Test I Practice Problems

# Test I Practice Problems - Test I Practice Problems Short...

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Test I Practice Problems Short Answer 1. Draw a production possibilities frontier showing increasing opportunity cost for hammers in terms of horseshoes. a. On the graph, identify the area of feasible outcomes and the area of infeasible outcomes. b. On the graph, label a point that is efficient as point "E" and a point that is inefficient as point "I". c. On the graph, illustrate the effect of the discovery of a new vein of iron ore, a resource needed to make both horseshoes and hammers, on this economy. d. On a second graph, illustrate the effect of a new computerized assembly line in the production of hammers on this economy. 2. The prairie dog has always been considered a problem for American cattle ranchers. They dig holes that cattle and horses can step in and they eat grass necessary for cattle. Recently, ranchers have discovered that there is a demand for prairie dogs as pets. In some areas prairie dogs can sell for as high as \$150. Cattlemen are now fencing off prairie dog towns on their land so these towns will not be disturbed by their cattle. Draw a production possibilities frontier showing a rancher's production option between cattle production and prairie dog production showing increasing opportunity cost and show what would happen in each of the following situations. (Use a separate graph for each situation.) a. The outcome is efficient, with ranchers choosing to produce equal numbers of cattle and prairie dogs. b. As a protest against the government introducing the gray wolf back into the wild in their state, ranchers decide to withhold 25 percent of the available grassland for grazing. c. The price of prairie dogs increases to \$200 each, so ranchers decide to allot additional land for prairie dogs. d. The government grants new leases to ranchers, giving them 10,000 new acres of grassland each for grazing. e. A drought destroys most of the available grass for grazing of cattle, but not for prairie dogs since they also eat plant roots. 3. Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade patterns, absolute advantage or comparative advantage? Why? 4. The only two countries in the world, Alpha and Omega, face the following production possibilities frontiers.

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a. Assume that each country decides to use half of its resources in the production of each good. Show these points on the graphs for each country as point A. b.
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## This note was uploaded on 05/01/2011 for the course ECON 2100 taught by Professor Darrinv.gulla during the Summer '08 term at Morehouse.

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Test I Practice Problems - Test I Practice Problems Short...

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