Practice Problems #1

1. Identify whether or not the following statements are normative (N) or Positive (P).

a. According to some economists who have studied the proposed tax cuts, the cuts should stimulate the economy resulting in higher levels of employment with no increase in the level of inflation.

b. The huge amount of government expenditures during the Great Depression stimulated the economy.

c. The new president should place a higher weight on reducing the unemployment rate instead of pursuing increased domestic demand for goods and services.

d. Holding all other variables constant, an increase in interest rates will cause stock prices to decrease.

2. What are the slope and the intercept of each equation? Let the horizontal axis be the X variable and the vertical axis be the Y variable. Solve each equation system, i.e. show the value of X and Y that is the solution for each set of equations.

a. Y = 3X + 2
Y = -2X +1

b. Y = 2X + 7
X = -5Y + 2

c. X = Y - 5
X = 3Y + 2

3. You are given the following set of information. Find the slope and y-intercept, and the equation for each set of information.

a. (x,y) = (1,3) and (-2,1)
slope :
y-intercept :
linear equation :

b. (x,y) = (-5,2) and (-2,-1)
slope :
y-intercept :
linear equation :

c. (x,y) = (-10,-3) and (-4,8)
slope :
y-intercept :
linear equation :

d. (x,y) = (-3,-3) and (-2,-2)
slope :
y-intercept :
linear equation :

4. Consider a bowed out from the origin production possibility frontier. Good Y is on the y axis and good X is on the x axis. Point A is on the PPF line, point B is interior to the PPF, and point C is beyond the PPF line.

a. Is B a feasible and obtainable point?
b. Is C a feasible and obtainable point?
c. Compare point A with point C in terms of resource allocation.
d. Compare and contrast the production levels for the economy at point A versus point B.
e. Draw a production possibility frontier that illustrates the law of increasing opportunity cost; label points A, B, and C; and explain why the law of increasing opportunity is true in general.

5 The following table is the survey result of Madison city in 2000.

Production of consumer goods in 2000        Production of capital goods in 2000

1000 units                                                       0 units

800 units                                                         100 units

600 units                                                         200 units

200 units                                                         400 units

You can draw PPF but note that the above table does not fully describe the shape of PPF.

a. What is the maximum amount of capital good production possible in the year 2000 in the city of Madison?
b. What is the slope of the PPF represented in the above table?
c. Does this PPF represent increasing, decreasing, or constant opportunity cost?
d. What is the opportunity cost of producing one more unit of consumer goods?

6. This question is one about absolute and comparative advantage. We will simplify the problem by assuming that both individuals face linear production possibility frontiers and thus have constant opportunity cost with regard to the production of the goods that we will be discussing.

Suppose that there are two people, Tom and Stacey, in Madison and each of them can produce either food or sports. Assume that the opportunity cost of production for each individual is constant along their PPF. Numbers in the table give the number of units of food and sports that can be produced by Tom or Stacey.

Tom                                                    Stacey

Food       Sports                                  Food       Sports

15           90                                        30           60

   30           60                                     50            40

   45           30                                       

a. What is Tom's opportunity cost for one more unit of food?

b. What is Tom's opportunity cost for one more unit of sports?

c. What is Stacey's opportunity cost for one more unit of food?

d. What is Stacey's opportunity cost for one more unit of sports?

e. Tom has the comparative advantage in producing ( ) and specialize in producing ( ) while Stacey has the comparative advantage in producing ( ) and specialize in producing ( ).

7. Judy can produce 2 fish in 3 hours or 5 loaves of bread in 2 hours. Mike can produce 3 fish in 4 hours or 3 loaves of bread in 3 hours. Currently, Judy is producing 8 fish and 30 loaves of bread while Mike is producing 9 fish and 12 loaves of bread. Judy and Mike are not trading initially. Assume that Judy and Mike both have 24 hours a day that they can work.

a. What is the opportunity cost of producing one more fish for Judy?

b. What is the opportunity cost of producing one more loaf of bread for Judy?

c. What is the opportunity cost of producing one more fish for Mike?

d. What is the opportunity cost of producing one more loaf of bread for Mike?

e. In a single day of 24 hours, who has the absolute advantage in producing fish?

f. In a single day of 24 hours, who has the comparative advantage in producing fish?

g. Mike should specialize in producing ( ) while Judy specializes in producing ( ).