Part -1:

Assume the following possible combinations of shoes and CD-players that could be produced yearly:

a. Using the axes below, draw the production possibilities frontier (PPF) for these numbers. Be as exact and. neat as possible. (Assume that the dots define a complete curve.) Leave room for drawing a new PPF (in the same graph) when you get to (e).

1. Draw the production possibilities curve for this economy. What are the assumptions of the PP model?

2. If the society is currently producing alternative C, what is the opportunity cost of moving to alternative D.

3. Use this curve to illustrate the law of increasing opportunity cost and graph the opportunity cost line.

4. With these production possibilities, producing 18 pairs of shoes and 50 CD sets would be and producing 20 shoes and 60 CD would be

5. Suppose that the technology used to produce shoes improves, while that for producing CD does not , draw the new PP curve.

6. What kind of economic growth does this represent?

7. Can you determine the allocative efficient output from this exercise? Explain your answer. 3. What will happen to the PP curve if the economy outsources 50% of the production of shoes to a foreign country?

8. What is the difference between productive efficiency and allocative efficiency? Use a PP curve to illustrate your answer.

Part -2:

Questions:

1. What is the difference between optimum output and effigient output? Under what circumstances a firm will determine an optimum output?
And what is the rule to determine the optimum output?

2. What is the economic objective of a government from a microeconomics perspective?
And how government can accomplish this objective?

3. What is the economic objective of consumers in a market driven economy?
And why do we need to determine the optimum choice of consumers?

4. What is the difference between a monopolistic competitive market and an oligopoly?

5. Who are the Mercantilist?

Exercise: Illustration of the Principle of Comparative advantage

This table shows the number of labor hours required to produce a digital cameras and a bushel of wheat in China and South Korea.

a. Which county has an absolute advantage in the production of digital cameras?

b. Which country has an absolute advantage in the production of wheat?

c. What is China's opportunity cost of producing one digital camera?

d. What is South Korea's opportunity cost of producing one digital camera?

e. What is China's opportunity cost of producing one pound of wheat?

f. What is South Korea's opportunity cost of producing one pound of what?

g. If each country specializes in the production of the product in which it has a comparative advantage, who should produce digital cameras?

h. If each country specializes in the production of the product in which it has a comparative advantage, who should produce wheat?

II This table shows the number of labor hours required to produce a digital camera and a bushel of wheat in China and South Korea.

a If each country has a total of 9.000 labor hours to devote to the production of the two goods, draw the production possibilities frontier for each country. Put "Digital Camera" on the horizontal axis and "Wheat" on the vertical axis. Be sure to identify the intercept values on your graphs.

b. Suppose each country allocates 60% its labor hours to wheat production and 40% to the production of digital cameras. Complete Table 2-6 below to show each country's output of the two products.

Production and Consumption with no Trade

c. If the two countries do not trade and consume whatever they produce, identify the current production and consumption point for each country on their respective production possibilities frontiers. Label China's consumption point "C' and South Korea's consumption point, "K."

d. Suppose the two countries specialize and trade. Who should produce digital cameras and who should produce wheat? Explain your answer.

e. Complete Table below to show each country's output with specialization.

Table : Output with Specialization

f. Did specialization increase the combined output for the two countries without any increase in resources? If so, by how much?

g. Suppose China and South Korea agree to trade so that in exchange for 1,200 bushels of wheat, the exporter of wheat receives 48 digital cameras. Complete Table below to show each country's consumption bundle after trade.