Suppose you earn $1500 per week and you consume only two types of goods per week sandwiches and orange juice, which you purchase at a mini mart. Each sandwich cost $150mand an orange juice is $75 per cup.
a. Construct a table showing the alternative combinations of the two products
that are available.
b. Plot the data in your table on a budget line. What is the slope of the budget line? What is the opportunity cost of one more cup of orange juice? And what is opportunity cost of one more sandwich? Do these opportunity cost rise, fall or remain constant as you purchase an additional unit of the product?
c. Suppose the price of a cup of orange juice increased to $150. Construct a new table showing alternative combinations of sandwiches and orange juice. Construct the new budget line.
d. Suppose your income increase from $1500 per week to $3000 per week. Construct a new table showing alternative combinations of sandwiches and cups of orange juice. Construct the new budget line. Why would this budget line be preferred to the old one with an income of $1500?
Below is the production possibilities table for consumer goods (washing machine) and capital goods (tractor):
|
Types of Production
|
Production Possibilities
|
|
A
|
B
|
C
|
D
|
E
|
|
Washing Machine
|
0
|
4
|
8
|
12
|
16
|
|
Tractor
|
60
|
54
|
42
|
24
|
0
|
Show these data graphically.
b. If the economy is at point B, what is the cost of one more washing machine? What is the cost of one more tractor?
c. Explain how the production possibilities frontier reflects the law of increasing opportunity costs.
d. If the economy described by this production possibilities frontier was producing five washing machines and 30 tractors, what could you conclude about its use of resources?
e. Can this society produce 10 washing machines and 50 tractors? What must occur before the society can attain such a level of production?
The following table shows the production of cows' milk and potatoes per unit of input in the hypothetical countries of St. Claire and St. Paul. Use the following table to answer the questions.
|
St. Claire
|
St. Paul
|
|
Cows Milk
|
100 litres
|
50 litres
|
|
Potatoes
|
150 kilos
|
60 Kilos
|
a. Which country has the absolute advantage in the production of cows' milk?
b. Which country has the absolute advantage in the production of potatoes?
c. What is the opportunity cost of producing one liter of cows' milk in St. Claire?
d. What is the opportunity cost of producing one liter of cows' milk in St. Paul?
e. Which country has the comparative advantage in the production of cows' milk?
f. What is the opportunity cost of producing one kilo of potatoes in St. Claire?
g. What is the opportunity cost of producing one kilo of potatoes in St. Paul?
h. Which country has the comparative advantage in the production of bananas?