Focus Questions –Macro/Micro – Ch1-4, 7, & 9
These are questions and the solutions from previous HW and Tests that you should be
able to complete to be ready for a test. The chapters that the questions come from are in
parentheses after each question.
Question 1 (Ch3)
a. Draw and label a typical bow-shaped PPF with pizza on the x-axis and soda on the yaxis.
b. Illustrate the idea of increasing opportunity cost when we shift production from only
hamburgers to only shirts.
c. In your own words describe what is happening as we go from producing exclusively
one good to another.
d. Draw another PPF (use the same goods as above) and talk about the ideas of
efficiency in production and how the graph illustrates this concept. To do this you must
pick a point inside of the curve and compare it to a point on the curve.
e. Explain what happens if the capital, labor, and other resources used in the production
of these two goods were altered? Make sure to talk about increases, decreases, and
relative changes that are not proportional. Illustrate this on a separate graph.
(a) & (b)
PPF 1: Illustrates (a) and (b)
Soda
OC1
OC2
OC3
Pizza
1-unit each
(c) As we move from soda production to only pizza production we shift over our
resources using them for only soda to combinations of both soda and pizza. The first
things that are going to be shifted for pizza production are going to be the resources best
suited for pizza that are coming from soda production (i.e. the labor and capital from
pizza production that is best suited for pizza production and is not adding very much to
our numbers of sodas produced  people specialized at making pizza and not soda,
maybe sugar and carbonated water, etc..).
As we continue to shift from sodas to pizza on a per-unit basis the resources that are used
are less good at producing pizza and more specialized for soda production (i.e. we
increase pizza production by 1 unit each time. Note: Distance along the pizza-axis is in
1-unit increments). For this reason we see that we get fewer pizzas out of the resources
shift relative to the amount of sodas we have to give up. Because we have this specificity
of resources, we must give up more sodas for each unit increase in pizza production. As
we totally devote all of our resources to pizza we must then give up the most sodas (OC3)
because now the resources shifted were very specific to soda production.
(d)PPF 2:
Soda
Frontier
QA,B
Unattainable
B
A
Inefficient
Pizza
QA
QB
Efficiency in production is illustrated on the frontier (or outermost boundary) of the PPF.
At the frontier we are using all our resources as productively as possible when producing
different combinations of pizza and sodas.
If we are not on the boundary we could be using our resources more productively and get
more production from the resources that were used to produce the goods. This can be
seen when looking at points A and B. We get the same level of soda production at A and
B, but when resources are used more efficiently we move from A to B (inside the curve
onto the frontier). At B we get more units of pizza still being endowed with the same
amount of resources that we had at point A.
(e) If the capital and labor used in the production of goods were altered, then the PPF
would shift inward or outward due to the reduction or increase in resources. This goes
back to the idea of what a PPF illustrates. It shows all the production possible that a
country, firm, state, etc…can produce given a certain resource endowment (capital, labor,
technology). If we reduced the amount of resources available then the amount of
production must decrease as shown above when the PPF shifts in. The opposite case is
true. If we had an increase in resources it would be like going from PPF2 to PPF1.
Soda
PPF1
PPF2
Pizza
Most likely what you would get would be the graph above. You would have a decrease in soda
production what would outweigh the decrease in pizza production or vice versa (opposite case).
It might even be the case that no change in soda production might occur and it would solely cause
a change in pizza production. This can be seen in the graph below and would mean that any of
the resources that were altered only affected pizzas and did not affect soda production at all. This
could be an increase/decrease in flour, pizza sauce, mozzarella cheese, etc…., which are all items
that are clearly not going to affects how many sodas we could produce, but would affect pizzas.
Graphically:
Soda
PPF1
PPF2
Pizza
Question 2 (Ch3)
The following table shows the production possibilities for Computers and Staplers;
Combination
A
B
C
D
E
F
Computers
45
42
36
27
15
0
Staplers
0
1
2
3
4
5
Opportunity Cost
0
45-42 = 3
42-36 = 6
36-27 = 9
27-15 = 12
15-0 = 15
a. Fill in the opportunity cost of producing the first though fifth staplers.
b. Graph this PPC.
c. Why does this PPC have a bowed out shape? Use your results from (a) and the idea of
increasing opportunity cost to explain.
(a) Fill in the opportunity cost of producing the first though fifth staplers.
