DOUGHNUTS PER HOUR 10 3 CIDER PER HOUR 2 1 where cider is measured in gallons and doughnuts are measured individually. a. Who is more efficient at producing doughnuts? Cider? I am more efficient at producing donuts and Pat is more efficient at producing cider. b. For you, what is the opportunity cost of doughnuts? Of cider? For me, the opportunity cost of donuts is 1/5 a gallon of cider, and the opportunity cost of cider is 5 donuts. c. For Pat, what is the opportunity cost of doughnuts? Of cider?

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Problem Set #2 - ECON 162B-90 91 Fall 2007 PROBLEM SET...

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