Ec5p012007-1 - Economics 5 Principles of Economics D...

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Economics 5 D. Richards Principles of Economics Fall, 2007 First Problem Set Questions 1 and 2 refer to the following figure. Capital Goods A B Consumer Goods 1. What is happening to the opportunity cost (in terms of capital goods) of producing consumer goods as we move production from Point A to Point B? The opportunity cost is decreasing as production moves from Point A to Point B 2. Suppose the economy is at point A and an innovation occurs that increases the maximum amount of consumer goods that society can produce. How do you think the relative price of consumer goods will change? The relative price of consumer goods will decrease. Questions 3 through 5 refer to the following diagram: $/unit 90 S 40 10 D 90 Quantity of Widgets 3. Determine: a. the price and quantity sold in the market equilibrium; P= $30, Q = 60 b. the amount of consumer surplus at this equilibrium; and 20 x 60 / 2 = $1800 Curved Surface is Original PPF
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c. the amount of producer surplus at this equilibrium. 60 x 60 / 2 =$600 4. For each of the following events, explain what happens to: i) the quantity produced? ii) the market price? Explain your answers with the supply and demand diagram. a. The price of gizmos falls. People usually consume one widget with every gizmo bought; i) The quantity produced would increase to meet demand, which would increase with the lower prices.
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