Practice Questions #1A
Topics Covered:
Drawing and working with equations of straight lines, the slope-intercept form, shifts.
Opportunity cost and PPF.
Specialization and gains from trade.
1. Find the equation of the line that passes through:
Point A: (-2,6) and Point B: (3,4)
2. Find the equation of the line that passes through:
Point A: (-2,-4) and Point B: (1,2)
3. Draw the graphs of the equations:
y = 3x + 5
y = 3x
y = 3x + 10
4. A tribe living on an island has 5 workers that can collect 20 coconuts or 10 eggs per day. The only activities on the island are coconut collection and egg collection.
a. Draw the PPF.
b. Find the equation of the PPF.
c. Find the opportunity cost of 1 egg.
d. Find the opportunity cost of 1 coconut.
e. Is there a relationship between the opportunity cost and the slope of the PPF?
f. What could be the differences between a linear PPF and a bowed-out PPF?
g. Suppose the workers invent some new method to collect coconuts. With the implementation of the new method, each worker can collect 28 coconuts per day instead of 20. Draw the PPF and find its equation. What does this example suggest about the relationship between the PPF and technological improvements?
5. Assume that we live in a two-country world: the US and Japan. The only two goods produced in these countries are shoes (S) and shoelaces (L). The equations of the PPFs for each country are given as follows:
Japan: 4S = 100 - L
The US: S = 100 - 4L
a. Find the opportunity cost of 1 S in both the US and Japan.
b. Find the opportunity cost of 1 L in both the US and Japan.
c. Which country has absolute advantage in the production of shoes? In the production of shoelaces?
d. Which country has comparative advantage in the production of shoes? In the production of shoelaces?
e. Suppose these countries do NOT trade. Then the number of shoes produced in each country must be the same as the number of shoelaces produced (We are assuming that all shoes produced must have shoelaces). Find the number of shoes and shoelaces produced in each country.
f. Now allow the two countries to trade and find a way to make both countries better off.