Econ 111: Principles of Economics - Accelerated Treatment - Problem Set 1
Q1. State if the following statements are true or false and briefly explained why (Use diagrams where helpful).
a) The production possibility frontier is concave because different quantities of the two goods are produced at each point along the frontier.
b) As our income increases we are consuming more movies and less videos than before. This means that videos are a giffen good.
Q2. Tom can prepare 50 hamburgers per hour or wait on 25 tables per hour. Mike can prepare 20 hamburgers per hour or wait on 15 tables per hour.
a) For Tom, what is the opportunity cost of preparing a hamburger? For Mike? Who has the comparative advantage in the preparation of hamburgers?
b) Assume that Tom works 20 hours a week in the hamburger stand. Graph the possible combinations of hamburger preparation and table waiting for Tom. Do the same for Mike.
c) If Tom and Mike devoted half of their time (10 out of the 20 hours) to hamburger preparation and half of their time to waiting tables, what would their individual outputs be in a week? What would the aggregate production be for both partners?
d) If Tom and Mike were to open a hamburger stand, who should be the cook? What would the aggregate production of both partners in a week be if they were to specialize (completely) and work 20 hours a week each?
Q3. Suppose a severe drought hit the sugarcane crop. Predict how this would affect the equilibrium price and quantity in the market for sugar and the market for honey. Draw supply and demand diagrams to illustrate your answer.
Q4. There are only two main suppliers of comic books in Toontown, Goofy and Roger Rabbit.
Suppose that the demand and supply curves for comic books in Toontown are given by the following equations:
QD = 105 - 20 P
QS1 = 10 + 20 P
QS2 = 20 + 10 P
where
QD is number of comic books Toontown residents would like to buy;
QS1 is number of comic books supplier Goofy would like to sell each year;
QS2 is number of comic books supplier Roger Rabbit would like to sell each year.
a) Fill in the following table:
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Price per Unit US $
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Quantity Demanded QD
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Quantity Supplied by Goofy QS1
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Quant. Supplied by Roger Rabbit QS2
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Aggregate Quant. Supplied QS = QS1 + QS2
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.50
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1.00
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1.50
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2.00
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2.50
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b) Use the information in the table to find the equilibrium price and equilibrium quantity.
c) Graph the market (aggregate) demand and (aggregate) supply curves and identify the equilibrium price and quantity on your graph.
d) Solve for the equilibrium price and quantity algebraically.
e) If Toontown were to impose a price ceiling of $1 per comic book in the market for comic books, would there be an excess supply or an excess demand for comic books? Give its numerical value.
f) Under the price ceiling, quantity supplied and quantity demanded are different. Which of the two will determine how many comic books are purchased? Briefly, why?