ECO 108 HW3 - ECO 108 Fall 2010 Bo He Name ID Homework 3...

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ECO 108 Fall 2010 Bo He Name: __________________________ ID: __________________ Homework 3 Due Monday Sep 27 th , at the beginning of LECTURE 1. Suppose that a simple society has an economy with only one resource, labor. Labor can be used to produce only two commodities X, a necessity good (food) and Y, a luxury good (music and merriment). Suppose that the labor force consists of 100 workers. One laborer can produce 5 units of necessity per month (by hunting and gathering) or 10 units of luxury per month (by writing songs, playing the guitar…). (a) On a graph, draw the economy’s production possibility frontier (PPF). Where does the PPF intersect the y axis? Where does the PPF intersect the x axis? What meaning do these points have? (12 pts) (b) Suppose the economy produced at a point inside the PPF. Give at least two reasons why this might occur. What could be done to move the economy to a point on the PPF? (8 pts) (c) Suppose you succeed in lifting your economy to a point on the PPF. What point would you choose? How might your small society decide the point at which it wanted to be? (8pts)
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