PS2_S - METU Department of Economics Econ 101 Introduction...

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1 / 9 METU Department of Economics Econ 101 Introduction to Economics I Sections 01-02-03 Fall 2011 PROBLEM SET # 2 (With Answers) PART A: PROBLEMS 1. According to the information given below: Combination Meat (units) Wheat (units) A 0 2000 B 200 1800 C 400 1500 D 600 1100 E 800 600 F 1000 0 a) Draw the production possibility frontier (PPF) (put meat on the x-axis) b) The production possibilities frontier is concave to the origin. (concave /convex) c) Can this economy produce 200 units of meat and 1500 units of wheat? Yes, but it is inefficient or some resources are unemployed. d) Can this economy produce 200 units of meat and 2200 units of wheat? No it is unattainable e) What is the opportunity cost of increasing meat production from 200 units to 400 units (i.e. if the economy moves from combination B to combination C)? 300 units of wheat. What is the opportunity cost per unit of meat? 3/2 (=300/200) units of wheat 0 1000 Meat Wheat 2000

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2 / 9 f) What is the opportunity cost of increasing meat production from 400 units to 600 units (i.e. if the economy moves from combination C to D)? 400 units of wheat. What is the opportunity cost per unit of meat? 2 (= 400/200) units of wheat. g) Does the principle of “increasing opportunity cost” hold in this economy? Based on the answers to parts e and f, we can conclude that the principle of increasing opportunity cost applies in this economy. The opportunity cost of each additional unit of meat in terms of wheat increases as more units of meat are produced. 2. Fill in the blanks according to the figure below: a) If this economy is producing 100 units of roses, the maximum amount of guns that can be produced is 100 units. b) The maximum quantity of roses that can be produced is 150 units. c) Assume that production takes place at point c. The opportunity cost of increasing the production of guns to 100 units is 40 units of roses. d) Assume that production takes place at point g. The opportunity cost of increasing the production of guns to 100 units is 0. e) Assume that production takes place at point a. The opportunity cost of increasing the production of roses to 100 units is 40 units of guns. f) Assume that production takes place at point e. The opportunity cost of increasing the production of roses to 100 units is 0. g) The efficient point(s) is/are a, b and c. h) The inefficient point(s) is/are e and g. i) The unattainable point(s) is/are d. j) The attainable point(s) is/are a, b, c, e, g. 0 50 100 140 150 Roses (units) Guns (units) 150 140 100 50 a d e b g c
3 / 9 3. Answer the following questions according to the figure. i. Which one of the following choices implies efficient production in terms of full employment of the resources? a)

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This note was uploaded on 01/05/2012 for the course ECON 101 taught by Professor Gulipektunc during the Spring '11 term at Middle East Technical University.

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PS2_S - METU Department of Economics Econ 101 Introduction...

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