EC101p12bans - EC 2001 Problem Set No. 1 - Answers (1) (a)...

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EC 2001 Problem Set No. 1 -- Answers (1) (a) OC (food) = (45 − 60) / (30 − 20) = −1.5 or 1.5 drill presses. OC (drill press) = (10 − 20) / (70 − 60) = −1.0 or 1 ton of food. (b) Since Balkania is operating below its productive capacity, more food can be produced without forgoing any drill presses, so OC (food) = 0. (c) There is unemployment or technical inefficiency or both. (d) It is beyond Balkania's productive capacity. (e) OC (food) goes: 0.5, 1.0, 1.5, 2, 2.5: increasing OC. (2) (a) Assume initially the demand for coal is given by D 1 and the supply by S 1 . Then the equilibrium price is 30 and the equilibrium quantity is 300. Coal and oil are substitutes . Therefore the demand for coal will rise, say to D 2 . (The supply will not be affected, at least in the short run.) Hence the new equilibrium price will be 40 (higher) and the new equilibrium quantity will be 400 (higher). (b) Assume initially the demand is given by D 1 and the supply by S 1 . Then the equilibrium price is 30 and the equilibrium quantity is 300. An effective price floor must be above the equilibrium price, say at 40. Then the quantity demanded will be 200 while the quantity supplied will be 400. The result will be a
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EC101p12bans - EC 2001 Problem Set No. 1 - Answers (1) (a)...

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