This is a quantitative way (i.e. using numbers) of showing the law of increasing OC. It is
the same technique that is used in our graphical display, except now we are just using a
production schedule to illustrate it.
(b) Graph this PPC.
Computers
A
B
C
D
We can see the
OC is increasing
as the vertical
distance increases
E
F
Staplers
1
2
3
4
(c)Why does this PPC have a bowed out shape?
The bowed shape of the PPC is due to a couple of factors. One is that there is a shift in
productive resources from one good to the other, but these factors are not as equally productive in
both stapler and computer production. Due to this there is an increase in OC from allocating
resource from complete specialization in one good, producing different quantities of both, to
complete specialization of the other.
Question 3 (Ch 4)
a. Draw a demand curve and supply curve and label the graphs fully. Do so on the same
set of axes (i.e. draw them together).
b. Talk about why each graph illustrates their respective laws (i.e. supply illustrates the
law of supply).
c. What does the intersection of these two graphs illustrate? Explain this concept using
Qd and Qs.
d. What would happen if the demand curve shifted out? Show this on a new graph and
label the results. What are at least 3 things which could have caused this shift?
e. Explain what happens when S shifts out and D shifts in.
*note: you will need to explain what happens for sure depending on the magnitude of
each shift.
(a) Graph 1: General Equilibrium with Supply and Demand
P
E
S
PE
D
Q
QE
(b) A demand curve shows the relationship between p and q that consumer’s demand of a
particular good. They must be both willing and able to purchase the good. As the price of a good
goes down they wish to buy more of that good. That is why a demand curve slopes downward.
A supply curve shows the relationship between p and q that producers are willing to supply of a
particular good. As the price of a good goes down they wish to supply less of that good, and that
is why a supply curve slopes upward.
(c) The intersection of the two graphs (called equilibrium) is the combination of p and q that both
demanders and suppliers agree upon both price and quantity. At Pe consumers demand Qe and
producers supply Qe. At this price the market clears (all that is supplied is demanded or QS=QD).
If we were not at Pe then we would not be at a price where QS=QD . This would result in either
excess demand or supply depending on whether or not we were above or below equilibrium price.
(d)If the demand curve shifts in we get P dropping and Q dropping. This can be seen in the graph
below where we let demand shift out from D1 to D2. So we may write
D ↑  P↑ Q↑. All the things that could cause such a shift are:
1) PSub ↑
2) Pcomp ↓
3) Tastes/Preferences ↑
4) PExp ↑
5) Pop/Market Size↑
6) Income ↑ for a normal good
7) Income ↓for an inferior good
Graph 2: Affect on Equilibrium when Demand Shifts In
P
E1
E1
S
PE2
PE1
D2
D1
Q
QE1 QE2
(e) Recall that if we have a double shift we can't solely use graphical analyses to describe what
happens to P and Q at equilibrium. We must use our single shift components to do a complete
analysis. We will draw one case and finish the explanation explaining what would happen
completely with variable analysis.
Variable Analysis:
Step 1: Break up into single shift components
-S ↑  P↓ Q ↑
-D ↓  P↓ Q↓
So we know that P goes down for sure since it goes down in both cases. We also
know Qun det er min ed . We can have 3 cases for Q depending on the magnitude of the shifts of each
curve.
(1) magnitude of supply shift greater than demand  Q ↑
(2) magnitude of demand shift greater than supply  Q↓
(3) magnitude of each offset each other  Qsame
Question 4 (Ch 4)
Suppose we are given the following equations for supply and demand:
(1) Qd = 45 - 3p
(2) Qs = 10 + 2p;
a. Fill in the following table.
P Qd Qs
0
2
4
6
7
8
10
12
14
b. Graph each equation based on the tables that you calculated from part a. Label the
graph fully.
c. Solve for equilibrium P and Q algebraically making sure to show all your work. Note:
This should be consistent with your chart in a.
d. What would happen if our demand equation changed to: Qd = 65-3p (i.e. solve for new
equilibrium and graph  you don’t need to do a new table). Show your results on a new
graph and explain.
