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Economics Homework 1

Class Section: L4

Participants
Yuk Lam - 20547937
Prajyot Agrawal - 20559265
Simran Saxena - 20543395 L6
Aayush Prashant Gala - 20552695
Vishal Haresh Laungani - 20540070
Yuk - Question 1

(10pts) In lecture we discussed why the production possibilities frontier (the boundary of the
production possibilities set) is bowed ‘outwards’. When might the production possibilities set be
bowed ‘inwards’? Give an example of a two-good economy where the production possibility set
would be bowed inwards.

The ‘inward’ bowing of a Production Possibility Frontier would imply that the production of one
good would inhibit the production of another, vice versa. Hence, the economy could only specialize
in a single good while producing both would result in unsuccessful production in both goods. An
example of a two-good economy that may have an ‘inward’ bowing Production Possibility Frontier
is of Hydraulic Fracturing (or hydrofracking) and Fish Farming as each would inhibit the production
of the other. In terms of hydrofracking, there is a high risk of water pollution thus would inhibit any
possibility of fish farming. On the other hand, fish farming would also forbid the possibility of
hydrofracking as the latter operates only on flat surfaces, and the use of artificial ponds or other
water reservoir would prevent the availability of large flat surfaces.
Prajyot - Question 2
(20pts) Wooyoung’s production possibilities;

a) (5pts) Draw a graph of Wooyoung’s PPF and explain how your graph illustrates a tradeoff.
(On Paper)

b) (5pts) What is Wooyoung’s opportunity cost of producing 1 pound of food?


Wooyoung’s opportunity cost of producing 1 pound of food is 21 gallons of sunscreen.

c) (5pts) What is Wooyoung’s opportunity cost of producing 1 gallon of sunscreen?


Wooyoung’s opportunity cost of producing 1 gallon of sunscreen is 2 pounds of food.

d) (5pts) What is the relationship between your answers to parts (c) and (d)?
There is a linear relationship, where it costs twice as much to produce a gallon of sunscreen as it
does a pound of food. Wooyoung has an absolute advantage in producing food.

Prajyot – Question 3

(50pts) Suppose Kim can produce 40 pies an hour or 400 cookies an hour. Lim can produce 100
pies an hour or 200 cookies an hour.

a. (10pts) Who has a comparative advantage in producing pies?


Lim

b. (10pts) If Kim and Lim spend 30 minutes of each hour producing pies and 30 minutes
producing cookies, how many pies and cookies does each of them produce?
Kim would produce 20 pies & 200 cookies.
Lim would produce 50 pies & 100 cookies.
Therefore, 20+50=70 pies & 200+100=300 cookies in total.

c. (10pts) Suppose that Kim and Lim specialize in producing only the good in which they have
a comparative advantage. How many pies and cookies does each of them produce?
400 cookes & 100 pies.

d. (10pts) What is the highest price of a pie at which Kim and Lim would agree to trade pies
and cookies?
The highest price of a pie at which Kim would agree to trade would equal to 10 times the price of a
single cookie.

e. (10pts) Suppose that Lim sells 20 pies to Kim according to the price you nd at (d). What
are the gains from trade for each person compared to (b)?
In (d) one pie is equal to 10 times the price of a single cookie. So the result is that Kim has 20 pies
and 200 cookies, and Lim has 80 pies and 200 cookies. Kim has gained nothing, although she
hasn’t lost anything. However, Lim has gained 30 pies and 100 cookies.
Simran - Question 4
Done on paper.

Vishal - Question 5

Aayush – Question 6

Percentage changes.
a. Suppose there is a price change from HK$1,000,000 to HK$1,000,001. Calculate the
change in percentage using the average method for computing percentages and the
traditional method for computing percentages.
Average method
1
1000000.5 × 100 = 0.00009999995%

Traditional method
1
1000000 × 100 = 0.0001%

b. Now suppose the price changes back from HK$1,000,001 to HK$1,000,000. Calculate the
change in percentage using the average method for computing percentages and the
traditional method for computing percentages.
Average method
1
1000000.5 × 100 = 0.00009999995%

Traditional method
1
1000001 × 100 = 0.0009999...%

c. What do you notice about your answers to parts (a) and (b)?
The answer is the same when the average method is used but the answers change when the
traditional method is used based on what initial price has been used

Aayush – Question 7

Your price elasticity of demand for bananas is 4. If the price of bananas rises by 5 percent, what is

a. The percentage change in the quantity of bananas you buy?


The percentage change in the quantity demanded of bananas is -20%

b. The change in your expenditure on bananas?


Expenditure = P * Q

^P*Q = (^P)*(^Q)
= 1.05 * 0.80
= 0.84
1 – 0.84 = 0.16

There is a fall in expenditure on bananas by 16%.

Now your income elasticity of demand for bananas is 1 . If your income rises by 10 percent,

c. What is the percentage change in the quantity of bananas you buy?


The percentage in the quantity demanded of bananas is +10%

d. Is a banana a normal good or not? Explain.


Banana is a normal good as the YED is positive.

Question 8

(30pts) The demand schedule for computer chips

a) What happens to the total revenue if the price falls from $400 to $350 a chip and from $350
to $300 a chip? At what price is total revenue at a maximum?
From $400 -> $350 the total revenue increases from $12000 to $12250.
From $350 -> $300 the total revenue decreases back to $12000.
At $350 the total revenue is at a maximum.

b) (10pts) At an average price of $350, is the demand for chips elastic, inelastic or unit elastic?
Do NOT use total revenue test to answer this question.

c) (10pts) At an average price of $250, is the demand for chips elastic, inelastic or unit elastic?
Use total revenue test to answer this question.