101final2008revised - Eco 101 Final Spring 2008 Prof Dohan...

Eco 101 Final Spring 2008 Prof Dohan Online copy 1
QUEENS COLLEGE, ECO 101, Final Exam Prof. Dohan, Spring 2008
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I. Production Possibility Frontiers and Opportunity Costs
The concept of opportunity costs helps us think about resource allocation in terms of costs to society in real terms of choosing
one good instead of another good if we are at full employment. It also shows that the use of unemployed resources has zero
opportunity cost.
8
pt.
Batavia has a labor force of 6 persons that produces only two types of goods: 1) consumer goods/cars, 2)
machinery/guns. Each type of good uses a fixed amount of specialized resources that can only be used in producing
that good. Only labor can be shifted between the two industries. In the table below, we show the combinations of
consumer goods/cars and machinery/guns when all six workers are fully employed. Thus, when you produce 220
machinery/guns, you have enough labor left to produce 50
goods/cars.
1. Plot the production possibility frontier from this data..
2.
Every country must produce enough machinery to replace the machinery that depreciates (wears out) each year.
Batavia’s economists estimate that they need to produce 110 units of machinery/guns each year to replace the
machinery/guns that
wear out. If they do not replace the machines/guns that
depreciates each year, the production possibility frontier
moves inward and this can produce less. If Batavia wants to grow, they have to produce more than 110 units each
year to add to their capital stock. They know that they are going to have to reduce the production of goods/cars are if
they are going to grow.
Right now B atavia is already producing 60 units of machines & guns on the production possibility frontier.
2a. How many consumer goods/cars are they also producing right now?
2b. If Batavia increase the production of machinery/guns up to the minimum 110 units, how many fewer
goods/cars can they produce?
2c. Identify this starting point as “A” and the point require to replace depreciated machinery/guns as “Min Mach”.
3. If Batavia declares war on its neighbor Zatavez to capture its oil resources, it needs to produce another 70 units
of guns from the machines/guns sector. What is the real cost of the war measured by the decrease in the
production of goods/cars?
4. After winning the war, Batavia still produces only 90 units of consumer goods/cars even though it has cut back
its production of machinery/guns from 180 to 110 units . Plot this combination of outputs on the graph and label
it “R” for recession.