(a) Suppose we are given the following equations for supply and demand:
Qd = 45 - 3p & Qs = 10 + 2p, make a table for each equation showing all the
combinations of P, Q in increments of $2
Table 1: To make a table of each simply let P vary and obtain QS and QD
P
0
2
4
6
8
10
12
Qd
45
39
33
27
21
15
9
Qs
10
14
18
22
26
30
34
(b). Graph each equation based on the tables that you calculated from part a. Label the
graph fully. All you have to do here is pick two points from the table for both supply and
demand and then connect the lines. This is the case since we know that on a straight line
we can be guaranteed that slope is constant as we choose any two points.
Graph 1:
P
S
(15,0)
E
PE =
E
7
D
Q
QE
=
(45,0)
24
(c) Solve for equilibrium P and Q making sure to show all your work.
To solve for P and Q we simply set the equations equal to each other [see solving linear
equations on my website for a complete explanation].
Step1: set the equations equal to each other and solve for P
Qd = 45 - 3p = Qs = 10 + 2p  45 - 3p = 10 + 2p  5P= 35 p = 7
Step 2: Plug back into either equation to get Q
Qd = 45 - 3p  45 – 3 (7) = 24
Qs = 10 + 2p  10 + 7(2) = 24
So PE and QE are 7and 24
d. What would happen if our demand equation changed to: Qd = 65-3p (i.e. solve for new
equilibrium and graph  you don’t need to do a new table). Show your results on the
initial graph.
To find out what happens as we alter our demand equation we can use both methods
above to obtain what happens.
Step1: set the equations equal to each other and solve for P
Qd = 65- 3p = Qs = 10 + 2p  65- 3p = 10 + 2p  5P= 55  p=11
Step 2: Plug back into either equation to get Q
Qd = 65 - 3p  65 – 3 (11) = 32
Qs = 10 + 2p  10 + 7(11) = 32
So PE and QE are 11and 32
(d) Graph 1: P
S
(15,0)
E2
E
PE2 =
11
E1
PE1 =
7
D2
D1
Q
QE1 = 24 QE2 = 32
(45,0)
So we can see the new equilibrium that occurs as we get the new demand equation. We
can see from the graph above that the equivalent way to look at how our demand curve
changed would be simply a shift from D1 to D2 and we get the usual result with both P
and Q increasing (PE2 = 11>PE1 = 7 & QE2 = 32 QE1 = 24).
Question 5 (Ch 6&7)
a. Using the following graph calculate producer and consumer surplus:
Graph 1:
P
S
100
E
PE1 =70
20
D
QE1 =500
Q
b. What would happen if there were a price ceiling placed in the above graph? Illustrate
graphically and analyze. Make sure to talk about what happens to CS, PS, and TS. Note:
You need to include DWL in your analysis.
c. In another graph show what would happen if there was a tax that was placed on
suppliers. Make sure to talk about what happens to CS, PS, and TS. Note: You need to
include DWL & Tax revenue in your analysis.
(a) To calculate PS and CS we simply use the Area = (½) b*h formula with the values
provided. PS: Area = (½) b*h = (1/2) (70-20) (500-0) = 12500
CS: Area = (½) b*h = (1/2) (100-70) (500-0) = 7500
TS = PS + CS = 12500 + 7500 = 20,000
(b) Next we are asked to provide what occurs with a price floor. The graph is below.
Note that a price floor is placed because the market price of the good is deemed to be too
low, so the government sets a lower limit as to what the price can be. A common
example of this is a min wage. The result of this imposition is in favor of producers who
now get a higher price. Let’s look at the graph and table below to see what happens.
Note: No values are needed just an explanation of what occurs.
Graph 2:
Supply
surplus
P
1
2
Price Floor
3
DWL
PE
4
5
6
Demand
Q1
Q2
Q
Table 1:
PS
CS
DWL
TS
Before Price Ceiling
4+5+6
1+2+3
1+2+3+4+5+6
After Price Ceiling
2+4+6
1
3+5
1+2+4+6
It is clear from the above graph that we get the following
TS: This drops. Before we didn’t have any DWL, but now since we have areas that we
have DWL that was once included in TS being subtracted the overall value drops. This is
area 3 and 5.
CS: This value is decreased. So, a price floor is something that consumers really don’t
like. It increases the market price which detracts from the surplus that consumers once
received. The total value is 1.
PS: This value increases. The price ceiling in essence acts to re-distribute some of the
TS to producers. This makes them happy because they get more money than they other
wise would have. The total value is now 2, 4, and 6.