Question:
(a) Consider the following production possibilities frontier data in the table below.
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A
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B
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C
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D
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E
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F
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Capital goods
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30
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28
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24
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18
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10
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0
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Consumer goods
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0
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2
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4
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6
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8
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10
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(i) Draw a diagram with appropriate labels.
(ii) Indicate attainable, unattainable, efficient and inefficient areas on the diagram.
(iii) Explain the concept of increasing opportunity costs using data provided.
(iv) Using the data provided draw a new diagram showing growth in the resource base. Explain the changes to the production of both goods.
(v) Assume that the decision is made to invest more in capital goods than in consumption goods. Using the data provided draw a diagram and explain the impact of this decision on future production capacity.
(b) Suppose demand (QD ) and supply (QS) in a market can be expressed by these equations:
QD= 170-1.5*P
QS= 50+2.5*P
(i) Complete the table. What is the equilibrium price and quantity? If the prevailing market price is $60, what are the quantity demanded and the quantity supplied?
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P
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QD
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QS
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$10
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$20
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$30
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$40
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$50
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$60
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(ii) Draw the diagram and calculate the change in the equilibrium if demand changes to QD= 200-0.5*P. Explain why the change could occur (with examples).
(c) Utilise the demand-supply market models (for each market below) to graphically illustrate and explain the following scenarios (in the short run). Identify for each scenario what the effects on price and quantity are likely to be and show the effects on the diagram. State your assumptions.
(i) The market for luxury cars if there is an increase in households' income.
(ii) The market for housing if there was an increase in electricity prices.
(iii) The market for tea if the price of milk increases.
(iv) The market for Ipad 2 as the price of Ipad mini decreases.