ECONOMICS REVIEW PART 1 SOLUTION
1.
Complete the following Production Possibilities table and answer the questions that follow.
Production
Possibilities
Chainsaws
A
B
C
D
E
F
0
1
2
3
4
5
a)
Cheese
(In thousands of
(tonnes)
35
30
24
17
9
0
Opportunity Cost of
each Chainsaw
5
6
7
8
9
Calculate the opportunity cost of each additional chainsaw.
b) Graph the production possibilities curve using the data in the table above.
c)
Indicate two points, F and G, which are unattainable by the economy above.
d) Indicate a point, Z, which shows widespread unemployment in the economy above.
2.
On any given day, Cellutech Research Company can produce the following combinations of
Protein Supplement and Hair Replacement Formula #67 by varying the allocation of its fixed
budget.
Number of Packages of Protein Supplement
Number of 1 Month Prescriptions of Hair
Replacement Formula #67
99
86
71
52
30
0
0
1
2
3
4
5
a)
Plot the production possibilities curve for Cellutech Research Company.
b) What is the opportunity cost of:
c)
d)
e)
f)
g)
The first package of Protein?
The second package of Protein?
The first two packages of Protein?
The third package of Protein?
The first three packages of protein?
13
15
28
19
47
h) What do you notice about the opportunity cost of Protein as more and more of it is produced?
With each additional unit of Protien that is produced more and more Hair Replacement
Formula #67 is needed.
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3.
Page 2 of 7
Given the following information, graph the production possibilities curve for Laptops and Microwaves.
Possibility
A
B
C
D
E
F
a)
4.
Laptops
32
28
23
17
9
0
Microwaves
0
12
22
30
36
40
Compute the opportunity cost of the following.
i)
Going from 9 laptops to 23 laptops.
14
ii)
Going from 4 laptops to 17 laptops.
8 2/9 or 8.22
iii)
Going from 22 microwaves to 34 microwaves.
11 1/3 or 11.33
iv)
Going from 15 microwaves to 38 microwaves.
22
Given the following production possibilities schedule for Asparagus and Fiddleheads in New
Brunswick and British Columbia, graph the PPF for both provinces. (Use one Graph)
New Brunswick
Asparagus
Fiddleheads
1200
100
800
200
400
300
Possibilities
A
B
C
British Columbia
Asparagus
Fiddleheads
500
1600
450
1900
400
2200
a)
Which province has the absolute advantage in Asparagus? In Fiddleheads?
Asparagus – New Brunswick
Fiddleheads – British Columbia
b) Which province has the comparative advantage in Asparagus? In Fiddleheads?
Asparagus – New Brusnwick
Fiddleheads – British Columbia
c) Which province should specialize in Asparagus? In Fiddleheads?
Asparagus – New Brusnwick
Fiddleheads – British Columbia
5.
Given the following production possibilities schedules for Ireland and Japan, graph the PPF for both
countries. (Do this on one graph)
Japan
Rice
0
12
14
24
36
Possibilities
Potatoes
18
12
11
6
0
A
B
C
D
E
What is Japan’s opportunity cost of producing Rice?
1 rice for .5 potatoes
b) What is Japan’s opportunity cost of producing Potatoes?
1 potatoe for 2 rice
c) What is Ireland’s opportunity cost of producing Rice?
1 rice for .33 potatoes
a)
Ireland
Rice
0
60
66
120
180
Potatoes
60
40
38
20
0
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6.
Page 3 of 7
d) What is Ireland’s opportunity cost of producing Potatoes?
1 potatoe for 3 rice
e) Which country has the absolute advantage in Rice? In Potatoes?
Rice – Ireland Potatoes - Ireland
f) Which country has the comparative advantage in Rice? In Potatoes?
Rice – Ireland Potatoes - Japan
g) Which country should specialize in Rice?
Ireland
h) Which country should specialize in Potatoes?
Japan
i) Now assume that the countries specialized as you determined in parts (g and h) above. What
would be acceptable terms of trade?
2<Rice<3
or
.33<Potatoes<.5
Given the following demand and price information for steak in Cantown, graph and fully label the
demand curve.
Price per kg
(In $)
10
8
6
4
2
a)
Quantity Purchased per week
(In 000’s of kg)
20
30
50
80
120
Using the same graph, indicate how an increase in demand would appear (label this d2).
b) Using the same graph, indicate how a decrease in demand would appear (label this d3).
c)
Using the mini graphs below, show the graph for; inelastic demand, elastic demand, unit elastic
demand.
Inelastic
7.
Elastic
Unit Elastic
Complete the following chart for “Supersmooth Shaving Cream”
Price per can
(In $)
2.00
1.80
1.60
1.40
1.20
1.00
.80
Qd
(In 000’s of
cans)
50
60
70
80
90
100
120
Total Revenue
Elasticity Co-efficient
Elasticity
100
108
112
112
108
100
96
1.73
1.31
1.00
.76
.58
.82
Elastic
Elastic
Unit Elastic
Inelastic
Inelastic
Inelastic
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8.
