ECMA01F: Midterm Test #1: Sample #2 Answers
Part I
Place your answers (and work where necessary) in the space provided.
Clearly label all axes, curves, and points.
1.
Production Possibilities Curve (10 marks)
Ontario, with only labour and capital as resources, has the following production possibilities
for Buses and Cars.
a)
1 mark: Diagram with Bus intercept = 45,000 and Car intercept = 125,000
1 mark: Concave (to origin) PPC
b) 1 mark: no change in Bus intercept and new PPC concave to the origin
1 mark: increase in Car intercept to 135,000
a) Sketch
the country's production possibilities curve (PPCo) in the space below the table with
Buses on the vertical axis. (2 marks)
b) The opportunity cost of increasing Car production from 65,000 to 95,000 units is
12,000
Buses (must say Buses)
? (1 mark)
c)
The opportunity cost of increasing Buses production from 30,000 to 40,000 units is
40,000 Cars
? (1 mark)
d)
What is the opportunity cost/unit
of increasing Car production from 95,000 to 131,000
units?
Show your work. (2 marks)
1 mark: Opportunity Cost for the option = 18,000 Buses
1 mark: Opportunity Cost/unit = 0.6 Buses from 18,000/30,000
e)
What is the opportunity cost of increased output from 25,000 Buses and 65,000 Cars to
18,000 Buses and 95,000 Cars? (1 mark)
1 mark: OC = 7,000 Buses
f)
Suppose that technological change increases the output of Cars by 8% for each amount of
resource but does not effect Bus production.
i)
Sketch (particularly the intercepts) in your above diagram the production
possibilities curve (PPC
1
) that results from this technological change. (2 marks)
ii) What is the opportunity cost of increasing Bus output from 40,000 to 45,000
units
after technological change raises Car output by 8%? (1 mark)
1 mark: 27,000 Cars from something like 1.08*25,000
- 2/6 -
Buses
45,000
40,000
30,000
18,000
0
Cars
0
25,000
65,000
95,000
125,000