110_11s_SelectedQ_Ch02

# 110_11s_SelectedQ_Ch02 - Econ 110 Selected Questions From...

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1 Econ 110 Selected Questions From Chapter 2 - The Economic Problem 1. Brazil produces ethanol from sugar, and the land used to grow sugar can be used to grow food crops. Suppose that Brazil’s production possibilities for ethanol and food crops are given in the table. a. Draw a graph of Brazil’s PPF and explain how your graph illustrates scarcity. Figure 2.1 shows Brazil’s PPF. The production possibilities frontier itself indicates scarcity because it shows the limits to what can be produced. In particular, production combinations of ethanol and food crops that lie beyond the production possibilities frontier are not attainable. b. If Brazil produces 40 barrels of ethanol a day, how much food must it produce if it achieves production efficiency? If Brazil produces 40 barrels of ethanol per day, it achieves production efficiency if it also produces 3 tons of food per day. c. Why does Brazil face a tradeoff on its PPF ? Brazil faces a tradeoff on its PPF because Brazil’s resources and technology are limited. For Brazil to produce more of one good, it must shift factors of production away from the other good. Therefore to increase production of one good requires decreasing production of the other good, which reflects a tradeoff. d. If Brazil increases its production of ethanol from 40 barrels per day to 54 barrels per day, what is the opportunity cost of the additional ethanol? When Brazil is production efficient and increases its production of ethanol from 40 barrels per day to 54 barrels per day, it must decrease its production of food crops from 3 tons per day to 2 tons per day. Hence the opportunity cost of the additional ethanol is 1 ton of food per day for the entire 14 barrels of ethanol or 1/14 of a ton of food per barrel of ethanol. e. If Brazil increases its production of food crops from 2 tons per day to 3 tons per day, what is the opportunity cost of the additional food? When Brazil is production efficient and increases its production of food crops from 2 tons per day to 3 tons per day, it must decrease its production of ethanol from 54 barrels per Ethanol (barrels per day) Food crops (tons per day) 70 and 0 64 and 1 54 and 2 40 and 3 22 and 4 0 and 5

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2 day to 40 barrels per day. Hence the opportunity cost of the additional 1 ton of food crops is 14 barrels of ethanol. f. What is the relationship between your answers to d and e? The opportunity costs are reciprocals of each other. That is, the opportunity cost of 1 ton of food crops is 14 barrels of ethanol and the opportunity cost of 1 barrel of ethanol is 1/14 of a ton of food crops. g. Does Brazil face an increasing opportunity cost of ethanol? What feature of the PPF that you’ve drawn illustrates increasing opportunity cost? Brazil faces an increasing opportunity cost of ethanol production. For instance, when
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## This note was uploaded on 05/20/2011 for the course ECON 110 taught by Professor Po during the Spring '11 term at HKU.

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110_11s_SelectedQ_Ch02 - Econ 110 Selected Questions From...

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