Page 4 of 7
For each of the following pairs of goods, state which one of the pairs has the more elastic demand,
and state a reason for your answer.
a)
Air Conditioners or Furnaces
Air Conditioner – Furnace is a necessity in Canada
b) New Automobiles or Driver’s licenses
New Automobile – Must have a driver’s licence to drive a car
c)
Telephone service or Electricity
Telephone service – Electricity is more of a necessity in than a telephone
d) Beef or Meat
Beef – can switch from beef to any other type of meat
9.
Fill in the blanks by stating whether the following situations would lead to more elastic or more
inelastic results.
a)
Rising consumer incomes should make the demand for restaurant meals more inelastic.
b) At Christmas, the demand for turkey should become more inelastic.
c)
The development of inexpensive wigs would make the demand for hairdressing more elastic.
d) The use of freezers in more homes would make the demand for foods that can be frozen more
inelastic.
10. Read each case below and indicate whether there has been a Change in Demand or a Change in
Quantity Demanded and indicate the reason for the change. Once you have done so, show how the
demand curve would react to the information provided. Be sure to show the direction of the change
clearly.
a)
Bottled Water – In Walkerton after the e-coli breakout.
Change in Demand
Increase
Expectations
b) North American Beef – Mad cow disease has drastically reduced the beef available in Europe.
Change in Demand
Increase
Price and Availability of Related Goods
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c)
Page 5 of 7
Chicken – Chicken has risen in price due to the intensive lobbying efforts of a national group
called “More living space and more family time for all chickens before execution International”.
Change in Quantity Demanded
Decrease
Price
d) Beer – during an Ontario long weekend in the summer.
Change in Demand
Increase
Tastes
11.
Complete the following table.
Price
(in dollars per T-shirt)
35
30
25
20
15
10
12.
Quantity Supplied
(in T-shirts per day)
120
100
80
60
40
20
Elasticity of Supply
Elastic
Elastic
Elastic
Elastic
Elastic
Given the following situations, predict the effect on supply. Sketch graphs to illustrate your
answer.
a)
Severe weather has drastically damaged the Colombian coffee crop, but leaves the tea crop
virtually unharmed.
Colombian Coffee
Change in Supply
Decrease
Environmental Factors
b) General Motors has completely automated their mini van manufacturing plants and thereby
increasing their production efficiency.
Change in Supply
Increase
Technological Changes
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c)
Page 6 of 7
A labour dispute at Bud Automotive results in a significant wage increase for hourly
employees.
Change in Supply
Decrease
Price of Productive Resources
13.
What effect will each of the following have on the supply of bagels? Indicate whether this is a
change in quantity supplied or whether this is a change in supply. Indicate whether this change
will cause an increase or decrease, and whether the supply curve will shift to the right or the left.
a)
The price of bagels increases by 20%.
Change in Quantity Supplied
Increase
Price Change
Movement Up The Curve
b) New bagel making technology has allowed bagel manufacturers to produce bagels in about
1/3 the time.
Change in Supply
Increase
Technological Change
Shift Right
c)
14.
The provincial government has decided to add a new manufacturer’s tax on all bagel sales.
Change In Supply
Decrease
Taxes and Subsidies
Shift Left
Complete the following table by calculating the Marginal Utility.
Apple Juice
Total Utility (Tu)
0
100
167
217
242
1 litre tins per week
0
1
2
3
4
15.
Marginal Utility (Mu)
100
67
50
25
Given below is the utility chart for an individual for two products, Chicken burgers and calzones.
A chicken burger costs $4.00 and a calzone costs $3.00. You have $24 to spend.
# of chicken burgers
0
1
2
3
4
5
6
Total Utility
0
60
110
150
170
180
185
Number of Calzones
0
1
2
3
4
5
6
7
8
Total Utility
0
75
140
200
230
250
265
275
280
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Page 7 of 7
Calculate utility maximization using the “Total Utility method”. (Hint, first you must create a purchase
possibilities chart. A blank one is given below for your calculations)
# of Chicken
Burgers
Total Utility of
Chicken Burgers
6
3
0
185
150
0
Total Utility of
Chicken Burgers
and Calzones
185
380
280
Total Utility of
Calzones
# of Calzones
0
230
280
0
4
8
Prove your answer from above by calculating the maximum utility using the “Equalizing Marginal Utility
per Dollar” method. Create your own chart below.
CHICKEN BURGERS
# of
Marginal
Marginal
Chicken
Utility Per
Utility
Burgers
Dollar
6
5
1.25
3
40
10
0
0
0
16.
CALZONES
Marginal
Utility Per
Dollar
0
10
1.67
Marginal
Utility
# of
Calzones
0
30
5
0
4
8
An individual has the choice of buying 3 products; A, B, C. The maximum they can buy of any
one item is 10 units as the total utility has reached its maximum. The total amount that they have
to spend is $23. The Total Utility Table for the three items is given below.
Quantity
(Units)
1
2
3
4
5
6
7
8
9
10
Product A
100
150
180
200
218
228
235
240
244
248
Total Utility
Product B
600
800
900
950
970
980
984
986
987
988
Product C
80
140
190
235
275
310
335
358
370
376
Required:
If the price of A per unit is $2, the price of B per unit is $4, and the price of C per unit is $1, how much of
A, B, and C should the individual purchase to maximize satisfaction?
2 of A
3 of B
7 of C