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AKPS1-2007

# AKPS1-2007 - ECON 211 ANSWER KEY for Problem Set#1 Spring...

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ECON 211 ANSWER KEY for Problem Set #1 Spring 2007 1. Problem #4, Parkin, pg. 16 . Answer : The opportunity cost of taking this trip is \$550 plus 8 hours of study time. The opportunity cost is the highest-valued activity that you will give up by going skiing for the weekend. In taking the trip, you’ll forgo all the goods and services that you could have bought with the income from your weekend job (\$100) plus your expenditure on travel and accommodation (\$350), food (\$40), and ski rental (\$60). You’ll also forgo 8 hours of study time. 2. Tom is stranded on a desert island and can either fish or harvest dates. Six points on his production possibilities frontier are given in table below. a) Plot these possibilities on a “Dates gathered-Fish caught” grid, label the points, and draw the PPF. b) If Tom moves from possibility C to D, what is the opportunity cost per fish? c) In general, what happens to the opportunity cost of a fish as more fish are caught? What about the opportunity cost of dates as more dates are harvested? d) Based on the original PPF you plotted, is a combination of 40 dates and 1 fish attainable? Is this combination an efficient one? Explain. Tom’s Production Possibilities Possibility Dates gathered Fish caught A 54 0 B 50 1 C 42 2 D 32 3 E 20 4 F 0 5

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Answer : (a) Picture showing Tom’s production possibilities in the left. (b) The opportunity cost of the 3 rd fish is 10 dates gathered. (c) The opportunity cost of a fish increases as more fish are caught. Similarly, the opportunity cost of dates also increases as more dates are gathered. (d) Yes, 40 dates and 1 fish is attainable as is shown in the picture by the point K. However, it is not an efficient combination. In fact, you can do better. If you use all
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AKPS1-2007 - ECON 211 ANSWER KEY for Problem Set#1 Spring...

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