ps4key08 - Answer Key for PS4 Prof Shea Spring 2008 1(a...

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Answer Key for PS4 Prof. Shea Spring 2008 1. (a). Severe flooding destroys the output of farms in California The flood destroys the farm output. Then given the same hours worked, the economy will produce less output. As a result, the production possibility frontier (PPF) of the economy will pivot inside, as shown in the figure above. Along this new PPF, the society will choose a different bundle of output and leisure (e.g. from A to B). Therefore, both output and employment change, but the sign and amount of this change will depend on the social preference. I have drawn the picture so that output and leisure both go down (and employment goes up). (b) A new machine is invented that converts ordinary water into power This is a technology shock to the economy. Water, as a kind of new energy, can contribute to Leisure Output PPF A B Leisure Output PPF B A
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production more. Then, the PPF will pivot outside. The society will choose a new output and leisure combination on the new PPF (from A to B). Nevertheless, where B is located will be determined by PPF and social preference together. I have drawn the picture so that output and leisure both go up (and employment goes down).
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