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midterm practice 1 sol

midterm practice 1 sol - Econ 1 Winter 2008 Dr Narag 1...

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Econ 1 Winter 2008 Dr. Narag 1 Additional Practice Questions: Chapter 1-4 (1) You have recently purchased a large estate in Napa valley and are deciding how to use your land. You can either grow grapes or raise llamas (both of which are actually done in Napa.) Your land includes flat, loamy areas which are excellent for grapes, as well as more rocky, hilly areas which are less good for grapes. Llamas can be grazed on any of the land equally well. You know that you can produce the following combinations of grapes and llamas, depending on how much land you use for grapes and how much for llamas. Llamas Grapes (bushels) 0 125,000 200 115,000 400 95,000 600 70,000 800 40,000 1000 0 a) Draw the production possibility frontier that you face for grapes and llamas. b) You decide to raise 200 llamas and grow 115,000 bushels of grapes. What is the opportunity cost of these 200 llamas?
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Econ 1 Winter 2008 Dr. Narag 2 The opportunity cost of these 200 llamas is the number of bushels of grapes that you must forgo in order to get these 200 llamas. If you weren’t producing any llamas, you could produce 125,000 bushels of grapes. Now you are producing only 115,000. So the opportunity cost of these 200 llamas is 10,000 bushels of grapes. c) Explain why the ppf is bowed outward. The PPF is bowed outward due to the law of increasing opportunity costs. Imagine you are producing at point A in the graph of part a). There you produce only grapes using all of your land. Now you want to consider raising 200 llamas (which means moving to point B). To raise llamas, you must allocate some land for grazing by the llamas and can’t produce grapes on that part of your land. Since llamas graze equally well on any kind of land, you will allocate the areas that are least good for grapes, that is, the rocky, hilly areas; production of grapes will be reduced by only 10,000 bushels. But suppose now that you are producing at point D and want to increase your production of llamas by 200 again. You will have to allocate more land to the grazing of the llamas, probably some of the flat loamy areas since you are already producing 600 llamas.
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