ECO 210

SPRING 2015
PROBLEM SET 1
Q.1 Which of the following statements are examples of positive economic analysis? Which
are examples of normative analysis?
a) The inheritance tax should be repealed because it is unfair.
b) Allowing Chile to join NAFTA would cause wine prices in United States to drop.
c) The first priorities of the new regime in the Democratic Republic of Congo should be to
rebuild schools and highways and to provide basic health care.

i.

Q.2
Q.3

Explain how a production possibilities frontier exhibits the concept of scarcity.

How does a production possibilities frontier exhibit opportunity cost?

Q.4

Fill in the blanks according to the figure.

The figure indicates that if this economy uses all the resources in an efficient way, it is
capable to produce ______.
a) Both 20 units of wheat and 10 units of eggs
b) Both 20 units of wheat and 5 units of eggs
c) Both 100 units of wheat and 50 units of eggs
d) Either 100 units of wheat or 50 units of eggs

ii.

Which of the following output combinations would be interpreted as being inefficient?

a) 100 units of wheat and 0 units of eggs
b) 80 units of wheat and 5 units of eggs
c) 20 units of wheat and 40 units of eggs
d) 50 units of wheat and 25 units of eggs

iii. Which of the following output combinations would be interpreted as being impossible to
attain for given resources and production technology, ceteris paribus?
a) 30 units of wheat and 40 units of eggs
b) 80 units of wheat and 10 units of eggs
c) 100 units of wheat and 0 units of eggs
d) 50 units of wheat and 25 units of eggs
1

iv. The production possibility frontier implies an opportunity cost of 1 wheat is .

v. What would happen to the production possibilities frontier if there were a bio technological
advancement in the production of wheat?
Q.5 Turkey produces 6 T-shirts and 4 pants, and England produces 10 T-shirts and 8 pants.
(Output per Hour)
a-) Which country has absolute advantage on producing T-shirts and pants?
b-) What is the opportunity cost of producing T-shirts for Turkey and England?
c-) Which country has comparative advantage on producing T-shirts and pants?
d-) Assume that Turkey spends half of its time (12h/24h) to T-shirt and half of its time to
pants while England spends 14 hours to T-Shirts and 10 hours to Pants. Sketch the P.P.F.
Q.6 The following table shows output per unit of labor for England and Portugal in
the production of two kinds of goods: wheat and cotton
Output (bushels) per 1 unit of labor
COTTON
WHEAT

ENGLAND
1
2

PORTUGAL
2
3

a) Which country has absolute advantage over production of one commodity?

b) What is the opportunity cost of a bushel of wheat for England and Portugal?
c) In which commodity England has comparative advantage? Calculate and explain briefly.
d) The supply of labor in England and Portugal is equal and 40 in each. Draw the P.P.F curve
for both countries.

Q.7 Below is the P.P.F curve of an economy that produces only corn and wheat.

a) At which points is the economy operating efficiently?

b) What can you say when the economy is operating at points C and D?
c) If there is a movement from A to B, what happens to the opportunity cost of producing
wheat?
Q.8 Show graphically the effects of an increase in the price of hamburger on the demand for
hamburger and on the demand for ketchup, a complement for hamburger.
Q.9 Using graphs, explain the effect of an increase in the price of cheese on the supply of
cheese and the supply of pizza.
Q.10 Assume that hamburgers and hotdogs are substitutes. If there is a decrease in the price
of hotdogs, what happens to the demand for hamburger?
Q.11 If the corn production is biotechnologically enhanced, what happens to the supply of
corn?
Q.12 Suppose the demand and supply curves are given by the following equations.
Qd=200-20P Qs=50+10P
a) What is the equilibrium price and quantity?
b) If P=8, Qd and Qs =?
c) If P=3, Qd and Qs =?

Q.13 Suppose the market demand of CDs given by Q d=120-15P and market supply is given
by Qs=60+5P.
a) Graph the demand and supply curves and identify the equilibrium price and quantity.
b) At equilibrium how many CDs would be sold and at what price?
c) What would happen if suppliers set the price of CDs at $5?
d) What would happen if suppliers set the price of CDs at$2?
Q.14 The demand for ice cream is given by Qd=300-20P and the supply is given by
Qs=20P-100.
a) Draw both the demand and supply curves on the same graph and find the equilibrium
quantity and price.
b) What happens to the demand curve for ice cream, if the price of ice cream increases?
c) If the price is equal to $12, is there a shortage or surplus? How much?