Homework 1-

1. Identify whether the following statements are normative (N) or positive (P).

a. Ben Bernanke as Chair of the Federal Reserve has pursued new policy interventions intended to help restore the functioning of the credit markets.

b. If sufficient numbers of people lose their jobs this will likely cause the overall level of prices in the economy to fall.

c. High levels of unemployment are a far more serious issue than high levels of inflation.

d. Gasoline prices always rise during the summer months.

2. Point A with coordinates (X = 4, Y = 6) and point B with coordinates (X = 10, Y = 12) belong to a straight line. Let Y be on the vertical axis and X on the horizontal axis.

a. Draw a graph of this straight line.

b. Give the equation of this line.

c. Find the slope of the line.

d. Indicate the X and Y axis intercepts for this line.

Suppose there is a second line that has a slope of -1 and includes the point (5, 5).

e. What is the equation for this line?

f. Given these two lines, what are the equilibrium values for X and Y?

3. Graph the following sets of equations. Each set of equations should be on its own graph and each graph should have the x and y axis labeled, the solution for the two equations identified (i.e., what value of x and y will satisfy both equations) as X and Y.

a. Y = X - 2, Y = 20 - X

b. Y = - 2X + 10, Y = 8X

c. X = 3Y + 10, X = 30 - 2Y

d. X = 2Y + 2, X = 12 - 3Y

4. A factory of 2000 workers produces textbooks and paper tablets. Each worker can produce either 20 textbooks per hour or 100 paper tablets per hour. Assume that each worker works 40 hours a week.

a. Using a week as your time period, draw the PPF for this factory and label it PPF1. In your graph measure textbooks (TB) on the horizontal axis and paper tablets (PT) on the vertical axis.

b. Find the equation of the PPF. Write this equation in slope-intercept form.

c. What is the opportunity cost of producing one textbook?

d. What is the opportunity cost of producing one paper tablet?

e. Is there a relationship between the opportunity cost and the slope of the PPF? Explain this relationship.

f. Contrast and compare the relationship of the slope and opportunity cost of a linear PPF and a bowed-out from the origin PPF.

g. Suppose the workers invent some new method to produce textbooks. With the implementation of the new method, each worker can produce 30 textbooks per hour instead of 20 textbooks per hour. Draw the PPF (using a week as your time period) and label it PPF2. Write the equation for PPF2 in slope-intercept form. What does this example suggest about the relationship between the PPF and technological improvements?

Use the following table to answer question 5.

5. The Smalltown and Largetown both produce bicycles and soda. These goods are produced using labor only. The table above shows how many units are produced in each town during a week. We are assuming that the PPFs for both towns are linear.

a. Draw the production possibilities frontiers (PPFs) for Smalltown and Largetown with bicycles on the horizontal axis and sodas on the vertical axis. Use two different graphs for your representation.

b. What is the opportunity cost of producing one soda for Smalltown? What is the opportunity cost of producing one soda for Largetown?

c. What is the opportunity cost of producing one bicycle for Smalltown? What is the opportunity cost of producing one bicycle for Largetown?

d. Which town has the absolute advantage in producing sodas? And which town has the absolute advantage in producing bicycles?

e. Which town has the comparative advantage in producing sodas? And which town has the comparative advantage in producing bicycles?

f. What is the range of acceptable prices (measured in terms of bicycles) for soda if Smalltown and Largetown both specialize according to their comparative advantage and then trade with one another?

g. What is the range of acceptable prices (measured in terms of sodas) for bicycles if Smalltown and Largetown both specialize according to their comparative advantage and then trade with one another?

6. For each of the following situations determine the effect of this change on the equilibrium price and quantity in the given market. Assume that the given change is the only change that occurs in the market.

a. People's tastes and preferences change in favor of chocolate ice cream. What happens to the equilibrium price and quantity in the market for chocolate ice cream?

b. The price of chocolate ice cream increases. What happens to the equilibrium price and quantity in the market for vanilla ice cream? Assume chocolate and vanilla ice cream are substitutes for one another.

c. The price of chocolate ice cream increases. What happens to the equilibrium price and quantity in the market for ice cream cones (the wafer creations that ice cream is served in)?

d. People's income increases and ice cream is a normal good. What happens to the equilibrium price and quantity in the market for ice cream?

e. The cost of eggs and cream, ingredients in making ice cream, decrease. What happens to the equilibrium price and quantity in the market for ice cream?

f. The cost of eggs and cream, ingredients in making ice cream, decrease. At the same time, population increases. What happens to the equilibrium price and quantity in the market for ice cream?

g. Government passes a tax on ice cream and this tax must be paid by suppliers. What happens to the equilibrium price and quantity in the market for ice cream?

h. Government passes a tax on ice cream and this tax must be paid by suppliers. At the same time, people's income increases. Assume ice cream is a normal good. What happens to the equilibrium price and quantity in the market for ice cream?

7. Joe's demand for ice cream is given by the equation P =10 - Q. Mary's demand for ice cream is given by the equation P = 20 - 2Q. Sue's demand for ice cream is given by the equation P = 10 - .5Q.

a. How many units of ice cream will be demanded if the price of ice cream is $2 and there are only these three consumers in the market for ice cream?

 b. How many units of ice cream will be demanded if the price of ice cream is $5 and there are only these three consumers in the market for ice cream?

 c. How many units of ice cream will be demanded if the price of ice cream is $10 and there are only these three consumers in the market for ice cream?

d. What is the market demand curve for ice cream? Hint: you will need to provide more than one equation to describe this demand curve and you will need to identify the range of quantities or prices that apply to each equation of the market demand curve. Also, do not expect the numbers to be "nice" numbers on this calculation.