201M1Win06

# 201M1Win06 - Macroeconomics 201 Prof. Gordon TA: Jesse De...

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Macroeconomics 201 NAME: …………………………… Prof. Gordon TA: Jesse De Lille Midterm1 – Winter 2006 TOTAL POINTS: 32 + 28 = 60 Multiple Choice Answer Sheet (32 Points) Problem Number Answer Problem Number Answer 1 B 18 A 2 C 19 B 3 C 20 B 4 B 21 D 5 C 22 A 6 A 23 A 7 D 24 E 8 B 25 E 9 D 26 E 10 A 27 D 11 C 28 B 12 C 29 B 13 B 30 A 14 D 31 A 15 D 32 B 16 D 17 C

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Short answer Questions (28 Points) Question 1 (14Points) : The world is composed of two countries, Farmeria and Securitania. Each has 1000 workers, and each produces just two goods, guns and butter. All workers in Farmeria have the same skills, as do all workers in Securitania; the skills differ between the two countries, however. In Farmeria, each worker can produce either 10 pounds of butter a day, or 1 gun. In Securitania each worker can produce either 6 pounds of butter a day or 2 guns. A. Draw the production possibilities curve for each country on the sheet provided (page 2), clearly labelling the axes.(4points) F a r m e r i a S e c u r i t a n i a B. Explain why the curves you have drawn are straight lines or bowed.(3points) Answer: The curves are not bowed because the countries do not face increasing costs of production for either good. The trade off between producing either guns or butter is the same, regardless of the amount being produced. Therefore, the PPF has a constant slope and is a straight line. C. Compare the opportunity costs of producing guns in Farmeria and Securitania. Where is gun production cheaper?(2points) Answer: The opportunitycost of producing guns in Farmeria is 10 pounds of butter per 1 gun. The costs in Securitania is 3 pounds of butter per gun. Gun production is cheaper in Securitania. D. Suppose that each country devotes half of its labor to each good. Show the production point in each diagram. How much of each good will be produced in each country? What is the total global production of guns and butter? (2points) Butter (lbs) Guns 6000 2000 3000 1000 Half Production point Efficient Production (2000,0) 10,000 1000 5000 500 Half Production Efficient Production (0,10,000) Butter (lbs) Guns
Answer: See figures above for the production points. Production: Farmeria: 5000 pounds of butter, 500 guns Securitania: 1000 guns, 3000 pounds of butter Global production: 8000 pounds of butter, 1500 guns. E. Suppose now that each country produces nothing but the good in which its labor force is particularly skilled. Show the production point in each diagram. Compare the global production of guns and butter to your answer in part D. (3points) Answer: See figures for production points. Global production: 2000 guns, 10000 pounds of butter. By a more efficient allocation of workers, we have increased total production of both guns and butter without any additional inputs.

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Question 2 (14 Points): This question will consider the market for SUVs. The supply curve for SUVs is a straight line. The supply schedule for SUVs is given by the following table: Price Quantity
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## This note was uploaded on 09/04/2010 for the course ECON 201 taught by Professor Witte during the Spring '08 term at Northwestern.

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201M1Win06 - Macroeconomics 201 Prof. Gordon TA: Jesse De...

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