# PS2&amp;Answers - METU Department of Economics Econ 101...

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1 METU Department of Economics Econ 101 Introduction to Economics I All sections Fall 2009 PROBLEM SET # 2 (With Answers) PART A: PROBLEMS 1. According to the information given below: Combination Meat Wheat (units) (units) A 0 1000 B 100 900 C 200 700 D 300 400 E 400 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 600 units of wheat? Yes, but it is inefficient or some resources are unemployed. d. Can this economy produce 200 units of meat and 800 units of wheat? No it is unattainable 0 400 Meat Wheat 1000

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2 e. What is the opportunity cost of increasing meat production from 100 units to 200 units (i.e. if the economy moves from combination B to combination C)? 200 units of wheat. What is the opportunity cost per unit of meat? 2 ( =200/100) units of wheat f. What is the opportunity cost of increasing meat production from 200 units to 300 units (i.e. if the economy moves from combination C to combination D)? 300 units of wheat. What is the opportunity cost per unit of meat? 3 (= 300/100) 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 80 units of roses, the maximum amount of guns that can be produced is 80 units. b. The maximum quantity of roses that can be produced is 140 units. c. Assume that production takes place at point c. The opportunity cost of increasing the production of guns to 80 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 80 units is 0. 0 40 80 120 140 Roses (units) Guns (units) 130 120 80 30 a d e b g c
3 e. Assume that production takes place at point a. The opportunity cost of increasing the production of roses to 80 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 80 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. 3. How do the following events affect the PPF of a country, which produces only two goods, X and Y? a. A new law is passed which has decreased the retirement age from 65 to 55. b.

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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&amp;Answers - METU Department of Economics Econ 101...

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