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Econ1-Fall2010-PS1-sols

# Econ1-Fall2010-PS1-sols - Econ 1 Problem Set#1 Solutions...

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Econ 1 Problem Set #1 Solutions Fall 2010 1. Suppose that the following the points (AGR,MAN) = (10,30) and (AGR,MAN) = (20,10) lie on society’s production possibilities frontier for manufactured goods and agricultural goods. a. Suppose that the PPF satisfies the law of increasing opportunity costs. If society produces 15 units of AGR, what is the most that you can say about the production of MAN? Using a graph, give your reasoning. AGR MAN (10,30) (20,10) (15,??) A total of 20 units of MAN have to be given up to go from 10 to 20 units of AGR. Further, because opportunity costs are increasing, we know that when we move from producing 10 to 15 units of AGR, we are going to have to give up fewer units of MAN than when we move from 15 to 20 units of AGR. Thus, we know that if society is producing 15 units of AGR, it is producing at least 20 units of MAN. That is 20 < MAN < 30. b. Now, suppose that the PPF satisfies the law of decreasing opportunity costs (perhaps because of learning-by-doing). If society produces 15 units of AGR, what is the most that you can say about the production of MAN? Using a graph, give your reasoning. AGR MAN (10,30) (20,10) (15,??) If opportunity costs are decreasing, then we know that we know that when we move from producing 10 to 15 units of AGR, we are going to have to give up more units of MAN than when we move from 15 to 20 units of AGR. Thus, we know that if society is producing 15 units of AGR, it is producing no more 20 units of MAN. That is 10 < MAN < 20.

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2. Consider the production of agricultural goods ( A ) and capital goods ( C ). Assume that society’s production possibilities frontier satisfies the law of increasing opportunity costs and that bundles (A, C) = (100, 0) and (A, C) = (50, 40) are on the production possibilities frontier. If society devoted all of its resources to the production of capital goods, what’s the most you can say about how much it would produce? The law of increasing opportunity cost states that as you produce more of one
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Econ1-Fall2010-PS1-sols - Econ 1 Problem Set#1 Solutions...

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