Quiz1_Solutions - Economics
101
Section
400
...

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Unformatted text preview: Economics
101
Section
400
 Winter
2010
 
 Quiz
1

 For
discussion
in
section,
January
21
and
22
 ANSWER KEY (2 Points per part: Total of 8 points) Drawn
below
are
hypothetical
production
possibilities
frontiers
for
wool‐growers
in
 Australia
and
New
Zealand.

We
measure
the
quantity
of
fine
wool
(in
millions
of
bales)
 and
quantity
of
coarse
wool
(in
millions
of
bales)
on
the
horizontal
and
vertical
axes,
 respectively.
 Coarse
wool
 Coarse
wool
 3
 2
 9
 Fine
wool
 1
 Fine
wool
 Australia
 
 New
Zealand
 
 
 (a) Draw
the
joint
production
possibilities
frontier,
showing
the
maximum
amount
 of
coarse
wool
that
can
be
produced
in
the
two
countries
jointly,
for
any
level
of
 fine
wool
production
between
0
and
10
million
bales.
 
 
 (b) If
the
price
of
coarse
wool
is
$600/bale,
what
is
the
lowest
price
per
bale
of
fine
 wool
that
will
encourage
at
least
some
wool
growers
in
either
New
Zealand
or
 Australia
to
produce
fine
wool?

Explain
why.
 
 ANSWER:
 Since
both
goods
are
produced
in
the
market,
the
price
of
fine
wool
is
between
 p 1/3
and
2.
Since
we
are
concerned
with
the
lowest
relative
price
 f 
for
which
 pc fine
wool
is
produced,
then:
 pf 1 p 1 ≥ ⇒ f ≥ ⇒ p f ≥ 200 
 pc 3 600 3 € Therefore,
at
prices
of
fine
wool
below
$200
only
coarse
wool
is
produced,
and
at
 prices
above
$200
a
positive
amount
of
fine
wool
is
produced.
 
 € (c) If
the
price
of
coarse
wool
is
$600/bale,
what
is
the
highest
price
per
bale
of
fine
 wool
at
which
any
farmer
in
Australia
and
New
Zealand
will
wish
to
produce
 coarse
wool?

Explain
why.
 
 ANSWER:
 Since
both
goods
are
produced
in
the
market,
the
price
of
fine
wool
is
between
 p 1/3
and
2.
Since
we
are
concerned
with
the
highest
relative
price
 f 
for
which
 pc coarse
wool
is
produced,
then:
 pf p ≤ 2 ⇒ f ≤ 2 ⇒ p f ≤ 1200 
 pc 600 € Therefore,
at
prices
of
fine
wool
above
$1200
only
fine
wool
is
produced,
and
at
 prices
below
$1200
a
positive
amount
of
coarse
wool
is
produced.
 
 € (d) Draw
the
supply
curve
for
fine
wool
(representing
the
joint
supply
decisions
of
 Australian
and
NZ
wool
growers)
when
the
price
of
coarse
wool
is
$600/bale.
 
 ...
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